HATFA provides opportunities to reduce 2013 and/or 2014 cash contributions and 2014 PBGC premiums

August 22nd, 2014 No comments

By Tim Herman

Herman-TimThe recently enacted Highway and Transportation Funding Act of 2014 (HATFA-14) provides opportunities for plan sponsors to reduce cash contributions and PBGC premiums. For the approaches that involve contributions for the 2013 plan year, prompt action is needed to ensure the applicable funding requirements are satisfied. For calendar year plans, the final date to designate cash contributions and/or add excess contributions to the prefunding balance for the 2013 plan year is September 15, 2014.

HATFA opportunities
1. Reduce cash contributions required for the 2013 plan year.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA relief for 2013).
• With the use of the higher interest rates for the cash funding valuation, the minimum required contribution may be lower.

2. Reduce cash contributions required for the 2013 and 2014 plan years
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA relief for 2013).
• Plan sponsors are required to revise the 2014 actuarial valuation.
• With the use of the higher interest rates for the cash funding valuations, the total minimum required contributions (combined 2013 and 2014 plan years) may be lower.

3. Reduce 2014 PBGC variable rate premiums
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Designate some or all of the cash contributions previously used for the 2014 plan year as receivable contributions for the 2013 plan year.
• This reduces the unfunded liability for PBGC variable rate premium.

4. Manage credit balances for 2013 and 2014 plan years
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Create/use credit balances to optimize the plan sponsor’s use of cash.

Some plan sponsors may decide forego the opportunities provided by HATFA. One example is a plan sponsor with planned cash contributions to reach a specified funding threshold. These plan sponsors will still need to revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year (required). However, they may elect to opt out of the HATFA relief for 2013 and satisfy 2013 plan year minimum funding requirements by making contributions based on the 2013 actuarial valuation results prepared under the MAP-21 rates.

Cash savings opportunities under HATFA 2014 will vary by a plan’s funded status, amount of credit balances available, etc. Also, different plan sponsors will have different goals and objectives regarding cash funding to the pension plan. Your Milliman consultant can help you review the opportunities that are available and decide on a course of action that is appropriate for your situation.

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Google+ Hangout: Pension Funding Index (August 2014) and the implications of HATFA

August 20th, 2014 No comments

By Javier Sanabria

The funded status of the 100 largest corporate defined benefit pension plans decreased by $5 billion during July as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose from $252 billion to $257 billion at the end of July, primarily due to declines in equity and fixed income returns during July. As of July 31, the funded ratio decreased from 85.3% to 85.0% since the end of June.

In this month’s PFI Hangout, Zorast Wadia discusses the study’s latest results and the pension smoothing provisions related to the Highway and Transportation Funding Act of 2014 (HATFA).

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Thrift Savings Plan for all Americans?

August 19th, 2014 No comments

By Alexandra Moen

Moen-AlexRecently, members of Congress reintroduced the idea of opening the government-employees-only Thrift Savings Plan (TSP) to all Americans not currently covered by an employer-sponsored plan. Right now, that number is estimated at 78 million U.S. workers. According to the Bureau of Labor Statistics, as of early 2013, 68% of all workers had access to a defined benefit (DB) or defined contribution (DC) plan and 54% were enrolled. The vast majority of workers not covered are part-time or seasonal employees. The government recognizes that help is needed, and the TSP proposal is the latest attempt.

In place since 1986, the Thrift Savings Plan (TSP) has provided federal employees and military service members with retirement savings. It is a defined contribution plan, similar to 401(k) plans offered by corporations. A governing board, consisting of six people who are presidentially appointed, administers the plan. A variety of issues should be considered with this proposal, but there are a few important advantages and disadvantages.

• The most important aspect of this proposal is that it would provide payroll-based savings to millions of American workers—people who do not now have access to employer-sponsored retirement savings accounts.
• The Thrift Savings Plan is a simple plan with an auto-enrollment feature, six investment choices, and low fees.
• Because it is run by government agencies, taxpayers are technically funding the costs of the plan, so opening it to all Americans is a fair proposal.
• Increasing the TSP population this significantly would have a profound impact on the retirement savings industry that is hard to predict. Both private and government providers may benefit from increased competition.

• Administration of the TSP would require a major upgrade at a minimum, and possibly an entirely new system.
• With TSP membership this massive, government agencies would have a greatly increased, more powerful role in the retirement savings industry, and selection of investment fund options might take on a political element (at least the perception of such). This is the biggest concern that has been voiced.
• Potential compliance issues would be introduced as the TSP is exempt from ERISA and Internal Revenue Service regulations that govern the private sector. Independent review/oversight of the TSP would have to be in place. The TSP is required to adhere to regulations under the Federal Employees’ Retirement System Act (FERSA). These regulations are more lax.
• The conservative investment options offered by the TSP deliver the security and returns associated with long-term Treasuries, which are not protected against inflation.

All employees deserve the availability of a retirement savings plan. The difficulty lies in determining the best option to accomplish that goal. Inviting American workers not covered by an employer-sponsored plan to the TSP may not represent the best solution. The administration-sponsored “myRA” is already taking a step in that direction. This starter retirement account offered by the Department of the Treasury gives workers access to the most conservative of the six TSP funds, the G fund. MyRA will serve as an important first attempt, on a manageable scale, and will provide important input to the comprehensive solution. The time may be right for Congress to undertake a complete review of this area. Hopefully, employers will be included in these discussions.

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Corporate pension funded status drops by $5 billion in July

August 14th, 2014 No comments

By John Ehrhardt

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In July, these plans experienced a $3 billion decrease in pension liabilities and an $8 billion decrease in asset value, resulting in a $5 billion increase in the pension funded status deficit.


For months it’s been interest rates driving up the deficit, but in July the rates cooperated and it was instead poor financial market performance negatively impacting funded status. We’ve seen the deficit increase by more than $70 billion so far in 2014.

This month’s study includes perspective on how the Highway and Transportation Funding Act of 2014 (HATFA) may affect pension contributions next year.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.10% were maintained, funded status would improve, with the funded status deficit shrinking to $237 billion (86.1% funded ratio) by the end of 2014 and to $202 billion (88.2% funded ratio) by the end of 2015.

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Master limited partnerships: An option for investment diversification

August 14th, 2014 No comments

By Javier Sanabria

Diversification is an important part of a sound investment strategy. Yet achieving true diversification requires investment vehicles that have low correlation to one another—in other words, they don’t react in a similar manner to market developments. During periods of significant economic growth, typical investments tend to demonstrate significant correlation, even across dissimilar industries. Investments that are minimally correlated with the market as a whole are challenging to find. This, plus a history of strong returns, may explain a growing interest in investments known as master limited partnerships (MLPs).

In this paper, Milliman’s Jeff Chalk provides an overview of what MLPs are, their potential benefits, risks, and tax treatment, and the vehicles available for investing in them.

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It’s PPA restatement time! … wait, what’s PPA restatement?

August 13th, 2014 No comments

By Brandy Cross

Cross,-Brandy_mugShotLet’s start from the beginning.

If your qualified defined contribution (DC) retirement plan uses a base plan document with most of the basic features of the plan and an adoption agreement that allows you to select some specific plan features (as opposed to having an individually drafted plan document where there is just one document written specifically for the provisions of your plan), then you have a preapproved plan document.

Almost a decade ago, the Internal Revenue Service (IRS) determined that all preapproved plans would have to be restated periodically — every six years to be exact. This would allow them to pull in all of the law changes in the previous six years and hopefully make the plans easier to read, administer, and review.

The first cycle was referred to as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) restatement, which was to be completed no later than April 30, 2010.

In early 2014, the IRS released the approval letters to sponsors of preapproved plans for the second cycle, referred to as the Pension Protection Act of 2006 (PPA) restatement. The PPA restatement brings in required changes from that legislation, as well as all subsequent regulatory changes — including Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) and Worker, Retiree and Employer Recovery Act of 2008 (WRERA).

All plans that use a preapproved plan document must be restated before April 30, 2016. Failure to amend by this date will require the plan to submit an application to the IRS, through its Voluntary Compliance Program (VCP), to correct this error. IRS VCP fees as well as preparation fees will apply, and could be hefty depending on the size of the plan.

Milliman is in the process of working with plan sponsors utilizing our preapproved DC plan document services to complete the restatement prior to the above deadline.

Now is an excellent time for every plan sponsor to review the plan provisions to ensure they are in line with actual plan operations, as well as to ensure that the plan is meeting the goals and needs of the plan sponsor and plan participants.

Reviewing the plan provisions with your Milliman consultant at the time of restatement is both beneficial and cost-effective.

Some items that the plan sponsor should be reviewing include:

Eligibility: Are participants entering the plan when they should? Once eligible, is there anything that can be done to encourage participation in the plan? Should auto enrollment or other provisions be considered to get participants into the plan faster?

Plan design/contributions: Do the plan design and contributions elected and allowed under the plan meet the needs and goals of plan sponsors and participants? Each plan, plan sponsor, and participant population is unique. Visit with your consultants and advisors to see if there is anything you could be doing differently.

New provisions: Are there new provisions added in recent years, such as in-plan Roth conversions, or changes to base document language, such as the use of forfeitures and ERISA recapture accounts, that might make sense to review against the way your plan is operating?

Compensation: Is the correct compensation being provided to your plan’s recordkeeper or administrator? Plans should take this time to review the compensation definition in the plan document to make sure that it matches the compensation used by the payroll systems to determine contributions and benefits. The IRS finds compensation errors one of the most frequent errors made in qualified retirement plans.

When the restatement process is complete, you should receive a new signature-ready adoption agreement, a copy of the base plan document, and the IRS approval letter of the preapproved plan document, as well as an updated Summary Plan Description. You will want to make sure to maintain copies of all plan documents, including superseded versions for the life of the plan, plus six years.

Remember, changes to the plan document are fiduciary decisions, and should be reviewed carefully with your consultant and plan’s legal counsel.

Happy PPA restatement!

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The end of SSA letter-forwarding service poses an obstacle for plan sponsors

August 12th, 2014 No comments

By Javier Sanabria

The termination by the Social Security Administration (SSA) of its letter-forwarding service creates a hindrance for retirement plan sponsors. The service allowed sponsors to mail letters trying to locate missing participants regarding their benefits as required under ERISA.

In the latest issue of Milliman’s DB Digest, Alexandra Moen addresses the implications sponsors face in fulfilling their ERISA obligations. Here is an excerpt:

ERISA, IRS, SSA, and DOL regulations have consistently emphasized “reasonable methods” when attempting to locate participants. The SSA and IRS letter-forwarding services have historically provided fiduciaries great confidence that all appropriate steps had been taken. Free Internet search sites and social media can be unreliable and inaccurate. Are these methods “reasonable” if they fail to locate a participant? Several questions regarding these government agency announcements remain, but it seems certain that plan sponsors will now have to put more time, money, and effort into these required searches for plan participants and beneficiaries.

Many plan documents do not include wording about participants who are unable to be located. It is permissible to forfeit the benefit after all reasonable means have been exhausted, as long as the benefit would be reinstated if the participant makes a claim for it. Plan sponsors may also wish to consider adding wording to the Summary Plan Description or website telling the participant of their responsibility to inform the plan of address changes, especially if their benefit could be forfeited.

To read more DB Digest articles, click here.

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Regulatory roundup

August 11th, 2014 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

Social Security published article on two benefits provisions
A new article published by the Social Security Administration (SSA) uses health and retirement study data to investigate the effects of the SSA’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) on Social Security benefits received by households. The provisions reduce benefits for individuals or the dependents of individuals whose work histories include jobs for which they were entitled to a pension and were not subject to Social Security payroll taxes (“noncovered” employment).

To read the entire article, click here.

IRS updates FAQ on 403(b) preapproved plan program remedial amendment period
The Internal Revenue Service (IRS) has updated a frequently asked question (FAQ) regarding the 403(b) preapproved plan program remedial amendment period. According to the IRS, by adopting a 403(b) preapproved plan by the deadline (to be established and announced by the IRS), the program allows an eligible employer to retroactively correct defects in the form of its written 403(b) plan back to the first day of the plan’s remedial amendment period, which is the later of: January 1, 2010, or the plan’s effective date.

The employer’s adoption of a preapproved 403(b) plan that has a favorable opinion of advisory letter automatically corrects any defects in its prior written 403(b) plan, but not defects in any documents incorporated by reference into the prior plan). Interim amendments are not required for a plan to be eligible for this remedial amendment period.

403(b) plans sponsors who didn’t adopt a written plan before December 31, 2009, can use the 403(b) Voluntary Program Submission Kit to correct this error.

The IRS also indicated that at this time it does not anticipate opening a determination letter program for individually designed 403(b) plans.

For more information, click here.

IRS updates guide to common qualified plan requirements
The IRS has recently updated its web page on common qualified retirement plan requirements. The list highlights some of the more important plan requirements to help employers in implementing practices, procedures, and internal controls to monitor plan operations.

For more information, click here.

JCT releases estimates of federal tax expenditures for fiscal years 2014-2018
The Joint Committee on Taxation (JCT) has released its latest summary of federal tax expenditures entitled “Estimates of federal tax expenditures for fiscal years 2014-2018” (JCX-97-14). The JCT says that the employer health exclusion will cost the government $785.1 billion in forgone revenue from 2014 to 2018 and that the next exclusion of defined contribution plans will cost $399 billion.

To download a copy of the report, click here.

IRS updates posting on Voluntary Correction Program fee schedule and Form 8951
The IRS has updated its web page in regards to the Voluntary Correction Program (VCP) fee schedule and Form 8951 (Compliance Fee for Application for Voluntary Correction Program [VCP]).

To access Form 8951, click here.
To view the updated VCP fee schedule page, click here.

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HATFA requires immediate action on 2013 defined benefit plan valuations

August 6th, 2014 No comments

By Employee Benefit Research Group

President Obama is expected to sign into law the recently passed Highway and Transportation Funding Act (HATFA). As enacted, single-employer and multiemployer defined benefit pension plan sponsors will see temporary reductions in minimum required contributions and may be able to avoid benefit restrictions. Because the new law as written applies retroactively to the 2013 plan year (absent an election to opt out), affected plan sponsors will have to make decisions soon, ideally equipped with yet-to-be published technical guidance from the Internal Revenue Service (IRS).

At a minimum, plan sponsors will need to quickly instruct their plan actuaries to redo the 2013 actuarial valuation calculations or formally elect to opt out.

In general, the new law modifies the 2012 Moving Ahead for Progress in the 21st Century (MAP-21) Act interest-rate corridors used by affected sponsors to determine their minimum funding liabilities. HATFA maintains a narrower corridor than MAP-21 for the 2013 to 2017 plan years and then phases in a wider corridor over four years beginning in 2018. A plan sponsor may elect, in writing, to retain its use of the MAP-21 interest-rate corridor only for the 2013 plan year; starting in 2014, use of the HATFA corridors by all plan sponsors is required.

Plan sponsors face a number of time-sensitive decisions and actions as a result of HATFA’s enactment. For example, absent an election to opt out, the narrower 2013 plan year interest-rate corridor will require a revised actuarial valuation. Plan sponsors will also have to revise their disclosures to reflect the HATFA changes in the next annual funding notices. As the HATFA change temporarily reduces the amount a sponsor must contribute and the tax deductions for those contributions, the employers’ taxable income could increase. And longer term, required pension plan contributions should increase after the temporary “smoothing” provision expires, depending on corporate bond interest rates and other factors at that time.

The HATFA provision does not affect multiemployer defined benefit pension plans nor Pension Benefit Guaranty Corporation (PBGC) premiums. The pension-related provisions in HATFA also include changes for certain plan sponsors in bankruptcy, and companies subject to the rules of the Cost Accounting Standards Board (CASB) will have to adjust their CASB recovery calculations. Cooperative/small employer charity plans will need to recalculate their plans’ full funding limits.

For additional information about HATFA’s pension provisions and assistance with exploring the short- and long-term pension funding options, please contact your Milliman consultant.

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Is pension outsourcing right for you?

August 5th, 2014 No comments

By David Benbow

Benbow-DavidThere has been much discussion about the relevance of the defined benefit (DB) pension plan. For decades, people have bemoaned the demise of DB plans, saying they are too costly to administer and too expensive to maintain. Others have suggested that there is no other type of plan that will provide a sufficient and stable source of retirement income. There has been a growing trend of top employee benefit providers shifting their DB outsourcing service models by partnering with firms such as Milliman, while others have opted to exit the DB outsourcing business completely, as recently announced by Vanguard.

Does that mean DB outsourcing is no longer relevant?

Outsourcing is more relevant than ever, but it’s become so specialized that it’s best handled by experts who do it as their core business. DB plan outsourcing was once very expensive, but technology and economies of scale have made outsourcing much more affordable. Here are a few reasons why DB plan sponsors should consider outsourcing.

The changing of the guard
Many employers have a person (call her “Betty”) who has single-handedly administered a DB plan for years, maybe decades. Betty is friendly, she is dedicated, and she knows everything about the pension plan—including when to look people up in the big red binder. Betty is 62.

Not only is Betty going to retire someday, but she hasn’t trained anyone to take her place. Betty is very dependable, but has she stayed current on all the new pension legislation, and would her work stand up to an audit by the Internal Revenue Service or U.S. Department of Labor?

Because a change is imminent, someone else should also be considered with at least as much experience as Betty, someone who is familiar with the challenges of automating the information that’s in Betty’s head (and in the big red binder), and who keeps abreast of the latest pension rules—namely, a DB outsourcing provider.

Participant convenience
We’re more than a decade into the 21st century and, thanks to our laptops, tablets, and smartphones, we’ve gotten used to having information available instantly. Participants meeting with a financial planner will want to look up their pension benefits online as well as model a few different retirement dates to see what works best for them. Some outsourcing providers have this capability, which renders the annual pension statement obsolete (participants never bothered to look at them anyway).

Providing self-service options for participants also cuts down on requests to human resources departments (and Betty is pretty overloaded with requests for estimates).

For participants who still prefer human interaction, an outsourcing provider may include a call center of friendly DB experts, who have full access to the participant’s information. They can field questions ranging from plan eligibility to the ever-popular “Where is my check?”

Plan sponsor convenience
As mentioned earlier, DB plans have become much more complicated to administer. In order to calculate benefits consistently and efficiently, a dedicated system is required for all but the simplest plans.

Plan auditors are more confident with calculations produced by a pension system instead of hand calculations or clunky spreadsheets. System results can be stored indefinitely along with evidence that calculations were reviewed. In addition, many outsourcing providers are independently audited and can provide plan auditors with a Statement on Standards for Attestation Engagements No. 16 (SSAE 16 Type 2) report for additional reassurance.

With a dedicated pension system, plan sponsors can also have a wealth of data at their fingertips. Regular reports can be generated for compensation and benefits committees and data extracts for plan actuaries. Mailing lists for summaries of material modifications (SMMs) or annual funding notices are made much simpler.

Finally, with the day-to-day pension operations off its hands, the benefits department can focus on other, more urgent matters.

It takes a village
It takes quite a few people to administer a DB plan: Actuaries to measure plan funding and forecast liabilities, administrators to calculate benefits, representatives to answer participant phone calls, and payment processors to work with the trustee. A full service outsourcing firm houses all these roles under one roof, creating a seamless team of professionals to make life easier for plan participants and plan sponsors.

If you’re wondering whether Milliman can help with the administration of your DB plan or would like to see a demo of our administration system or participant website, feel free to contact me or visit www.milliman.com.

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