By Denise Foster

Individuals who don’t save for retirement can be divided into three groups: those who don’t know they should, those who are unwilling (they know they should but don’t), and those who don’t have the means (they know they should but can’t). A plan sponsor likely has all three of these groups within its organization; each presents some unique challenges, but the first two groups would clearly benefit from an effective financial literacy program.

Don’t Know

It’s a simple and sad fact that some people don’t understand how important it is to save for their futures—these are the truly financially uninformed. Perhaps they were never exposed to the concept of saving; or their parents didn’t save or emphasize its importance. Where else would they pick this up? In North America, it’s rarely taught in school. Lacking knowledge and awareness, they live in the moment and are surprised to find they’re unprepared for the future.

Unwilling

More puzzling is the group of individuals who don’t save for retirement when, at a basic level, they know they should. Why would someone saving hard for retirement take an ill-advised loan from the account to pay for a new truck? Perhaps the following starts to explain some of this seemingly irrational behavior.

• The concept of a comfortable retirement is too nebulous and distant to motivate people to save. Instant gratification is the name of the game. Why wait when you can have it now?
• Denial dominates the thinking. If subsisting on Social Security or a meager public pension is the consequence, it doesn’t seem real for individuals as they continue to enjoy a prosperous and bountiful lifestyle.
• Information overload can lead to inaction. An overabundance of information can make it hard to filter out what’s important. People can reach the point of saturation and simply become paralyzed.
• Choice costs time. When faced with too many choices, it can be overwhelming to wade through them. The more choice, the more effort—and people will often choose the path of least resistance, which is to do nothing at all.

No Means

Critical needs can compete for resources. When a person is struggling to put food on the table every day, how is it possible to set money aside for the future? Sadly, given the economic downturn, more and more people are in this situation across the globe.

Communications Denise Foster, participant communication

By jeremy.engdahl-johnson

Milliman today released the results of its 2012 Milliman Medical Index (MMI), which measures the average healthcare costs for a typical American family of four receiving healthcare through an employer-sponsored preferred provider organization (PPO) plan. The average cost of care for this typical family in 2012 is $20,728. While the 6.9% increase over 2011 is the lowest rate of increase in the 12 years tracked by the MMI, the $1,335 increase surpasses last year’s record of $1,319.   

“The average rate of increase this year dips below 7% for the first time since we began analyzing these costs, but the total dollar increase is still the highest we have seen,” said Lorraine Mayne, principal and consulting actuary with the Salt Lake City office of Milliman. “This helps illustrate the challenge of controlling healthcare costs. When the total cost is already so high, even a slower rate of growth has a serious impact on family budgets.”

The MMI’s release date falls during an uncertain time for American healthcare, with the nation awaiting the outcome of the U.S. Supreme Court’s decision on the future of the Patient Protection and Affordable Care Act (PPACA). To date, the PPACA has had only a limited effect on healthcare costs for families covered by an employer-sponsored PPO plan; longer term, the implications may be more pronounced, and will depend on a number of dynamic and interrelated factors.

“We face a number of different potential scenarios depending on the future of reform,” said Chris Girod, principal and consulting actuary with the San Diego office of Milliman. “With this year’s MMI we have tried to map out what those different scenarios may mean for consumers, employers, care providers, and the government.”

As has been the case in prior years, this year’s analysis examines several key medical cost components:

• The MMI includes analysis of healthcare costs in 14 cities, thereby showcasing the role that geography plays in healthcare costs. This year, the average cost of care for the typical family in all but three of these cities exceeds $20,000. Of the 14 cities analyzed, Miami is the most expensive, at $24,965, while Phoenix is the least expensive at $18,365.
• The MMI examines how employers and employees share the cost of healthcare. This year employers will on average contribute $12,144 of the $20,728 total while employees—through payroll deductions and out-of-pocket expenditures—will pay the remaining $8,584.

“Some families may be surprised to hear their total average healthcare costs are exceeding $20,000 this year,” said Scott Weltz, consulting actuary with the Milwaukee office of Milliman. “While everyone knows the cost of healthcare is increasing, most people who receive health insurance through their employer are insulated from the true costs associated with the care they receive.” 

To view the complete MMI, click here.

Uncategorized Chris Girod, Lorraine Mayne, Milliman Medical Index, MMI, Scott Weltz

By Employee Benefit Research Group

The U.S. Department of Labor (DOL) has issued Field Assistance Bulletin (FAB) 2012-02, which contains a set of 38 “frequently asked questions” (FAQs) and answers on the agency’s final rules on retirement plan service provider and participant-level fee disclosures, well known as the ERISA section 408(b)(2) and section 404(a)(5) disclosure rules. FAB 2012-02 does not extend the upcoming (July 1 and August 30) compliance dates that some plan sponsors had sought. However, the DOL’s enforcement actions will consider whether plan sponsors and service providers acted reasonably and in good faith if or when a plan is audited.

In general, the guidance supplements the participant-level disclosure regulation by clarifying the requirements and its implementation. It also provides additional guidance to service providers about the requirements to furnish specified information to plan administrators. The FAQs cover numerous topics under two main headings. Under disclosure of plan-related information, questions are answered about: tax-sheltered annuity programs, administrative expenses, treatment of brokerage windows, benchmarks, and glossary requirements. Topics covered under disclosure of investment-related information include: the form of disclosure, operating expenses, transitional rules, and final amendments to the regulation. The DOL also announced in an accompanying news release that a second set of FAQs focusing on disclosure by covered service providers will be released in the near future.

The FAB 2012-02 is available here.

Benefit News

By Employee Benefit Research Group

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

DOL releases Field Assistance Bulletin on fee disclosures
The Department of Labor (DOL) has released Field Assistance Bulletin 2012-02 providing guidance on fee disclosures. This bulletin supplements the participant-level disclosure regulation by providing guidance on some of the most frequently asked questions concerning the regulation and how it may be implemented.

In addition, on February 3, 2012, the DOL published a final regulation under section 408(b)(2) of ERISA. The 408(b)(2) regulation, in relevant part, requires that certain covered service providers furnish specified information to plan administrators so that they may comply with their disclosure obligations in the participant-level disclosure regulation. Consequently, the guidance in Field Assistance Bulletin 2012-02 also serves as guidance concerning that specific requirement of the 408(b)(2) regulation. The bulletin is available here.

IRS posts VCP “Submission Kits” for plan sponsors who missed April 30 deadline
For retirement plan sponsors who missed the April 30 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) deadline to adopt a preapproved plan, the IRS has made available Voluntary Correction Program (VCP) submission kits. These kits include sets of instructions, forms, and information that will be needed about how the VCP program works. Plan sponsors with defined benefit (DB) plans can find more information here. Those with defined contribution (DC) plans can find more information here.

DOL’s ERISA Advisory Council announces 161st meeting for June 12-14
The Advisory Council on Employee Welfare and Pension Benefit Plans (also known as the ERISA Advisory Council) will hold its 161st meeting on June 12-14, 2012. The purpose of the open meeting is for Advisory Council members to hear testimony from invited witnesses and to receive an update from the Employee Benefits Security Administration (EBSA).

The Advisory Council will study the following issues:

• Managing disability risks in an environment of individual responsibility
• Current issues regarding income replacement during retirement rears
• Current challenges and best practices concerning beneficiary designations in retirement and life

 

Benefit News Regs and guidance

By John Ehrhardt

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit (DB) pension plans. In April, these pensions experienced a $39 billion decrease in pension funded status  based on a $35 billion increase in the pension benefit obligation (PBO) and a $4 billion decline in the asset value. April’s drop in funded status is the first of 2012 and comes following a strong improvement in March.  

These pensions were doing well in 2012 until April reversed the momentum. As has been the case with so many of our negative months, the decline in funded status was mostly interest-rate-driven.

In April, the discount rate used to calculate pension liabilities fell from 4.88% to 4.76%, pushing the PBO up to $1.561 trillion at the end of the month. The overall asset value for these 100 pensions decreased from $1.298 trillion to $1.294 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.76% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funding ratio from 82.9% to 85.6% by the end of 2012 and to 90.7% by the end of 2013.

Defined benefit John Ehrhardt, Pension Funding Index

By Employee Benefit Research Group

May began with a set of regulatory updates and reports worth noting for anyone in the employee benefits world. The following lists the key retirement-related topics to watch and includes links for you to learn more about each topic.

Pension priorities
Last Monday was the deadline to sign Economic Growth and Tax Relief Reconciliation Act (EGTRRA) plan documents. If you are a plan sponsor who is required to sign, but you missed the deadline, the IRS has issued guidance for fixing the problem that includes detailed instructions on restoring the tax-qualified status of your plan by filing a submission with the Voluntary Correction Program (VCP).

Also, the Department of Labor has posted the preliminary publication of the Form 5500 Direct Filing Entity Bulletin Abstract of 2008 Form 5500 Annual Reports. This resource includes data on direct filing entities (DFEs) including counts of DFEs, counts of private pension plans invested in DFEs, and asset counts.

Another report was recently released adding to the data on public pension plans. The Public-Employee Retirement Systems State- and Locally-Administered Pensions Summary Report: 2010 presents data on state- and locally administered public pension systems based on information collected from the 2010 annual survey of public-employee retirement systems. The data collected from these systems are for defined benefit (DB) plans only and do not include data for defined contribution (DC) plans or other postemployment benefit plans.

Spotlight on Social Security
Keeping tabs on Social Security earnings and benefit information just got easier. On May 1, the Social Security Administration (SSA) announced that Social Security statements are available online. In the press release announcing the online statements the SSA encouraged people to “get in the habit of checking their online Statement each year, around their birthday” to make sure their earnings are accurately reflected.

In other Social Security news, the Bureau of Labor Statistics published the final issue of its Program Perspectives with the focus on how much private industry employers pay for legally required employee benefits. The publication looks at private employers’ Social Security costs, along with Medicare, federal and state unemployment insurance, and workers’ compensation.

Check back here for more on new and updated regulations and how they affect you. To stay updated on recent regulatory developments, check out our Monthly Benefit News & Developments newsletter.

Defined benefit, Social Security Regs and guidance

By jeremy.engdahl-johnson

A profound shift is taking place in the way pension plan fiduciaries manage market risk and help participants save for retirement. It is being driven by strategies that go beyond asset allocation and seek to actively account for changing market conditions, striving to protect growth in bull markets and defend against losses during major downturns. For more on this new approach, see the new article in the latest issue of Insight.

Uncategorized Milliman Protection Strategy, Paul Bonsee, Tamara Burden, Zorast Wadia

By Charles Clark

The Social Security Trustees issued their annual report on April 23 and the messages are somewhat dour. However, the headlines that scream that payments will stop and drop to zero after 2033 are based on a fundamental misunderstanding about how the system will work.

Although the Social Security Trust Fund is projected to be “exhausted” after 2033, the payroll taxes collected on wages earned after that point will provide the source of revenue to pay retirement benefits. The system will then be a true pay-as-you-go system.

After 2033, projected continuing income to the trust funds equals about 75% of program cost, meaning that retirees will only receive 75¢ for every $1 under the current (complex) formula—but not zero. After 2085, continuing income equals about 73% of program cost, so retirees will only receive 73¢ for every $1 under the current (complex) formula.

Note that these forecasts do not anticipate any change in the current aforementioned complex formula. It does however reflect a set of economic, demographic, and actuarial assumptions that are “medium” in three sets of assumptions, commonly referred to as low, medium, and high.

And while we’re on the topic, the Social Security Administration today announced the availability of online statements. For more information, go here.

Social Security Charles Clark, Social Security

By Chris Sill

Liability-driven investment (LDI) strategies have been around for some time now. The main idea behind LDI strategies is that pensions should invest in long-term fixed-income securities in order to match their long-term liabilities. The theory is certainly sound; if a pension is able to accurately match all sensitivities to the yield curve of both assets and liabilities then its future income statements would not be subject to future interest rate moves. But a reduction in volatility of future cash requirements does not necessarily mean a reduction in future cash requirements.

For instance, underfunded plans may simply be locking in large future cash requirements if they were to move to an LDI strategy. This would be caused by the need to make up their funding deficit through future contributions. Further, even some well-funded plans may lock in large future contributions, which is due to the potential discrepancy between the assumed earned rate on assets in the actuarial valuation (current funded status) and the actual rates available in the market currently. Locking in future contributions may be feasible, or even preferable, to some well-funded pension plans. But for others the need for growth remains.

Growth assets such as equities are necessarily accompanied by an increase in volatility. Generally speaking, asset allocation strategies comprising equities have focused on notions of the long-term expected returns and volatilities of these assets, along with their correlations with each other and other portfolio assets. But such methods have ignored short-term fluctuations in these expected values. For instance, at the beginning of the financial crisis in September 2008, short-term realized equity volatilities were around three times their historical average levels. Accordingly, portfolio volatilities were much higher than targeted and, as most of the volatility was on the downside, much pain was felt.

Therefore, the need for asset risk management, as part of a comprehensive risk management process, is greatest in those plans requiring investment in growth assets. As such, this has become a hot topic of discussion among investment advisors, risk professionals, fund managers, and academics.

The need for portfolio growth should not be viewed as a license for unmitigated risk-taking. Equity risk management strategies involving the purchase of put options have been around for some time, but they are very expensive and rigid in the long term and require precise market timing in the short term. Another fund strategy, risk parity, seeks to create a fund with equal risk contributions from different asset classes. Given the lower volatility of bonds, however, this necessarily means large bond allocations, which may not be desirable given the current interest rate environment.  Ideally, a pension plan would benefit from a futures overlay strategy that combines formula-driven volatility management plus capital protection to help mitigate equity risk.  The Milliman Protection Strategy offers exactly that, and when combined with an effective LDI strategy, the pension portfolio becomes well positioned for (responsible) growth!

Defined benefit Chris Sill, FRM, Milliman Protection Strategy

By jeremy.engdahl-johnson

Over the last 25 years, defined contribution (DC) plans have replaced defined benefit (DB) plans as the primary retirement plan sponsored by employers. In the long run, this remarkable shift is problematic because having benefits from a DC plan as a primary retirement source subjects plan participants to longevity risk—the risk of running out of money during retirement.

Based on average life expectancy statistics, we know that half of the population will survive beyond its life expectancy and half of the population will not. This creates challenging circumstances for people to manage withdrawals from their retirement accounts. In addition, there is the added challenge of managing investments.

This article from the Spring 2012 issue of Actuarial Digest is not meant to compare the advantages and disadvantages of DC and DB plans; rather, it is meant to promote a new retirement paradigm where both types of plans can coexist and complement one another. This paper offers this new retirement model as a solution to the longevity risk problem.

Defined benefit longevity plan, Zorast Wadia