Pension plan summary plan description updates: Something easy to forget?

March 27th, 2015 No comments

By Jeffrey Kamenir

Kamenir-JeffIt can be easy to lose sight of the requirement to periodically update a pension plan summary plan description (SPD) because SPDs no longer need to be filed with the U.S. Department of Labor. Plan sponsors can potentially find themselves more focused on annual governmental filings such as Form 5500, Pension Benefit Guaranty Corporation (PBGC) premium, Schedule 8955-SSA, and annual participant notifications such as the annual funding notice. But don’t overlook required SPD updates.

SPDs are required to be updated every five years if there have been any material plan changes since the last SPD update or every 10 years no matter what. SPDs should be carefully drafted to be consistent with the provisions of the official plan document.

Updated SPDs should be provided to all plan participants which would include actives, terminated deferred vested, retirees, and beneficiaries. New active participants should be provided an updated SPD within 90 days of becoming eligible to participate in the pension plan.

In the event there is a material plan change after the issuance of an updated SPD, a summary of material modification (SMM) should be provided within 210 days after the end of the plan year in which the change was adopted. A SPD updated to reflect the plan change can be provided in lieu of providing an SMM.

SPDs can be provided to plan participants either by mail, distribution at the plan sponsor’s work place or posted on the plan sponsor’s employee benefits website.

Not having an updated SPD can become an issue when participants have questions about their pension benefits. Having an updated SPD facilitates responding to participant questions.

Plan sponsors should review the latest version of the pension plan SPD to see if an update is required.

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PBGC requires plan sponsors to report risk transfer activities

March 26th, 2015 No comments

By Employee Benefit Research Group

Single-employer and multiemployer defined benefit plan sponsors that undertake “de-risking” activities must now disclose information about annuity purchases or lump-sum window offerings when they pay their premiums to the Pension Benefit Guaranty Corporation, beginning with the filings for the 2015 plan year. For sponsors of plans with calendar year plans, the first filing with the de-risking disclosures is due Oct. 15, 2015. The PBGC’s rationale for this new requirement is that there currently is no available comprehensive, detailed, and reliable source for information on risk transfer activities, which can result in substantially reduced premium payments to the agency. This Client Action Bulletin provides more perspective.

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Multiemployer Pension Reform Act of 2014 contributions for withdrawal liability

March 25th, 2015 No comments

By Javier Sanabria

The Multiemployer Pension Reform Act of 2014 (MPRA) changes how certain employer contributions are handled when calculating withdrawal liability payment amounts. Plan administrators should review their systems and procedures regarding invoicing employees and/or retaining employer contributions so they can isolate certain contribution amounts excluded when calculating withdrawal liability. Milliman consultant Nina Lantz provides more perspective in this paper.

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Three cautions when considering public pension reform

March 24th, 2015 No comments

By Sheila Barrett

Barrett-SheilaOnce a mainstay in American society, there has been a growing trend among public and private employers over the past three decades to close or freeze defined benefit (DB) plans. More recently, public DB plans have been in the forefront of the news with dark headlines detailing bankrupt public sectors unable to make good on their pension promises to retirees. The trend to downsize pensions coupled with some notorious public pension crises has led many to question whether DB plans have any place in the public sector at all. However, focusing on the horror stories from a few states or large cities is surely taking a myopic view of the situation.

The National Institute on Retirement Security (NIRS) recently published a follow-up study comparing the expense of defined contribution (DC) and DB plans. The study, published in December 2014, follows up on the original study performed in 2008, which reported similar results. The authors, William Fornia and Nari Rhee, indicate there are several advantages to DB plans that should be considered over the long term. These authors and the NIRS study provide three specific reasons for the cost savings of DB plans:

Risk pooling: DB plans spread the risk associated with employee life expectancy across the entire participant population. An easy way to conceptualize this is a bell curve—while some employees will live an “average” life span, there will always be employees who live longer and employees who live shorter lives. Those who live longer will use more retirement income than expected, but this cost is offset by the savings from those with shorter life spans. Without risk pooling, an individual bears the entire longevity risk alone; there is no cost offset mechanism for an individual who lives beyond his or her life expectancy.
Asset pooling: DB plans have significantly larger asset pools than an individual will maintain in an individual account plan. DB plans are also able to make multigenerational investments. While an individual will shift an investment strategy to be more conservative in the years leading up to retirement, a DB pension trust has no need to behave similarly as the trust can continue to maintain an investment strategy with some degree of aggressiveness. This yields better long-term investment results.
Fee pooling: The microeconomic concept of economies of scale comes into play for investors. An individual managing a single 401(k) account will bear the burden of professional investment fees. A DB plan has two advantages in this area. The first is that professional fees are paid out of the pooled asset trust and essentially split up among all individuals in the plan. The second advantage involves “investor IQ.” The typical DC plan participant does not have the investor knowledge of a professional asset manager. While a DB plan can afford to hire a professional asset manager and glean good returns, an individual is left to navigate the murky waters of the financial economy without an educated guide (National Institute on Retirement Security, 2014).

The NIRS also published a study in September 2011 highlighting public employee perspectives on public DB versus DC plans. If public entities intend on remaining competitive in the job market, maintaining their public pension plans could be a key to successful recruitment. Private pension plans are scarcer than their public counterparts, so this can be a factor for highly talented individuals looking at stable career choices.

For these reasons, a DB plan has significant, long-term advantages. These structural factors are relevant in any employment sector, but for public pension plans there is an additional angle to consider. Because the cost of public employees’ retirement plans are ultimately laid on the taxpayer, it should be a priority of any such system to use tax-funded contributions as efficiently as possible.

Last year’s NIRS study demonstrates that DB plans are truly efficient mechanisms for generating retirement income. But recent public discourse has suggested that public employers move away from DB plans. Thus, many retirees may be at risk of having a shortfall in their retirement incomes and will need to turn to the government for means of additional financial support. Social welfare programs are already in place to provide for retirement shortfalls, but these resources are not equipped to handle the long-term risk associated with today’s retirees.

In a broad sense, taxpayers will be on the hook regardless—either by paying for government DB plans or for government-subsidized welfare programs to supplement inadequate retirement income. The factors brought to light by the NIRS study reaffirm that the taxpayer dollar is put to more efficient use in a DB plan.

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Regulatory roundup

March 23rd, 2015 No comments

By Employee Benefit Research Group

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

DOL rules on timing of annual disclosures for participant-directed account plans
The Department of Labor (DOL) has released a direct final rule and a companion proposed rule on the timing of annual disclosures that affect fiduciary requirements for disclosure in participant-directed account plans. The direct final rule amends the DOL’s participant level fee disclosure regulation by making a technical adjustment to a timing requirement of the current regulation. It amends the definition of the term “at least annual thereafter” and substitutes the term “14-month period” for the term “12-month period.” The amendment provides plan administrators with flexibility as to when they must furnish annual disclosures.

The accompanying proposed rule would make the technical amendment necessary to implement the direct final rule’s annual timing requirement. If the DOL receives no significant adverse comments during the 90-day comment period, the direct final rule will go into effect without the agency taking further action. But if it receives significant adverse public comment, the direct final rule will be withdrawn.

To read the entire direct final rule, click here.
To read the entire proposed rule, click here.
Also, for a fact sheet, click here.

IRS extends temporary nondiscrimination relief for closed defined benefit plans
The Internal Revenue Service (IRS) recently published Notice 2015-28, extending the temporary nondiscrimination relief provided in Notice 2014-5 for an additional year. The new guidance applies relief to defined benefit plan years beginning before 2017 if the conditions of Notice 2014-5 are satisfied. During the period for which this extension applies, the remaining provisions of the nondiscrimination regulations under § 401(a)(4), including the rules relating to the timing of plan amendments under § 1.401(a)(4)-5), continue to apply.

To read Notice 2015-28, click here.

Joint Committee on Taxation issues explanation of tax legislation enacted in the 113th Congress
Twelve tax bills passed the 113th Congress and were signed by the president—including several that have an impact on retirement savings—according to a Joint Committee on Taxation report detailing each piece of legislation.

Read the entire report here.

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Employee communications: Transition to a VAPP

March 20th, 2015 No comments

By Heidi tenBroek

tenBroek-HeidiRetirement plan sponsors are increasingly considering transitioning their current retirement plans to variable annuity pension plans (VAPPs). This allows them to have stable costs like those of a 401(k) plan, while providing participants with reliable, lifelong income like a traditional pension plan.

Communicating the change to a VAPP, however, may feel daunting for plan sponsors. Effective communications ensure that employees understand how the VAPP works, how it will affect them, and why a VAPP is a stable retirement solution for the sponsor and for them. Breaking down plan concepts into digestible, clear messages is key. Using a variety of communication vehicles—meetings, newsletters, personalized projections, etc.—increases the odds of success. In fact, we’ve found employees are excited about VAPPs once they understand how they work.

A short video created for employees can be one of your most powerful tools in communicating a new kind of benefit. The combination of images, written text, and oral explanations are very effective in conveying how a VAPP works. It provides a solid foundation and a basic understanding that makes the detailed communications to follow more accessible. Below is a sample video created as an introduction to a VAPP transition.

For more Milliman perspective on VAPPs, click here.

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2014 a so-so year for most multiemployer plans

March 18th, 2015 No comments

By Kevin Campe

Campe-KevinMilliman today released the results of its Spring 2015 Multiemployer Pension Funding Study (MPFS), which analyzes the cumulative funded status of all U.S. multiemployer pension plans. These pension plans experienced little movement last year, slipping slightly from an 81% funded status at the end of 2013 to an 80% funded status at the end of 2014. As was the case in 2013, many mature plans are still struggling to recover from the financial crisis.


While the market value of assets for all multiemployer plans increased by $7 billion, the liability for accrued benefits outpaced these gains, growing by $12 billion and resulting in an increased shortfall of $5 billion.

People assume that the stock market recovery would be enough to push these multiemployer plans back to where they were in 2007, but it’s not that simple. Liabilities have been growing at 7.5% per year on average, which complicates a full recovery.

Approximately 15% of multiemployer pension plans are less than 65% funded as of December 31, 2014, and over half of the $117 billion aggregate shortfall for all multiemployer plans is attributable to these plans. On the positive side, about 22% of all multiemployer plans are over 100% funded.

The study notes that the recently enacted Multiemployer Pension Reform Act of 2014 provides new tools to the Trustees of the most severely underfunded multiemployer plans.

To download a copy of the entire study, click here.

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Regulatory roundup

March 16th, 2015 No comments

By Employee Benefit Research Group

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

OMB approves PBGC 2015 premium filing instructions
The Office of Management and Budget (OMB) has approved 2015 premium filing instructions. My PAA has been updated and is now ready to accept electronic premium fillings for plan years beginning in 2015.

For more information, click here.

IRS updates 403(b) listing of required modifications package
The Internal Revenue Service (IRS) has updated its Section 403(b) plan listing of required modifications. Also updated was a redlined version showing changes to 403(b) plan LRM from 2013. The package contains sample plan provisions that satisfy certain specific Internal Revenue Code requirements applicable to Internal Revenue Code Section 403(b) plans.

For 403(b) plan listing of required modifications and information package (LRM) (3-2015), click here. For the redlined version showing changes to 403(b) plan LRM (3-2013) (revised 3-2015), click here.

Senate finance letter addresses affordable retirement advice
Chairman Lamar Alexander (R-Tenn.) led a group of eight Republicans on the Senate labor committee in a letter recently cautioning Office of Management and Budget (OMB) Director Shaun Donovan on the potential negative impact of approving the Department of Labor’s (DOL) proposed rule to redefine and expand the term “fiduciary” if the current proposal has not changed significantly from the proposal DOL offered in 2010.

To read the entire letter, click here.

PBGC study: Multiemployer guarantee
The Pension Benefit Guaranty Corporation (PBGC) has published a new study entitled “Multiemployer guarantee.” The study found that more than half of the people in terminated multiemployer plans running out of money in the near future face a reduction in benefits under current PBGC guarantees. This compares to 20 percent of workers and retirees who saw reduced benefits under plans that have already run out of money and are relying on PBGC financial assistance.

To download the entire study, click here.

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Pension plan risks will dictate de-risking behavior

March 13th, 2015 No comments

By Javier Sanabria

The de-risking of defined benefit (DB) plans is not expected to cease despite a low interest rate environment. This de-risking activity will depend on how the options available to plan sponsors address their particular pension plan risks. In a recent Bloomberg BNA article, Milliman consultants Zorast Wadia and Stuart Silverman discussed the option of longevity hedging.

Here is an excerpt:

Another type of longevity risk-shifting is longevity hedging, also called longevity swaps, [Zorast] Wadia said.

With the release of the Society of Actuaries’ updated mortality tables, “I wouldn’t be surprised if there’s more interest in 2015 in longevity hedging for pension plans,” Wadia said.

The market for longevity hedging has been growing in Europe and the U.K., but has yet to develop in the U.S., Wadia said.

…Longevity swaps or longevity bonds are a “fairly low-cost approach” to de-risking a pension plan, said Stuart Silverman, also a principal and consulting actuary in Milliman’s New York office.

In a September 2014 Milliman report titled “Understanding Risks and Solutions: A Pension De-Risking Case Study,” co-authored by Silverman, longevity bonds are defined as “capital market instruments that can reduce the upper tail of pension plan costs that are due to life expectancy significantly higher than initially expected.”

“Essentially, the corporation would issue a bond, with the principal repayment contingent on the level of future life expectancies,” the report said.

If plan sponsors had been using longevity swaps since 2000, they would have locked into an economic payment stream based on mortality exposure, but would have reduced their longevity exposure, and therefore “would have saved a significant amount of pension liability, because they would have not had that exposure over that period of time,” Silverman said.

When a plan sponsor is considering its options—whether to maintain its plan or to move in the direction of de-risking—it should consider not only the risks to the plan, but also the company’s risk tolerance, Silverman said.

For Milliman’s perspective on the de-risking of DB plans, click here.

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March 15 alert: Ides of March is a 409A fateful day for employers’ bonus programs

March 11th, 2015 No comments

By Dominick Pizzano

Pizzano-DominickJust as ignoring the seer’s warning to “Beware the Ides of March” led to Julius Caesar’s demise on that fateful March 15, employers with calendar fiscal years must be wary of this date. Otherwise, when they distribute their bonuses, they may find the payments falling victim to a similarly highly undesirable outcome – becoming subject to Internal Revenue Code Section 409A. It is true that 409A, the now infamous rule that so strictly regulates the time and form of payment of nonqualified deferred compensation, includes a helpful exemption for “short-term deferrals.” However, to qualify for this “get out of 409A free” card, a payment must be made on or prior to the 15th day of the third month (i.e., March 15 for calendar fiscal years) following the end of the employees’ (or, if later, the employer’s) taxable year in which the bonus amount is no longer subject to a “substantial risk of forfeiture” (SROF).

Payment of the bonus is considered subject to a SROF if the employees only earn the right to payment once they have completed a specified number of years of service and/or met certain performance goals. Once such conditions are met, employees are considered to be “vested” in the benefit (i.e., entitled to the payment when it is made regardless of their employment status on the payment date). Employers sometimes add an extra condition by attaching a non-compete restriction under which employees forfeit the bonus if they terminate employment and enter employment with one of the employer’s competitors prior to the payment date. However, the inclusion of such a restriction is not recognized by the 409A rules as sufficient to create a SROF.

The following two examples illustrate how these rules are applied to employers with calendar fiscal years. Under the first scenario, the employer rewards an annual bonus based on both the employer’s financials and the employees’ individual performances. Payment of the bonus is scheduled to be made in the first quarter of 2015 as soon as administratively practicable following the determination of the amounts. Participants must actually be employed with the employer on the payment date to receive the bonus. Due to this “active employment on payment date” requirement, the employees never become vested in the benefit until the actual payment date. Therefore, employers with this design need not be concerned with missing the March 15 payment deadline.

In contrast, assume the same facts as the previous example except that in order to receive the bonus payment made in 2015, the employees must be employed on December 31, 2014, and must not violate a non-compete agreement prior to the payment being made. Because 409A does not recognize the non-compete condition, the vesting occurs in 2014. Consequently, in order to avoid 409A coverage, the bonus must be paid by no later than March 15, 2015, unless one of 409A’s limited late payment exception applies: (1) an unforeseen administrative delay, (2) the need to retain such funds because their disbursement would jeopardize the employer’s ability to continue as a going concern, or (3) the employer reasonably anticipating that its deduction of the bonus will be subject to the $1 million IRS deduction limit (and the employer did not reasonably anticipate the application of Section 162(m) when the bonus award was originally made). Each of these three exemptions will only be considered valid if the employer promptly makes the delayed bonus payment as soon as the applicable cause for the delay no longer exists.

What happens in the case of a bonus plan where the amounts were vested in 2014, the March 15 payment deadline is missed, and none of the three exemptions are available? Does 409A coverage automatically spell doom in the form of noncompliance and the corresponding penalties? The good news is that it’s possible to structure bonus plans so that they comply with the 409A rules. So for any employer that currently has a bonus program that needs to meet the March 15 deadline (i.e., those programs that vest employees in the prior year), it’s crucial to examine their current bonus determination and delivery processes. Do they have any intrinsic procedures (i.e., thereby eliminating the “unforeseen” exemption) that could cause the program to pay bonuses later than March 15 more than just on a one-time accidental basis? If the answer is “yes,” these employers should consult with their employee benefits specialist to review such bonus programs to make sure they are covered by a compliant 409A document so that even if the payment date is missed and their “short-term deferral exemption” blown, the bonus payment does not violate 409A, thereby risking the costly consequences of such noncompliance. One does not need to be a seer to know that to do otherwise would tempt the fates of the Ides of March, which history has shown never to be sound policy whether for emperors or employers.

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