COLAs for retirement, Social Security, and health benefits for 2015

October 31st, 2014 No comments

By Employee Benefit Research Group

With the release of the September 2014 Consumer Price Index (CPI) by the Bureau of Labor Statistics, the Social Security Administration (SSA) and the IRS have announced cost-of-living adjusted figures for Social Security and retirement plan benefits, respectively, for 2015. The 2015 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.

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A thought out approach to borrowing funds may ease PBGC premiums

October 30th, 2014 No comments

By Javier Sanabria

Congress has increased the PBGC premium rates that plan sponsors of underfunded defined benefit (DB) plans will have to pay in the coming years. Sponsors should consider borrowing money to fully fund their plans to eliminate these premiums. In the latest issue of Pension Risk Perspective, Milliman consultants Will Clark-Shim and Chris Jasperson discuss how to structure this kind of lending transaction.

Here is an excerpt from their article:

Factors to consider when borrowing funds include:

• Method of borrowing: Two primary options are a direct loan from a financial institution or issuing bonds. Plan sponsors should consider whether accounting treatment may vary depending upon the method of borrowing.

• Structure of repayment: Two common approaches are amortizing payments like a mortgage or issuing a bond with periodic interest payments and full principal repayment at maturity.

o Amortizing the debt over seven years may allow plan sponsors to somewhat replace the IRS minimum required contributions prior to issuing debt, but this may not be a readily available payment structure.

o Using a traditional bond structure with repayment occurring over 10, 20, or 30 years would give plan sponsors more cash-flow flexibility in the short term, but would not settle the outstanding liability until the debt is paid off at maturity.

o The longer the debt repayment period, the less attractive the transaction may become. If the plan sponsor intends to roll over the debt, that should be modeled at the outset.

• What is the interest rate on the debt? The lower the rate, the more attractive the transaction becomes.

• What is the plan sponsor’s marginal tax rate? The higher the tax rate, the more attractive the transaction may become.

For more Milliman perspective on pension risk management, click here.

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Pension sponsors can benefit from a weekly death audit

October 29th, 2014 No comments

By Javier Sanabria

Overpayment of pension benefits due to annuitant deaths may require additional plan contributions from a sponsor. However, a continuous death audit can help sponsors learn of annuitant deaths early, preventing unnecessary disbursements of funds. In his article “Advantages of a continuous death audit,” Milliman’s Justin Guy discusses the benefits of working with a certified search firm to report on annuitant deaths.

Here is an excerpt:

For some plan sponsors, Milliman has partnered with a certified search firm in order to continuously monitor two distinct populations. Both annuitants and deferred vested participants are monitored on a weekly basis for mortality verification purposes.

Why deferred vesteds? If these participants are not in pay, there is no risk of overpayment, so why monitor this population? The answer has roots in de-risking. If a terminated vested participant dies, the liability to the plan could be removed if that participant is not entitled to a death benefit based on marital status or other applicable plan provisions. In addition, contacting any beneficiary in as timely a fashion as possible will reduce the administrative burden of trying to locate beneficiaries years later before they become lost.

To illustrate the impact of prompt notification of a death for an annuitant, consider the following:

• Administrator conducts annual death audit on July 1.
• Annuitant dies on July 25, 2014.
• Death is not reported by estate.
• Annuitant has EFT.
• Annuitant is receiving a single life annuity of $500.

In this example, an overpayment for the months of August 2014 through July 2015 is likely, totaling $6,000 due to the timing of the audit and trust cut-off calendars. If the death is reported on the public DMF, which Milliman monitors weekly, only the August overpayment is inevitable. Therefore, $5,500 in overpayments would be prevented.

Although we have seen a 70% successful rate of recoupment, this is across the entire plan. It is much more likely to recoup $500 dollars from an estate than $6,000. Also, if identified early enough, it may be possible to recall the EFT without funds being lost from the plan at all!

In real-life administrative activities, a total of 149 annuitants became deceased between July 15, 2013, and August 1, 2013, for the same population Milliman supports.

Overall, the cost of administering these activities is far less than the cost of a single overpayment that is unsuccessfully returned. Milliman can achieve even higher savings due to a per-record fee structure. The more records searched, the lower the cost per record.


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Regulatory roundup

October 27th, 2014 No comments

By Employee Benefit Research Group

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

IRS announces pension plan limits for 2015
The Internal Revenue Service (IRS) has announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment.

For additional information, click here.

IRS issues guidance on target date funds for qualified defined contribution plans
The IRS has issued Notice 2014-66, providing a special rule that enables qualified defined contribution plans to provide lifetime income by offering, as investment options, a series of target date funds (TDFs) that include deferred annuities among their assets, even if some of the TDFs within the series are available only to older participants.

This special rule provides that, if certain conditions are satisfied, a series of TDFs in a defined contribution plan is treated as a single right or feature for purposes of the nondiscrimination requirements of § 401(a)(4) of the Internal Revenue Code. This permits the TDFs to satisfy those nondiscrimination requirements as they apply to rights or features even if one or more of the TDFs considered on its own would not satisfy those requirements.

Notice 2014-66 will be published in Internal Revenue Bulletin 2014-46 on Nov. 10, 2014.

In an accompanying letter, the Department of Labor (DOL) has confirmed that target date funds serving as default investment alternatives may include annuities among their fixed income investments. The letter also describes how ERISA fiduciary standards can be satisfied when a plan sponsor appoints an investment manager that selects the annuity contracts and annuity provider to pay the lifetime income.

To read Notice 2014-66, click here.
To read the DOL’s letter, click here.

IRS posts summary of new single distribution rule for 401(a) qualified, 403(b) and 457(b) governmental retirement plans
Beginning January 1, 2015, when participants choose to direct their retirement plan distribution to go to multiple destinations, the amounts will be treated as a single distribution for allocating pre-tax and after-tax basis (Notice 2014-54 and proposed rules issued September 19, 2014).

For additional information, click here.

PBGC posts 2015 premium rates
The Pension Benefit Guaranty Corporation (PBGC) posted the 2015 premium rates. The per-participant flat premium rate for plan years beginning in 2015 is $57 for single-employer plans (up from a 2014 rate of $49) and $13 for multiemployer plans (up from a 2014 rate of $12).

For plan years beginning in 2015, the variable-rate premium (VRP) for single-employer plans is $24 per $1,000 of unfunded vested benefits (UVBs), up from a 2014 rate of $14. This $10 increase was provided in The Bipartisan Budget Act of 2013. The VRP rate is also subject to indexing, but due to statutory rounding rules, indexing had no effect on the 2015 VRP rate.

For 2015, the VRP is capped at $418 times the number of participants (up from a 2014 cap of $412). Plans sponsored by small employers (generally fewer than 25 employees) may be subject to an even lower cap. Multiemployer plans do not pay a VRP.

The Bipartisan Budget Act of 2013 calls for the VRP rate to increase another $5 starting with 2016 (on top of indexing).

To view the PBGC premiums rates, click here.

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The Supreme Court, Tibble, fees, and the statute of limitations

October 24th, 2014 No comments

By Suzanne Smith

Smith-SuzanneEarlier this month, the U. S. Supreme Court decided that it will review a case relating to retirement plan fees. Although it is a case about fees, the issue before the Supreme Court is really about ERISA’s six-year statute of limitations.

Background about the case. Plan participant Glenn Tibble brought a lawsuit against his employer, Edison International, and the company’s benefits and investment committees as fiduciaries and administrators of his defined contribution (DC) plan. Tibble claims the plan fiduciaries managed the plan imprudently by selecting retail mutual funds as retirement plan investments when institutional shares were available at a much lower cost to participants.

The lower courts found that the fiduciaries were imprudent in selecting retail-class shares and failing to investigate alternative institutional-class mutual funds.

The problem for Tibble is that some of the retail-class funds were added to the retirement plan more than six years before Tibble filed the lawsuit.

The courts have held that although the fiduciaries were imprudent with the selection of the retail-class shares, Tibble’s claim with respect to funds selected more than six years before the lawsuit is barred by ERISA’s six-year statute of limitations.

Current issue for the Supreme Court review. Now the Supreme Court has agreed to review the statute of limitations issue.

Tibble’s argument, which is supported by the U.S. Department of Labor, is that there is a continuing duty to monitor the plan investments. As a result, Tibble thinks his claim should not be time-barred under the theory that there is a restart of the six-year period with the ongoing failure to monitor the plan’s investments. This is a frightening thought for employers!

Prior court decisions have sided with the fiduciaries and found that the six-year period runs from the initial selection of the investment. While there is a duty to monitor the plan’s investments, the courts have been reluctant to permit a new limitations period for a continuing violation. The Ninth Circuit said it would lead to an “unworkable result” where present fiduciaries could be liable for decisions made by their predecessors decades before.

So what are the takeaways for plan fiduciaries? On the fee issues, if you are selecting retail type mutual funds, you need to consider alternative institutional-class mutual funds and document your decision.

With respect to the statute of limitations, we should have the Supreme Court decision by the end of June 2015. For plan fiduciaries, the decision will be an important ruling on the meaning of ERISA’s six-year statute of limitations and the future liability for plan sponsors.

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Multiemployer Alert: The new ASOP 27 – what is the impact on multiemployer plan funding?

October 23rd, 2014 No comments

By Employee Benefit Research Group

The Actuarial Standards Board (ASB) has approved a revised version of Actuarial Standards of Practice (ASOP) No. 27, Selection of Economic Assumptions for Measuring Pension Obligations. The new standard is effective for any actuarial work product with a measurement date on or after September 30, 2014.

For a calendar year plan, this means the new standard will first apply to the 2015 actuarial valuation. Economic assumptions covered by ASOP 27 include the investment return, discount rate, inflation, postemployment benefit increases, compensation increases, and any other related assumptions. The greatest impact of the revised ASOP may appear in the development of multiemployer pension plan liabilities through its effect on the actuary’s selection of the investment return assumption. This Milliman Multiemployer Alert provides more perspective.

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GASB 67/68: Pension expense, balance sheet items, and projections from valuation date to measurement date

October 21st, 2014 No comments

By Javier Sanabria

In 2012, the Governmental Accounting Standards Board (GASB) released new accounting standards for public pension plans and participating employers, GASB Statements No. 67 and 68. This PERiScope article by Jennifer Castelhano and Erik Goodhart examines the impact these new accounting standards have on the pension expense and balance sheets of both pension plans and participating employers. In addition, the article explores roll-forward procedures that can be used to project plan liabilities from the valuation date to the measurement date.

To read Milliman’s PERiScope series on technical and implementation issues surrounding GASB 67 and 68, click here.

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Regulatory roundup

October 20th, 2014 No comments

By Employee Benefit Research Group

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

IRS revises Publication 4531, adds two new questions to 401k compliance checklist
The Internal Revenue Service (IRS) has updated its 401(k) compliance checklist for October 2014 and added two new questions to help employers determine if their plans meet the requirements of key IRS rules. The checklist, contained in Publication 4531, added the following two questions:

• Were top-heavy minimum contributions made?
• Was Form 5500, Annual Return/Report of Employee Benefit Plan, filed?

Each question has a yes or no answer, with a link to more information if the answer is no.

To access the updated checklist, click here.

IRS issues employee plans newsletter
The IRS has released the latest issue of Employee Plans News. The newsletter covers the following issues:

• New single distribution rule
• Canadian retirement plan participants
• Mandatory electronic filing for Form 8955-SSA and 5500-series
• Fidelity bonds and depositing plan contributions
• Form 500-EZ Pilot Penalty Relief Program
• IRS Nationwide Tax Forums online
• The Advisory Committee on Tax-Exempt & Government Entities (ACT)
• HAFTA premium guidance
• PBGC premium payments

To read the newsletter, click here.

PBGC issues technical update regarding HATFA’s impact on annual financial and actuarial information reporting
The Pension Benefit Guaranty Corporation (PBGC) has issued Technical Update 14-2 providing PBGC guidance on the effect of the Highway and Transportation Funding Act of 2014 (HATFA) on annual financial and actuarial information reporting under section 4010 of ERISA and part 4010 of PBGC’s regulations. This technical update supersedes any inconsistent guidance in PBGC’s 4010 filing instructions.

To read the entire technical update, click here.

PBGC files two notices requesting OMB approval
The PBGC has filed two notices of intention to request extension of Office of Management and Budget (OMB) approval (with modifications). PBGC is proposing to modify:

• Form 5500 Series – the 2015 Schedule MB (multiemployer defined benefit plan actuarial information) and instructions and the Schedule SB (single-employer defined benefit plan actuarial information) and instructions.
• Regulations on termination of single-employer plans and missing participants; implementing forms and instructions.

The notices inform the public of PBGC’s intent to modify these forms and solicit comments after publication in the Federal Register.

To read the entire notice regarding annual reporting via Form 5500 Series, click here.
To read the entire notice regarding termination of single-employer plans and missing participants, click here.

FASB issues proposed accounting standards update on compensation
The Financial Accounting Standards Board (FASB) has issued the exposure draft “Proposed accounting standards update: Compensation – retirement benefit (Topic 715)” covering “Practical expedient for the measurement date of an employer’s defined benefit obligation and plan assets.”

The amendments in this proposed update would provide a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity’s fiscal year-end and to follow that measurement date methodology consistently from year to year.

The amendments would require that an entity disclose the accounting policy election and the alternative date used for measuring defined benefit plan assets and obligations.

The proposed amendments would reduce the costs of measuring defined benefit plan assets and obligations for entities with fiscal year-ends that do not fall on a month-end without decreasing the usefulness of the information to financial statement users.

To read the entire exposure draft, click here.

EBSA requests OMB extend approval of information collection requests
The Employee Benefits Security Administration (EBSA) has filed a notice requesting public comment on their request that the Office of Management and Budget (OMB) extend approval of information collection requests (ICRs) contained in certain rules and prohibited transactions.

The Titles of the ICR rules and prohibited transactions are:

• Prohibited transaction exemption 86-128
• Consent to receive employee benefit plan disclosures electronically
• Furnishing documents to the Secretary of Labor on request under ERISA 104(a)(6)
• Patient Protection and Affordable Care Act (ACA) Section 2715 summary disclosures
• ERISA Section 408(b)(2) regulation
• ERISA Procedure 76-1 advisory opinion procedure
• ERISA Technical Release 91-1
• Disclosures by insurers to general account policyholders
• Registration for EFAST-2 credentials
• Notice of blackout period under ERISA
• ACA internal claims and appeals and external review procedures for non-grandfathered plans

To read the entire notice, click here.

BLS issues multiemployer pension plans analysis
The Bureau of Labor Statistics (BLS) has published an analysis of multiemployer pension plans in its latest issue of Beyond the Numbers. According to the analysis, about one in four workers currently covered by a traditional pension plan is in a multiemployer plan, established by a labor union and an industry or trade group to cover workers from two or more related employers.

To read the entire analysis, click here.

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Understanding risks and solutions: A pension de-risking case study

October 17th, 2014 No comments

By Javier Sanabria

Corporations with pension plans can be viewed as corporations owning life insurance companies (offering lifetime annuities to plan participants). De-risking these pension plans has become an increasingly important topic for chief financial officers as they try to manage their corporations’ risk.

Annuitization is often touted as one of the primary options to de-risk pension plans, but there are actually many strategies available for consideration. Each has its own strengths and weaknesses, so it is paramount for CFOs to have the appropriate information before making a decision. CFOs must also understand the risks associated with their pension plans, and should be able to define each corporation’s unique risk tolerance.

Longevity risk is often overlooked in the United States because of its long-term nature. However, it is an extremely important risk to consider when de-risking pension plans, due to the tremendous level of mortality improvement experienced in the United States within the last five to 10 years.

In the case where annuitization is determined to be the best solution, the process of obtaining annuity prices introduces a whole new array of considerations for the CFO. Because the annuitization of a pension plan is analogous to selling a life insurance company, we believe obtaining an independent actuarial appraisal can assist the corporation in securing the most cost-efficient annuity.

This article was published in Institutional Investor Journals (subscription required).

To receive a copy of this article, please contact Stuart Silverman.

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Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

October 16th, 2014 No comments

By Doug Conkel

Conkel-DouglasThe U.S. Supreme Court has agreed to rule on the Tibble vs. Edison case, the first case in front of the Supreme Court dealing with excess fees within a qualified defined contribution (DC) plan, e.g., a 401(k) plan. In this case the plaintiff contends there was a fiduciary breach of duty by Edison because the plan continued to use retail share class funds when lower-cost share classes became available to the plan as it grew. However, the focus of the ruling may not focus on the excess fee component but more on the six-year statute of limitations under ERISA (the U.S. law that regulates qualified retirement plans and fiduciary responsibilities). The statute of limitation under ERISA is designed to prevent fiduciaries from never-ending risks arising from historical decisions. Congress specifically added this limitation to try to minimize the burden of a 401(k) plan to plan sponsors. For this reason, the scope of the ruling may be limited to the statute of limitations rather than specifics on the fee issue. However, this ruling will be significant in light of the $4.2 trillion in 401(k) plan retirement assets.

Ultimately, the Supreme Court’s ruling and comments could have a large impact on future litigation concerning participant grievance against plan sponsors—we will have to wait and see. Regardless of the ruling, this increased attention will hopefully promote more education and development of best practices when it comes to plan sponsors truly understanding their fee arrangements within their qualified plans. As an active relationship manager ensuring that my clients completely understand their “total” fee structure, there has been a focused effort on my part toward that end the last several years. I have written a couple of white papers discussing elements of qualified plan fees, which often are overlooked or not discussed in detail at the fiduciary/advisor/provider level:

Fees: What everyone is NOT talking about!

Fees: What no one is talking about, round 2

One of the fee elements I discuss in detail is the administrative fees (revenue sharing) embedded in the plan’s investment options. It often feels as if sponsors focus on implicit administration fees when usually 70% or more of the plan’s total cost comes from the expense ratios of the plan’s investment options. One important best practice is to ensure that any revenue sharing embedded in a fund’s expense ratio is used to benefit the participants invested in that fund (not at the plan level but to benefit the participants who actually pay that revenue-sharing amount via the expense ratio). This is referred to as “fee-leveling” and while it is becoming a best practice there are still a large number of sponsors who don’t understand the issue and simply don’t know the solutions.

Assuming that a plan levels fees by giving the participants in a fund the benefit of that fund’s revenue sharing, then once an investment option is chosen for a plan’s fund lineup selecting the share class of that fund becomes an easy choice. The sponsor simply needs to select the share class that provides the lowest net cost to the participant. In the example below, assume that a plan sponsor levels fees by taking any revenue sharing paid by an investment option and crediting that back to the participants in that fund as a revenue-sharing expense reimbursement (a credit).

Figure 1: Fund A, Various Share Classes

Expense Ratio Revenue Sharing Net Cost to Participant
Share Class A 0.75% 0.30% 0.45%
Share Class I 0.50% 0% 0.50%

In the example above, for this plan at its current provider, the lowest net cost to participants (once the revenue sharing is allocated back to participants in this fund) would be the Share Class A. This is not always the result, depending on the fund family and share classes. Sometimes, there is no difference in net cost so the conclusion would be to go with the zero revenue-sharing class so the plan doesn’t have to do a revenue-sharing credit allocation.

As this case progresses we will post more comments and updates, but, for now, I encourage sponsors to study up on their plan’s fee arrangements, fee-leveling, and other best practices within the industry. Sponsors should not rely too much on their current providers or advisors if some of the topics discussed above have never been mentioned in a retirement committee meeting, as they might lack the insight required to do a complete evaluation.

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