The year in DC plans: Confidence up, savings to follow?

Regli-JinnieFrom a regulatory perspective, 2015 has been a good year for defined contribution (DC) retirement plans. The Employee Benefit Research Institute (EBRI) 2015 Retirement Confidence Survey reported that 22% of workers are now very confident about their retirement savings, up 4% from 2014 and 9% from 2013 survey results. Despite the rising confidence, only 67% percent of workers have reported they or their spouses have saved for retirement, which is statistically equivalent to the findings from 2014.

As we roll into 2016, we’ll begin to see the effects of most of 2015’s legislative updates. We hope to see a continued rise in retirement confidence among American workers. Here are the regulatory updates from 2015 that will affect defined contribution plans:

Announcement 2015-19 (January): Changed the determination letter program for qualified plans. Effective January 1, 2017, the regular five-year determination letter cycle for individually designed plans will be terminated. Determination letters will only be required upon initial plan qualification and plan termination. Effective July 21, 2015, off-cycle determination letter applications will no longer be accepted.
Form 5500 SUP (effective January 2015): Offers a paper-only form to supplement the Form 5500 for 2015 and later plan years. Only plans that are exempt from mandatory Internal Revenue Service (IRS) electronic filing may use this form.
Rev Proc 2015-28 (April): Updated the corrections procedures under the Employee Plans Compliance Resolution System (EPCRS) to provide some relief for missed deferral penalties.
Rev Proc 2015-32 (June): Granted late filer penalty relief for Form 5500-EZ filers. The new payment per submission is $500 for each delinquent return for each plan up to a maximum penalty of $1,500 per plan.
• H.R. 3236, Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 aka “The Highway Funding Bill” (July): Extended the Form 5500 deadline for taxable years beginning after December 31, 2015. For calendar-year plans, the deadline extends from October 15 to November 15 of the following year.

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Regulatory roundup

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

PBGC publishes 2015 Annual Report
According to the Pension Benefit Guaranty Corporation (PBGC) 2015 Annual Report, the agency paid $5.7 billion to more than 800,000 people in failed pension plans, similar to the amount of payments PBGC made in FY 2014.

The PBGC’s multiemployer insurance program reported a deficit of $52.3 billion, compared with $42.4 billion in fiscal year 2014. The larger deficit is due to changes in interest factors that increased multiemployer program liabilities. PBGC’s interest factors are used to measure the value of future benefit payments. The deficit increase was also driven by the identification of 17 additional multiemployer plans that are newly terminated or are projected to run out of money within the next 10 years.

To learn more about the annual report, click here.

Savings arrangements established by states for non-governmental employees
The Employee Benefits Security Administration has issued a proposed rule under the Employee Retirement Income Security Act of 1974 (ERISA) setting forth a safe harbor describing circumstances in which a payroll deduction savings program, including one with automatic enrollment, would not give rise to an employee pension benefit plan under ERISA. A program would be established and maintained by a state government, and state law would require certain private-sector employers to make the program available to their employees.

Several states are considering or have adopted measures to increase access to payroll deduction savings for individuals employed or residing in their jurisdictions. By making clear that state payroll deduction savings programs with automatic enrollment that conform to the safe harbor in the proposal do not establish ERISA plans, the objective of the safe harbor is to reduce the risk of such state programs being preempted if they were ever challenged. If adopted, this rule would affect individuals and employers subject to such laws.

To read the entire proposed rule, click here.

Interpretive bulletin – State savings programs
The Employee Benefits Security Administration has issued an interpretive outlining the views of the Department of Labor concerning the application of ERISA to certain state laws designed to expand the retirement savings options available to private sector workers through ERISA-covered retirement plans. Concern over adverse social and economic consequences of inadequate retirement savings levels has prompted several states to adopt or consider legislation to address this problem.

To read the entire interpretive bulletin, click here.

IRS schedules hearing regarding multiemployer plan administration
The IRS has issued a notice of public hearing on proposed regulations relating to the administration of a multiemployer plan participant vote on an approved suspension of benefits under the Multiemployer Pension Reform Act of 2014 (MPRA). The proposed regulations were issued on September 2, 2015.

The public hearing is being held on Friday, December 18, 2015, at 10 a.m. The IRS must receive outlines of the topics to be discussed at the public hearing by Monday, November 30, 2015.

To read the entire IRS Notice, click here.


Regulatory roundup

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

IRS issues final rule with transitional amendments related to hybrid retirement plans
The IRS has issued final regulations that provide guidance regarding certain amendments to applicable defined benefit plans. Applicable defined benefit plans, including cash balance plans and pension equity plans, use a lump sum-based benefit formula.

These final regulations relate to previously issued final regulations that specify permitted interest crediting rates for purposes of the requirement that an applicable defined benefit plan not provide for interest credits (or equivalent amounts) at an effective rate that is greater than a market rate of return. The regulations permit a plan sponsor of an applicable defined benefit plan that does not comply with the market rate of return requirement to amend the plan in order to change to an interest crediting rate that is permitted under the previously issued final hybrid plan regulations without violating the anti-cutback rules of section 411(d)(6). The regulations affect sponsors, administrators, participants, and beneficiaries of these plans.

To read the entire final rule, click here.

IRS announces changes to ERPA Program
The IRS has issued the latest edition of Employee Plans News. The edition announces changes to the Enrolled Retirement Plan Agent (ERPA) Program.

Specifically, as of February 12, 2016, the IRS will no longer be offering the ERPA Special Enrollment Examination (ERPA SEE) to become an ERPA. Any current ERPAs will continue to hold the ERPA designation, allowing them to practice before the IRS. Anyone who has passed both parts of the SEE can still become an ERPA if they file the Form 23-EP, Application for Enrollment to Practice before the Internal Revenue Service as an Enrolled Retirement Plan Agent (ERPA).

For more information, click here.

Year-end compliance issues for single-employer retirement plans

By year-end 2015, sponsors of calendar-year single-employer retirement plans must act on necessary and discretionary amendments and perform a range of administrative procedures to ensure compliance with statutory and regulatory requirements. This Client Action Bulletin looks at key areas that such employers and sponsors of defined benefit (DB) or defined contribution (DC) plans should address by Dec. 31, 2015.

Corporate pension funded status improves by $25 billion in October

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In October, these pension plans experienced a $25 billion increase in funded status based on a $33 billion increase in asset values and an $8 billion increase in pension liabilities. The funded status for these pensions increased from 81.7% to 83.3%.


October was a great month for these pensions, but it may be too little too late as far as 2015 is concerned. Overall funded status has improved by only 1.8% this year, and this would be worse if it weren’t for interest rates inching in the right direction to reduce pension liabilities.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.26% by the end of 2015 and 4.86% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 85% by the end of 2015 and 98% by the end of 2016. Under a pessimistic forecast (4.06% discount rate at the end of 2015 and 3.46% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 82% by the end of 2015 and 75% by the end of 2016.

Regulatory roundup

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

IRS extends comment period on proposed rule related to Form W-2 series
The IRS has issued an extension to its comment period on its proposed rule relating to extensions of time to file information returns on forms in the W-2 series (except Form W-2G). Written or electronic comments and requests for a public hearing for the notice of proposed rulemaking published on August 13, 2015 (80 FR 48472), is extended to January 11, 2016.

For more information, click here.

Employee Benefits Security Administration publishes new fact sheet
The Department of Labor’s Employee Benefits Security Administration (EBSA) released a fact sheet regarding the private employee benefit plan system in the United States. In FY 2015, EBSA recovered $ 696.3 million for direct payment to plans, participants and beneficiaries.

To read the entire fact sheet, click here.

Multiemployer pension plans experience slight decline in funded status during the first six months of 2015, may face further funding challenges ahead

Campe-KevinMilliman today released the results of its Fall 2015 Multiemployer Pension Funding Study (MPFS), which analyzes the cumulative funded status of all U.S. multiemployer pension plans. These pension plans showed little movement in the last six months, dropping from 80% as of December 31, 2014, to 79% as of June 30, 2015.


The study noted that the market value of assets for all multiemployer plans decreased by $1 billion. The liability for accrued benefits grew by $7 billion and resulted in an increase in the funded status shortfall of $8 billion.

Multiemployer pension plans have not experienced the kind of equity returns hoped for this year, and recent stock market volatility has only compounded the funding challenges. We’ve added a new twist to this latest study, forecasting how various returns would affect funded status. A strong six months of double-digit returns could push pension funding for multiemployer plans slightly over 87%, while a 7% decline would drop funded status below 72%.

As of June 30, 279 multiemployer plans are over 100% funded, with an aggregate surplus of approximately $6 billion, unchanged from December 31, 2014. The shortfall for multiemployer plans less than 65% funded grew from $60 billion to $65 billion. This group now represents about 17% of all plans and continues to account for more than half of the aggregate deficit for all multiemployer plans of $125 billion.

The study also found that there has been significant recovery from the low point in 2009, but that the aggregate funded percentage has yet to return to pre-2008 levels.

Weighing income options can prepare individuals for retirement

Pushaw-BartPension plans are providing an ever-decreasing portion of retirement wealth as wave after wave of Baby Boomers reach retirement. In and of itself, this is neither surprising nor remarkable. What is remarkable, though, are two typical characteristics of what we are being left with regarding retirement wealth.

First, the jettison of pension plans means relying on defined contribution plans as the provider of principal retirement wealth. This is suboptimal inasmuch as these plans are typically 401(k) savings plans, originally introduced as a sideline fringe benefit scaled for purposes less than what they’re now required to deliver on. This is mostly a benefit-level issue of which we have seen recent hints of amelioration—namely, the industry recognizing that in an all-account-based retirement world, saving 16% of annual pay is in the ballpark, not the historical mode of 6% employee deferral (plus maybe 6% employer match totaling 12%). This relates to the second endangered characteristic, which needs to be brought into brighter focus: an in-plan solution for generating guaranteed retirement income.

Pension plans are wonderful for participants in that everyone is automatically a participant, automatically earning benefits on a meaningful trajectory, and automatically having the ultimate retirement wealth delivered on a lifetime guaranteed basis. Yes, 401(k) plans are trending this way on the first two, and the third is quickly emerging as another area where we need more pension-like alternatives.

One may generalize by saying that retirees take their 401(k) balances and roll them over when they retire. An economic conundrum baffling academics is that none or very few of these folks take advantage of insured annuities even in the midst of robust studies identifying them as an optimal solution for retirement income in face of investment uncertainty and longevity risks. This raises two subtle yet important points.

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Changing public pension investment landscape

The global financial crisis shrunk the funding status of many public pensions. Some sponsors are beginning to cut their expected rate of return, and change the way they invest and handle portfolio risk. In this Reuters article, Milliman consultant Tamara Burden provides perspective on how sponsors can better manage their pension investment risk.

The growing recognition that short-term volatility can have a devastating impact on mature pension plans in the $4 trillion sector could herald a sea change in the way public funds invest in the future.

“There is this shift to recognizing risk is a relevant piece of the discussion, it’s not just about how you get the highest returns over a long period of time but that short-term fluctuations in asset levels can be incredibly detrimental,” said Tamara Burden, an actuary at consulting firm Milliman….

Burden is seeking to persuade public pension managers to use Milliman’s risk management strategy to reduce equity exposure in portfolios by shorting stock index futures. This means they don’t have to sell their fund’s equity holdings.

The strategy is being applied to about $70 billion in portfolios with variable annuities, retail mutual funds and collective investment trusts used by 401(k) plans, but so far not in the public pension sector.

Interest, Burden says, has increased this year with about 15 public pension administrators considering a shift versus five during the same period last year.

Retirement, social security, and health benefit limits for 2016

With the release of the September 2015 Consumer Price Index (CPI) by the U.S. Bureau of Labor Statistics, the Social Security Administration (SSA) and the Internal Revenue Service (IRS) have announced the 2016 figures for, respectively, the Social Security program and tax-qualified retirement plan benefits. In most cases, the figures are unchanged from 2015. The 2016 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.