A major change to correction procedures provides much needed relief for sponsors

April 20th, 2015 No comments

By Kari Jakobe

Jakobe-KariOn April 2, the Internal Revenue Service (IRS) rolled out major changes to the correction methods related to failure to implement automatic enrollment or to having missed participant-elected deferral changes.

Previously, the prescribed correction in the Employee Plans Compliance Resolution System (EPCRS) was for the employer to make up 50% of the missed deferrals and 100% of the match, plus earnings on both. This was often a windfall for participants and penalty for sponsors that deterred many from adopting auto-enroll provisions in their plans.

There are now two new safe harbor corrections: one for plans with auto-enroll provisions, another for faulty elective deferrals. The general guideline of the new correction methods are as follows:

For plans with auto-enroll features:
• If the failure is found within nine months of the plan year-end in which the auto-enroll should have begun:
o Start the deferral immediately
o Send a notice of the failure to the participant
o 100% of any missed match is made up and adjusted for earnings

• If the failure is found outside the nine-month window following the plan year-end, the old procedure remains in place.

For other elective deferral changes that are not completed as requested by the participant, if the failure is found within three months:
• Start the deferral immediately
• Send a notice of the failure to the participant
• 100% of any missed match is made up and adjusted for earnings

If found after three months from the date the change was to be effective:
• Start the deferral immediately
• Send a notice of the failure to the participant
• 100% of any missed match is made up and adjusted for earnings and the participant must receive a qualified non-elective contribution (QNEC) in the amount of 25% of the missed deferral, plus earnings

For a more detailed explanation on the new regulations, see the recent Client Action Bulletin published by Milliman.

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Regulatory roundup

April 20th, 2015 No comments

By Employee Benefit Research Group

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

DOL issues proposed fiduciary rule
The U.S. Department of Labor (DOL) has released a proposed rule that will protect 401(k) and IRA investors by mitigating the effect of conflicts of interest in the retirement investment marketplace. Under the proposals, retirement advisers will be required to put their clients’ best interests before their own profits. Those who wish to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest will need to rely on one of several proposed prohibited transaction exemptions.

To read the entire proposed rule, click here.

Bureau of Labor Statistics: A look at today’s pension equity plans
Among the changes in pension plans tracked by the Bureau of Labor Statistics (BLS) since the late 1970s are different formulas for calculating benefits. One of those formula types is the pension equity plan, or PEP. These plans were first identified by BLS private industry surveys conducted in the late 1990s; today, they make up a small share of all pension plans. The latest issue of BLS’s Beyond the Numbers examines the concept behind pension equity plans and looks at some unique features of these plans.

To read the latest issue, click here.

FASB issues accounting standards update on employer’s defined benefit obligation and assets
The Financial Accounting Standards Board (FASB) has issued a new accounting standards update entitled “Practical expedient for the measurement date of an employer’s defined benefit obligation and plan assets.” The update gives companies “practical expedient” to decide fair value measurement date for plan benefits when there is mismatch in timing.

The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. The amendments in this update should be applied prospectively.

To read the entire update, click here.

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Plan funding side by side: Traditional DB and VAPP

April 16th, 2015 No comments

By Kelly Coffing

Coffing-KellyIn recent months, we have featured quite a few articles on the resurgence in popularity of variable annuity pension plans (VAPPs). They provide lifelong inflation-protected benefits to participants while employers make predictable plan contributions (similar to 401(k) plans).

In this presentation, I discuss how funding a VAPP compares with funding a traditional defined benefit pension plan. The presentation also touches on how Milliman helps plan sponsors stabilize benefits for retirees through reserves.

For more information on VAPPs, click here, or visit our reading list.

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IRS eases correction methods for common 401(k)/403(b) plan failures

April 14th, 2015 No comments

By Employee Benefit Research Group

This Client Action Bulletin discusses recently issued IRS Revenue Procedure 2015-28 that will allow sponsors of 401(k) and 403(b) plans to fix two common administrative errors. The IRS released guidance that will allow sponsors of 401(k) and 403(b) plans to easily correct two common administrative errors without first having to obtain approval from the agency. Revenue Procedure 2015-28 modifies and improves the Employee Plans Compliance Resolution System (EPCRS) by providing a new safe harbor relating to automatic contribution features (including automatic enrollment and automatic escalation of elective deferrals) and a separate new special safe harbor correction method for faulty elective deferrals that occur over a period of limited duration.

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Regulatory roundup

April 13th, 2015 No comments

By Employee Benefit Research Group

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

IRS updates determination letter guidance and FAQs
The Internal Revenue Service (IRS) has updated its web guidance on applying for a determination letter as it applies to individually designed plans. The IRS also updated its set of frequently asked questions (FAQs).

To read the updated determination letter guidance, click here.
To read the updated FAQs, click here.

The National Technical Information Service receives comment letters on the Death Master File
Section 203 of the Bipartisan Budget Act of 2013, requires the Secretary of Commerce to establish a program to certify persons who may access the Social Security Administration’s Death Master File (DMF). As a result of this action, the National Technical Information Service (NTIS) created regulations that establish the requirements and procedures for access to the DMF. Additionally, this action established a fee structure for the certification program for access to the DMF for any deceased individual, within three years of the individual’s death.

The NTIS issued proposed regulations with a comment period that ended on March 30, 2015. To read the comment letters, click here.

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Projected funding rates for the next several plan years

April 10th, 2015 No comments

By Stuart Kliternick

Kliternick-StuartThe assumptions actuaries use to calculate funding and accounting liabilities for defined benefit (DB) plans are in the process of undergoing revisions over the next several years. The Society of Actuaries recently released new mortality and mortality projection tables and, even though the Internal Revenue Service has yet to adopt the new mortality tables for funding purposes, several plans are using either these tables or a modification of the current standard tables when calculating their accounting disclosure liabilities. Actuarial Standards of Practice (ASOPs) will encourage actuaries to review other demographic assumptions (e.g., withdrawal) and economic assumptions, such as the consumer price index (CPI). And, as the Milliman Pension Funding Study shows, the discount rates used for accounting purposes have fluctuated.

However, because of recent law changes made by the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA), pension funding discount rates for plans that use segmented interest rates have been relatively stable for the past several years. In fact, the process used to determine the segment rates under HATFA is so stable that, absent additional funding rules changes, one can predict with reasonable accuracy the segment rates to be used for funding valuations for the next several plan years.

As an example of the stability of the process for calculating the HATFA rates, assume that the yield curve used to calculate the segment rates remains constant from February 2015 (the most recent yield curve released as of this blog post) through September 2015. The calculated rates used to establish the HATFA corridor would be 4.92%, 6.57%, and 7.39%. The low-end segment rates of the HATFA corridor, which make up 90% of those rates, are 4.43%, 5.91%, and 6.65%. They would be the rates used for 2016 plan year valuations. These rates do not change even if the yield curve used to calculate the segment rates were to increase by 42 basis points each month through September 2015 or decrease by 19 basis points each month.

We have calculated 5,000 stochastic simulations of the Pension Protection Act of 2006 (PPA) yield curve, assuming current funding laws remain in place throughout this calculation and using Milliman’s capital market assumptions. The table below shows the results for the next four years showing the 50th percentile of the 24-month average rates (assuming a calendar-year plan with no look back period), and a range using the 5th and 95th percentile rates as endpoints for 2015-2018.

Year 2015 2016 2017 2018
First Segment Rate 1.22% 1.48%(0.94%-2.11%) 1.89%(0.46%-3.71%) 2.30%(0.16%-5.11%)
Second Segment Rate 4.11% 3.94%(3.49%-4.42%) 4.04%(2.81%-5.37%) 4.36%(2.55%-6.50%)
Third Segment Rate 5.20% 4.96%(4.56%-5.37%) 5.04%(3.98%-6.17%) 5.40%(3.86%-7.08%)

As the table indicates, short term interest rates are projected to rise over the next several years, perhaps as much as over 100 basis points. Mid-term and long term rates are projected to initially fall and then rise about 20 to 25 basis points over the next several years. As such, the effective interest rate on this basis would rise by about 25 basis points depending on the plan’s payout streams.

Next, the following chart provides the 50th percentile of the stochastic simulations of the low end of the HATFA rates through the 2018 plan year, and a range using the 5th and 95th percentile rates as endpoints for each segment for 2015-2018. As a reminder, the segment rate to use when calculating liabilities is the greater of the 24-month average rate and the low-end HATFA corridor rate. Therefore, if the HATFA rate is lower than the 24-month average rate, the 24-month average rate will be used in the stochastic simulation.

Year 2015 2016 2017 2018
First Segment Rate 4.72% 4.43%(4.43%-4.44%) 4.16%(4.13%-4.19%) 3.71%(3.63%-5.10%)
Second Segment Rate 6.11% 5.91%(5.91%-5.91%) 5.72%(5.70%-5.74%) 5.23%(5.16%-6.50%)
Third Segment Rate 6.81% 6.65%(6.65%-6.65%) 6.48%(6.46%-6.50%) 5.96%(5.90%-7.08%)

As this table indicates, despite the rise in the 24-month average rates, the HATFA rates drop by 85 to 101 basis points. This would cause a typical plan’s effective interest rate for funding purposes to drop by 84 basis points from 2015 to 2018, which leads to an increase in the Target Liability by over 10.5%. The large drop in the HATFA rates from 2017 to 2018 is due to two reasons: the HATFA corridor widens by 5% starting in 2018 so the low end of the corridor is now 85% of the 25-year average used to calculate the HATFA rates; and the highest rates in the 25-year average used to calculate the HATFA rates are removed by 2018.

Based on the stochastic simulations, it would appear that the 2016 plan year HATFA segment rates have already been determined. The 5th to 95th percentile interval around the midpoint rate is the same except for an increase of one basis point in the first segment, and the 24-month average rates do not approach the HATFA rates. In addition, it can reasonably be predicted that the 2017 rates will be the HATFA rates based on these simulations. This is due to the 24-month average rates in the first table not approaching the HATFA corridor rates in the second table. Because the 5th to 95th percentile interval around each projected 2017 plan year HATFA rate is narrow, using the midpoint rates in projecting 2017 liabilities will result in a good estimate of the 2017 liability to be used for minimum funding purposes.

However, for 2018 the 5th to 95th percentile interval around the midpoint HATFA rate widens, especially going from the 50th percentile to the 95th percentile. This increase is due to the projected 24-month average being greater than the low-end HATFA corridor rate. The likelihood of the 24-month average rate falling inside the HATFA corridor increases in the next several plan years as the HATFA corridor widens to 70% to 130% of the 25-year average. Therefore it becomes harder trying to predict plan year segment rates starting in 2018.

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Communication is key to achieving high take-up rates for pension lump-sum cash out programs

April 7th, 2015 No comments

By Julie Bentz

Bentz-JulieOne of the ways many organizations are reducing pension risk is by offering a lump-sum cash out opportunity, or “window,” to former employees. Successful cash outs can reduce participant-driven fees and future plan liabilities, as well as protect plan sponsors from unexpected plan costs. But without a high response rate, cash outs won’t deliver the desired results. That’s where communication comes in: successfully notifying and educating participants of their cash out options is key to achieving the highest possible response rate.

Generally, Milliman has seen that a program with an effective communication campaign can achieve take-up rates in the range of 50% to 60%. Consider these proven steps to communicate your lump-sum cash out option:

1. Plan for success. Determine how to get your communications into their mailboxes, literally. Do you have good addresses? How about email addresses? If not, how can they be found?

2. Make the message clear. Separate information from action to simplify the decision-making process and to ensure that participants aren’t overwhelmed with their options. Highlight what they need to know, what they need to do, and where they can find help along the way. Communication should be carefully presented as unbiased and understandable options.

Our lump-sum communication plan is supported by what the U.S. Government Accountability Office (GAO) reported regarding the eight key types of information participants should have for a sound understanding of a lump-sum offer. Your communication should answer the following questions:

• What benefit options are available?
• How was the lump sum calculated?
• What is the relative value of the lump sum versus the monthly annuity?
• What are the potential positive and negative ramifications of accepting the lump sum?
• What are the tax implications of accepting a lump sum?
• What is the role of the Pension Benefit Guaranty Corporation (PGBC) and what level of protection does the PGBC provide on each benefit option?
• What are the instructions for either accepting or rejecting the lump sum?
• Who can be contacted for more information or assistance?

An appealing design should complement a clear message. Design, layout, graphics, and colors are all factors that can make the difference between something that gets a response and something that gets ignored.

3. Reinforce the message. Don’t expect one mass mailing to do the job. Include multiple touch points to announce the window, educate about the opportunity, and provide reminders about the deadline.

4. Offer support. Be sure to consider where participants can go for help, whether that’s a call center, human resources (HR) department, or outside financial advisors. Then provide the service team with materials such as frequently asked questions (FAQs), communication samples, and training to prepare them to answer questions and support the initiative.

5. Go the extra mile. To boost the response rate, you may also want to consider additional touch points, such as:

• Webinars with overviews of pension benefits, discussions of lump sums versus annuities, and other considerations
• Letters for special situations, such as qualified domestic relations orders (QDROs), alternate payees, etc.
• Individual consultations with experienced retirement education specialists
• Group meetings to walk through the statement, form, and election process
• A website with personalized statements, online election capabilities, and daily reporting of response rates

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Regulatory roundup

April 6th, 2015 No comments

By Employee Benefit Research Group

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

IRS releases guidance on safe harbor correction methods
The IRS has issued Revenue Procedure 2015-28, which contains modifications to Revenue Procedure 2013-12, 2013-4 I.R.B. 313. The modifications reflected in this revenue procedure include new safe harbor EPCRS correction methods relating to automatic contribution features, including automatic enrollment and automatic escalation of elective deferrals, in plans described in § 401(k) and § 403(b). The special safe harbor correction methods established for plan including those with automatic contribution features that have failures that are of limited duration involving elective deferrals.

To read the entire guidance, click here.

PBGC issues proposed rule on electronic filing of multiemployer plans
The Pension Benefit Guaranty Corporation (PBGC) is proposing to amend its regulations to require electronic filing of certain multiemployer notices. These changes would make the provision of information to the PBGC more efficient and effective. The proposed rule would require the following notices to be filed electronically with PBGC:

• Notices of termination under part 4041A
• Notices of insolvency and of insolvency benefit level under parts 4245
• Notices of insolvency and of insolvency benefit level under part 4281 (following mass withdrawal)
• Applications for financial assistance under part 4281 (following mass withdrawal).

To read the entire proposed rule, click here.

IRS reminds plan sponsors to keep track of loans and hardship distributions
Even if a plan sponsor uses a third party administrator (TPA) to handle participant transactions, they are ultimately responsible for the proper administration of their retirement plan. The IRS has published recordkeeping requirements regarding loans and hardship distributions.

For more information, click here.

IRS issues guidance on plan distributions to foreign persons
The IRS has published information for plan sponsors making distributions to foreign individuals. To read the entire guidance, click here.

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Milliman Hangout: 2015 Pension Funding Study

April 3rd, 2015 No comments

By Javier Sanabria

The funded status of the largest 100 corporate defined benefit plans declined by $131.3 billion in 2014 as measured by the 2015 Milliman 100 Pension Funding Study (PFS). Plan liability increases overwhelmed robust asset investment gains and annual contributions declined to $39.8 billion from $44.2 billion in 2013. PFS coauthors John Ehrhardt and Zorast Wadia discuss the results of the study with Amy Resnick, executive editor of Pensions & Investments, in this Milliman Hangout.

To read Pensions & Investments’ coverage of the study, click here.
To download the 2015 Milliman 100 Pension Funding Study, click here.

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Discount rates deepen pension funding deficit and make 2014 a banner year for liability-driven investing

April 2nd, 2015 No comments

By John Ehrhardt

Ehrhardt-JohnMilliman today released the results of its 2015 Pension Funding Study, which analyzes the 100 largest U.S. corporate pension plans. In 2014, these pension plans experienced a funded status decline despite a 10.9% investment return, with plan liabilities for these 100 plans increasing by $189.2 billion and assets increasing by $57.9 billion. This resulted in a $131.3 billion increase in the funded status deficit, representing a funding ratio decline of 6.1%.

Pension plan sponsors may be feeling whiplash after the last three years. In 2012, plans with the heaviest investment in fixed income experienced superior returns. In 2013, we saw the opposite: Plans with heavy equity allocations fared the best. Now with these latest results, we’ve again reversed ourselves, as plans with the highest fixed income allocation once again outpaced the field despite a strong year for equities. This whiplash is the result of discount rates that hit a record low this year, and continue to define pension funding status.

Study highlights include:

Asset allocations shift toward fixed income. Equity allocations in the pension portfolios dropped to 37.3% by the end of 2014, the lowest in the 15-year history of this study. The companies included in this study have generally shifted toward higher allocations in fixed income investments.

Risk transfer trend continues. Some plan sponsors engaged in pension risk transfer activities, including two well-publicized pension buyouts conducted for two of the Milliman 100 companies (Bristol-Myers Squibb and Motorola).

New mortality assumptions increase pension liabilities by 3.4%. The magnitude of these increases is contingent on age, gender, and other demographic characteristics of each plan’s participants. Based on the footnote disclosures at year-end 2014, the new Society of Actuaries mortality tables led companies to update mortality assumptions, increasing pension liabilities by approximately $38.3 billion, or 3.4%, at least among those plans that disclosed the impact.

Contributions decline during 2014. The $39.8 billion in contributions during 2014 were the lowest level since 2008 and marked a $4.4 billion decrease from 2013 contribution levels. The lower-than-expected contributions were likely due to plan sponsors changing their contribution strategies in light of the Highway and Transportation Funding Act of 2014 (HATFA) interest rate stabilization legislation, enacted in August 2014.

Pension expense increases. Robust investment gains in 2013 were partially offset by the impact of lower contributions and increasing discount rates during 2013, producing a net increase of $4.8 billion and resulting in a total of $37.1 billion in pension expense. Pension expense hit an all-time high at $56.1 billion in 2012.

What to expect in 2015. The passage of HATFA may result in lower contributions on par with those seen in 2014. However, for plans already engaged in liability-driven investing (LDI), higher contribution levels can be expected. The lower discount rates at the end of 2014 are expected to lead to significant 2015 pension expense increases because discount rates for the coming fiscal year are set at the start of the fiscal year. This does not factor in any possible plan de-risking activity.

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