Top Milliman blog posts in 2014

December 15th, 2014 No comments

By Javier Sanabria

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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How to avoid running out of money in retirement: Final in a series

December 17th, 2014 No comments

By Janet McCune

McCune-JanetEarlier, we described three things 401(k) plan sponsors can do to help participants avoid running out of money in retirement. Offering managed risk equity funds as investment options, and incorporating them into the asset allocation glide path for the plan’s auto-investing tools, addresses two of three fundamental risks for retirement income: market risk and inflation risk. By continuing to service retirees as ongoing participants in the plan, the plan sponsor helps retirees maintain continuity between their pre-retirement and post-retirement investment strategies with lower, institutional investment expenses. But we haven’t addressed the issue of longevity risk—how can participants know how long their retirement savings have to last?

One powerful solution is to use a deferred annuity contract, which transfers longevity risk to an insurance company by starting payouts to the policyholder at an advanced age. On July 1, 2014, final Treasury regulations were issued regarding “qualified longevity annuity contracts” (QLACs) held within qualified defined contribution plans, i.e., 401(k) plans, 403(b) plans, IRAs. The regulations provide an exception to the required minimum distribution (RMD) rules of Internal Revenue Code section 401(a)(9), which require certain distributions to be made from qualified plans starting at age 70½. Without this exception, a deferred income annuity could cause the plan to violate the RMD rules, because the annuity does not begin payments until much later (usually age 80 but at least 85). The regulations state that a QLAC is not subject to RMDs until payments begin under the terms of the annuity, thus expanding retirement income options as an increasing number of Americans reach retirement age.

A QLAC can be purchased with up to 25% (maximum $125,000) of the account balance. If a participant at age 65 were to use 18% to 20% of their portfolio to purchase a QLAC that commences benefit payments at age 80, the remaining 401(k) account need only provide retirement income for 15 years, when the annuity payments would begin. Removing the uncertainty around how long the 401(k) account needs to last allows for a significant increase in retirement income. By adding a QLAC and applying the investment strategies suggested earlier in this series, we have achieved significant improvement in the sustainable withdrawal rate for the participant, while maintaining an equal probability of success!

In order to maintain simplicity and portability of the 401(k) plan, as well as to minimize fiduciary exposure for the plan sponsor, the best practice may be to encourage participants to hold the QLAC within an IRA. The participant may initiate a rollover distribution from the 401(k) to an IRA in order to pay the premium. The retiree takes installment payments from the 401(k) from age 65 to 80, then the annuity benefits provide retirement income from age 80 until death.1

This is Step 4 in helping 401(k) participants create sustainable retirement income from their 401(k) accounts (see the first three steps here). Undoubtedly, creative strategies will continue to emerge as the industry tackles this issue.

1This statement is not a recommendation to buy investment or insurance products. An individual should consult their personal adviser to determine the suitability of any investment or insurance product.

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Regulatory roundup

December 16th, 2014 No comments

By Employee Benefit Research Group

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

Treasury issues final rule on “myRA” savings bonds
The Treasury Department’s Bureau of the Fiscal Service has issued a final rule on the savings bond only available for Roth individual retirement accounts established under the “myRA” retirement savings program that the President announced in his 2014 state of the union address. The new electronic savings bond pays interest at a variable rate equal to the weighted average yield of all outstanding Treasury notes and bonds with four or more years to maturity, and thus carries no principal risk. This is the bond that has been available only to federal employees invested in the “G Fund” of the Thrift Savings Plan.

Although the push for myRA accounts has been directed at employees with no employer-sponsored plan, the fact sheet released when the program was announced states that myRAs are “for savers who either do not have access to an employer-sponsored retirement savings plan or are looking to supplement a current plan.” Worker eligibility requirements include annual incomes of less than $129,000 for individuals ($191,000 for couples).

The final rule, which is effective starting on Dec. 15, 2014, sets forth the requirements applicable to the retirement savings bonds issued to the designated Roth IRA custodian for the myRA program on behalf of program participants. Thus, it addresses registration, crediting, limitations on additions, interest, and redemptions; it does not provide guidance on any employer role.

Treasury submission to OMB and comment request on new information collection
The Treasury Department is seeking the Office of Management and Budget’s (OMB) approval for an information collection to inform its administration of a new federal program being launched this year that aims to enable more low- and moderate-income individuals to save for retirement.

As part of its work to launch the program, the Treasury is exploring several approaches for enabling eligible individuals to open and put savings into the retirement accounts, including the option of encouraging individuals to open and fund the accounts when they file their federal tax forms. The Department contracted with the Center for Social Development (CSD) at Washington University in St. Louis to assist with research on this topic. CSD currently administers an annual privately-funded survey, the Household Financial Survey (HFS), through which it gathers savings information from low- to moderate-income tax filers immediately after they have filed their tax forms. This national survey is integrated into the no-cost version of Intuit’s TurboTax tax preparation software, and it reaches a significant sample of people who could be eligible for the accounts.

The information collected through the Treasury-funded Retirement Savings Module of the HFS will provide baseline characteristics, needs, and practices of a segment of the population targeted by the federal program.

For more information, click here.

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Considerations in deciding whether or not to terminate a frozen pension plan during 2015

December 11th, 2014 No comments

By Jeffrey Kamenir

Kamenir-JeffThe recent issuance by the Society of Actuaries of a new mortality table for possible use in valuing pension liabilities has some plan sponsors thinking they should consider terminating their frozen pension plans by the end of 2015. The plan termination consideration is due to speculation that the Internal Revenue Service (IRS) may require the use of the new mortality table for calculating lump-sum distributions of pension benefits beginning in 2016, which would increase lump-sum amounts. There are many other considerations beyond the possible timing of the new mortality table that a plan sponsor should take into account before deciding to terminate a frozen pension plan by the end of 2015, which are summarized below.

In support of 2015 plan termination:

1. Avoidance of scheduled increases to Premium Benefit Guaranty Corporation (PBGC) premium rates after 2015.
2. No prospective concerns about trying to annually manage pension cost volatility.
3. Elimination of annual administration costs.
4. If a lump-sum distribution is offered, active participants have the opportunity to have immediate access to the value of their frozen benefits.

Disadvantages of 2015 plan termination:

1. Lump-sum and annuity purchase liability interest rates are currently very low, which results in higher plan termination liabilities.
2. A large one-time pension settlement accounting loss may be incurred on the company’s financial statements.
3. A very large pension contribution may be necessary to fully fund plan termination liabilities, which in part is due to the low interest rate environment.
4. A plan termination is a time-consuming process with various steps required, including trying to locate missing participants.
5. Recent funding relief legislation may result in lower minimum required contributions over the next several years.

In order to accomplish a plan termination by the end of 2015, a plan sponsor will need to make a decision to terminate early in 2015 to account for the entire plan termination process. The decision process should include discussing with the plan’s legal counsel whether or not it is advisable to distribute plan assets following PBGC approval but prior to IRS approval of the plan termination.

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First-time adoption of International Accounting Standards for EOS benefits

December 10th, 2014 No comments

By Javier Sanabria

In many countries in the Middle East it is a legal obligation to provide an end of service (EOS) severance benefit when an employee leaves an employer. Analysis by Milliman indicates that a significant proportion of companies could be underreporting when accounting for the cost of these benefits. The growing trend toward accounting for EOS benefits under International Accounting Standards provides for the transparent representation of these long-term costs. Employers should be aware that the impact of moving to the international standards will depend on how reserves were established previously. This paper by Milliman consultants Danny Quant, Joanne Gyte, and Simon Herborn offers some perspective.

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Regulatory roundup

December 8th, 2014 No comments

By Employee Benefit Research Group

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

House approves tax extenders bill with multiemployer pension plan provisions
On December 3, the House of Representative voted 404-17 to approve the “Achieving a Better Life Experience Act” (ABLE Act, H.R.647) which would allow for the creation of savings accounts to enable certain disabled beneficiaries to help pay for qualified expenses, effective for tax years beginning in 2015. Following the vote, the House combined the bill with the tax extenders legislation (H.R.5771) before sending it to the Senate.

Of interest to some employers are two provisions included in the ABLE Act:

• The IRS would be authorized to certify “professional employer organizations” (PEOs). Such PEOs would pay an annual fee of $1,000, satisfy certain requirements (including posting a bond to ensure they satisfy employment tax withholding and payment obligations and submitting audited financial statements), and assume sole responsibility for the customer’s employment taxes. The provision generally would be effective for wages paid by a certified PEO for services performed by an employee after 2015, and the IRS would be required to establish the PEO certification program by July 1, 2015. (The Joint Committee on Taxation estimates this provision would increase revenues by $8 million over 10 years.)

• Certain civil penalties under the tax code would be adjusted for inflation, beginning in 2015, including for failures to file a tax return or to pay tax; failures to file certain information returns, registration statements, and other statements; and failures to file correct information returns and payee statements. (The Joint Committee on Taxation estimates this provision will increase revenues by $115 million over 10 years.)

IRS extends submission deadlines
The IRS released Announcement 2014-41. This announcement extends to June 30, 2015, the deadline for submitting on-cycle applications for opinion and advisory letters for pre-approved defined benefit plans for the plans’ second six-year remedial amendment cycle. This announcement also provides a two day extension (from Saturday, January 31, 2015, to Monday, February 2, 2015) for Cycle D on-cycle submissions (primarily individually designed plans including multiemployer plans).

For more information, click here.

DOL report to Congress finds EBSA has not provided guidance and oversight of use of limited-scope audits
The Department of Labor’s Office of Inspector General (OIG) has issued its Semiannual Report to Congress on the DOL’s activities, accomplishments, and concerns for the six-month period ending September 30, 2014. During this reporting period, the Office of Inspector General (OIG) issued 19 audit and other reports that identified needed improvements in Department of Labor (DOL) programs and operations.

Of interest to employee benefit practitioners was that an audit of the Employee Benefits Security Administration’s (EBSA’s) oversight of the use of limited-scope audits for employee benefit plans found that EBSA has not provided the guidance and oversight needed to adequately protect more than $1 trillion of plan assets invested in complex trust arrangements and hard-to-value assets held and certified by custodians.

To read the entire report, click here.

Read more…

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Google Hangout: Pension Funding Index, December 2014

December 5th, 2014 No comments

By Javier Sanabria

The funded status of the 100 largest corporate defined benefit pension plans fell by $8 billion during November as measured by the Milliman 100 Pension Funding Index (PFI). The deficit widened from $263 billion to $271 billion, primarily due to another decrease in the benchmark corporate bond interest rates used to value pension liabilities. The funded ratio declined from 84.8% to 84.6% at the end of November.

PFI co-author Zorast Wadia offers some perspective on the latest results in this Milliman Google+ Hangout.

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Corporate pension funded status drops another $8 billion in November

December 4th, 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 November, these plans experienced a $26 billion increase in pension liabilities and an $18 billion increase in asset value, resulting in an $8 billion increase in the pension funded status deficit.


The story this year seems to be the same month after month, and in November it’s exactly the same as it was in October—an $8 billion increase in the funded status deficit, with liabilities exceeding positive asset performance. For the year, interest rates have dropped by 79 basis points, driving a $167 billion liability increase.

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 3.89% were maintained, funded status would improve, with the funded status deficit shrinking to $230 billion (87% funded ratio) by the end of 2015 and to $191 billion (89.2% funded ratio) by the end of 2016. This forecast assumes 2014 aggregate contributions of $44 billion and 2015 and 2016 aggregate contributions of $31 billion.

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Fund pensions and reduce PBGC premiums by borrowing cash

December 4th, 2014 No comments

By Javier Sanabria

Pension Benefit Guaranty Corporation (PBGC) premium rates are going to rise threefold by 2016. Consequently, companies sponsoring underfunded defined benefit plans will have to pay higher annual premiums. A solution that could lower or eliminate PBGC premiums is to borrow cash to fund a pension. This Plan Sponsor article authored by Milliman’s Will Clark-Shim offers perspective.

Here’s an excerpt:

Plan sponsors may not have the cash to contribute to their plans; another option is to borrow money to fund the pension plan.

This may sound like leverage, but plan sponsors already owe the pensions. The PBGC values those pensions as if they were AA-rated corporate debt. If a plan sponsor borrows money, funds the pension plan, and invests the borrowed proceeds in AA-rated corporate debt, it has roughly swapped one type of debt for another. The goal here is not to beat the market; the goal is to avoid paying a “tax” of 2.9% per year…

How much can plan sponsors save? Illustratively, if a plan sponsor pays 6% interest on its debt, invests the proceeds at 4% in long-duration corporate bonds, and forgoes 2.9% PBGC premiums, it saves 0.9% per year. On $20 million, that would be $180,000 per year, prior to taxes.

In addition, the pension contributions and the interest on the plan sponsor’s debt are generally tax-deductible. That may mean some tax relief above and beyond the PBGC premium savings. The higher the company’s taxes, the greater the potential tax advantages.

To learn more about this pension risk management solution, read Clark-Shim and Chris Jasperson’s article “Borrowing money to reduce PBGC premiums.”

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Developing pension plan investment strategy: A variety of considerations

December 4th, 2014 No comments

By Javier Sanabria

Investment committees face a variety of considerations when managing pension plans. In the past, these committees focused mainly on strategies for investments, but now they need to consider multiple dimensions. Taken together, the multiple aspects affect the value of plan assets and liabilities when effectively managing a pension plan. They also affect the development of an investment strategy for the plan assets. As a pension plan sponsor, it is important to fully understand the various areas that will affect the volatility of assets, liabilities, and contributions on the pension plan and to develop a strategy that will lessen this impact. This paper authored by Jeff Marzinsky offers some perspective.

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