Sticky contribution rate can enhance public pension funding status

Alternative funding approaches can help public defined benefit (DB) plan sponsors stabilize contribution rates and maintain a healthy funded status. In this article, Milliman actuary Daniel Wade discusses how a fixed, or “sticky,” contribution rate approach helped one large DB retirement system maintain a strong funded ratio.

Here is an excerpt:

While policymakers have the discretion to recommend a change to contribution levels when deemed necessary, the funding and benefits policy has guidelines and metrics to assist those policymakers with the difficult decisions required. The policy has a relatively wide (but not too wide) zone for maintaining the status quo. When the funded ratio is between 95% and 120% and certain other parameters are met, the policy advises that no action should be taken.

Note that the “no action” zone is not symmetric around 100%. This is by design, which is due to the belief that actions required to increase the funded ratio when it dips below 100% are more urgent than taking actions that could decrease the funded ratio as it exceeds 100%. Reserves over 100% may be needed for future rate stabilization. The funded ratio is a useful measure, but it is based on the assumption that best estimates are met. A cushion above 100% is welcomed when assumptions are not met.

Often in the public sector, there are significant governance issues once there is a “surplus” as measured by a funded ratio above 100%. Permanent benefit improvements can be made based on temporary highs in asset values.

… Note that in the System’s policy, the term “funding reserve” is used instead of surplus when the funded ratio is above 100%. While this is only terminology and does not directly influence anything, it reflects a mindset that having a funded ratio above 100% does not mean that you have extra money that must be spent; instead there is a reserve for rate stabilization.


Corporate pension funded status declines by $28 billion in September

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In September, these pension plans experienced a $28 billion decrease in funded status based on a $19 billion decrease in asset values and a $9 billion increase in pension liabilities. The funded status for these pensions decreased from 83.3% to 81.7%.


The calendar year began with strong equity performance that seemed so promising, and yet here we are looking at an overall decline in equities for the year. It will take a massive rally in the fourth quarter for these 100 pensions to sniff their annual expected return of 7.3%.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.34% by the end of 2015 and 4.94% 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 97% by the end of 2016. Under a pessimistic forecast (4.04% discount rate at the end of 2015 and 3.44% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 80% by the end of 2015 and 73% by the end of 2016.

Survey of Thai employee benefit obligations as of 2556 B.E. (A.D. 2013)

This Milliman study, authored by Danny Quant, Joanne Gyte, and Simon Herborn, covers the 50 companies featured in the SET 50 index as of 31 December 2556 Buddhist Era (31 December A.D. 2013). The main aim of the study is to educate and create awareness about the state of employer-sponsored long-term employee benefits programs and foster a healthy dialogue among policy builders, employers, employees, and the general public about the future of such plans in Thailand.

Regulatory roundup

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

PBGC releases FY2014 projections report
The projected insolvency date for the insurance program for multiemployer pension plans, which cover more than 10 million Americans, has been delayed by three years, according to the FY 2014 projections report released by the Pension Benefit Guaranty Corporation. The risk of program insolvency has decreased over the near term due primarily to the new premium revenues anticipated under the Multiemployer Pension Reform Act of 2014 (MPRA). It is more likely than not that the program’s assets will be depleted in 2025, compared with 2022 in last year’s report, and the risk of insolvency grows rapidly thereafter.

Projections for the PBGC’s insurance program for single-employer plans, which cover about 31 million people, show that the program’s financial condition continues to be likely to improve and conclude that it is highly unlikely to run out of funds in the next 10 years. PBGC modeled 5,000 simulations for the 2014 Projections Report, and none showed that the program would be unable to pay the benefits it owes in 2025.

To read the PBGC’s entire projections report, click here.

JCT provides background on proposed fiduciary rule
The Joint Committee on Taxation has released a report explaining information regarding the Department of Labor’s proposed fiduciary rule. The document provides a description of present law relating to prohibited transactions, investment advice, and fiduciary status with respect to retirement plans and individual accounts.

To read the entire report (JCX-131-15), click here.

GAO report on pension advance transactions
The Government Accountability Office (GAO) have released a report entitled “Pension advance transactions – questionable business practices and the federal response” (GAO-15-846T). The report is based on testimony provided by Stephen Lord, managing director, forensic audits and investigative service at the GAO, before the Senate Special Committee on Aging. The testimony examines companies attempting to take advantage of retirees using pension advances. The report describes the number and characteristics of pension advance companies and marketing practices; evaluates how pension advance terms compare with those of other products; and evaluates the extent to which there is federal oversight.

To read the entire report, click here.

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Regulatory roundup

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

Access to specific provisions of employer-provided benefits
The U.S. Bureau of Labor Statistics released a new Beyond the Numbers article describing the prevalence with which people working for private employers in the United States are given the opportunity to enroll in health and retirement plans with various provisions—the extent to which they have access to those provisions.

To read the entire article, click here.

Summary of the quarterly survey of public pensions
The U.S. Census Bureau has released the summary of its quarterly survey on public pensions. The report for the 100 largest public-employee pension systems in the country shows that cash and security holdings totaled $3,369.0 billion in the second quarter of 2015. This is a decrease of 1.0% from the first quarter total of $3,401.5 billion. Earnings in the second quarter totaled $32.0 billion, a decrease of 59.2% from $78.3 billion in the previous quarter.

To read the entire survey, click here.

National Compensation Survey: Employee benefits in the United States
The National Compensation Survey (NCS) provides comprehensive measures of compensation cost trends, the incidence of benefits, and detailed benefit provisions. A newly published bulletin presents estimates of the incidence and key provisions of selected employee benefit plans. Estimates presented are on benefits for civilian workers—workers in private industry and in state and local government—by various employee and employer characteristics.

To read the entire bulletin, click here.


Automatic savings increase tool enhances 401(k) plan

Milliman’s automatic savings increase tool helped one bank transition to a defined contribution-focused retirement program. In this article, Noah Buck discusses how the organization’s 401(k) plan achieved higher employee participation as well as greater savings rates two years after plan modifications.

Here’s an excerpt:

Separate from providing guidance and strategy on plan design, Milliman helped the client roll out a secret weapon: Milliman’s voluntary automatic savings increase tool. To be clear, the plan design changes mandated a 1% annual increase up to 10% for any participant who is automatically enrolled. The voluntary automatic savings increase tool is a feature of Milliman’s website that allows participants to elect their own automatic increase schedule. It is a convenient mechanism to help participants update or confirm their current savings rate and choose an annual increase date, the annual incremental increase, and the maximum savings rate. For example, a participant may elect to save at 5% with an annual 1% increase every September 1 until the savings rate reaches 12%. Participants can provide their email address in order to receive a reminder a few weeks before the scheduled annual increase.

The voluntary automatic savings increase tool was not expected to have a major impact. Instead, it was considered something useful to help chip away at the lost 11.5% of annual DB benefits. It was also considered a means for those participants on a tight budget who were not automatically enrolled to increase their savings rates at their own pace.

… As seen in the table below, the average expected total increase in the savings rate for the 35 participants who elected auto-increase is 5.9%, which will roughly double the current average savings rate for this group. This increase, combined with the expanded profit-sharing contribution, is projected to close the 11.5% gap for many employees.

Auto savings increase tool_image

Milliman clients recognized by “Save 10” initiative

Milliman announced this week that a group of its clients will be recognized by the Financial Services Roundtable’s “Save 10” initiative, which is a business-to-business, peer-to-peer effort encouraging responsible employers to help their employees better prepare for retirement by helping them to save 10% of their income.

“One of the best ways to help people save for their financial future is for companies to automatically enroll employees in workplace savings programs,” said former Minnesota Governor Tim Pawlenty, chief executive officer (CEO) of the Financial Services Roundtable. “Save 10 recognizes such companies, and we hope that by highlighting their terrific efforts, more companies will become Save 10 employers.”

The Milliman clients joining the Save 10 effort include Mankato Clinic, Francis Investment Counsel, Fish & Richardson, Tiller Corporation, Southern Minnesota Beet Sugar Cooperative, CliftonLarsonAllen, Felhaber Larson, and Communications Systems, Inc.

“We work with our clients to provide a meaningful retirement benefit,” said Milliman principal Kevin Skow. “Features like auto-enrollment and auto-escalation allow employers to better help their employees save for retirement. Our plan participant tools help to educate employees on how much they need to save and how they can accomplish their retirement goals.”

Nearly 82% of employees save for retirement when their employers offer an auto-save program compared with just 64% when employers do not. Save 10 aims to fundamentally change these facts.

To be considered for recognition as a Save 10 employer, companies must certify that they engage in certain activities that qualify them as Save 10 certified. This includes offering a retirement plan, providing employees opportunities to save 10% of their income, contributing to employee retirement accounts, ensuring employees can “keep 10” by providing access to disability and life insurance plans, and other criteria.

Other companies that have joined the Save 10 effort include Allstate, Assurant, AXA, EZE Castle Integration, First Horizon, Franklin Resources, IBM, LPL Financial, Mastercard, Nationwide, Northern Trust, Popular Community Bank, Principal, Prudential, Putnam Investments, Quicken Loans, State Farm, SunTrust, TransAmerica, Toyota Financial Services, United Technologies, and UNUM.

Read more about the Save 10 initiative and qualifying criteria at For more on Milliman’s retirement planning tools, click here.

Regulatory roundup

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

PBGC issues final rule on electronic filing requirements for multiemployer plan
The Pension Benefit Guaranty Corporation (PBGC) has released a final rule that will require electronic filing of certain multiemployer notices (e.g., notices of termination under part 4041A, notices of insolvency and of insolvency benefit level under parts 4245 and 4281, and applications for financial assistance under part 4281). The agency says the changes will make the provision of information to PBGC more efficient and effective.

To read the entire final rule, click here.

PBGC posts premium filings reminders
The PBGC has posted a checklist of reminders on its website to help ensure premium filings are timely and accurate. To review the checklist, click here.

Regulatory roundup

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

PBGC issues final rule on reportable events and certain other notification requirements
The Pension Benefit Guaranty Corporation (PBGC) has issued this final rule to make the requirements of the sponsor risk-based safe harbor more flexible, make the funding level for satisfying the well-funded plan safe harbor lower and tied to the variable-rate premium, and add public company waivers for five events. The waiver structure under the final rule will further reduce unnecessary reporting requirements, while at the same time better targeting PBGC’s resources to plans that pose the greatest risks to the pension insurance system.

To read the entire final rule, click here.

IRS issues final rule on determination of minimum required pension contributions
The Internal Revenue Service (IRS) has issued a final rule providing guidance on the determination of minimum required contributions for single-employer defined benefit pension plans. In addition, this document contains final regulations regarding the excise tax for failure to satisfy the minimum funding requirements for both single employer and multiemployer defined benefit pension plans.

The final regulations for minimum contributions reflect provisions of the Pension Protection Act of 2006 (PPA), Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21), and the Highway and Transportation Funding Act of 2014 (HATFA).

The final rule is effective as of September 9, 2015, and applies to plan years beginning on or after January 1, 2016.

To read the entire final rule, click here.

EBSA posts transcripts of hearings on conflict of interest proposed rule
The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) posted transcripts of the four-day public hearing on the conflicts of interest proposed regulation.

To read the transcripts, click here.

You heard it before, American workers still aren’t saving

Moen-AlexA recent survey shows that Americans are saving more overall, but less in employer-sponsored retirement plans. So how can sponsors and administrators of defined contribution plans solve this? Easy:

1. Use an auto-enrollment design with a default of no less than 6%.
2. If you provide a match, stretch the match to at least 7% or 8% of pay.
3. Consider adding a nonelective (i.e., profit-sharing) contribution.
4. Reenroll all non-savers every six years at the default rate.

Some experts suggest that automatic plan features are the best way to change behavior. This is most likely true, but a New York University (NYU) study suggests that while auto-enrollment gets people into the plan, it is not ensuring that they build secure retirements. All too often employers select the default rate of 3%, which, according to researchers, reduces long-term retirement savings for those who would have enrolled at a higher rate. As consultants, we see this example frequently—a young employee enters the plan automatically and three years later is still at 3%, even though the plan is matching deferral rates up to 6%. Out of sight and out of mind can be dangerous for young employees. The NYU study states that 80% of retirement plans include an employer match contribution, and of those plans, almost half of employees are not maximizing the match. That means that at least half of workers do get it; at the right deferral rate, there is free money on the table. With this in mind, consider an example to illustrate the savings impact of a new match contribution formula: currently, the match is 50% of the first 6% (or maximum of 3% of pay). Why not match 100% of the first 1%, then 25% of the next 8%? In this scenario, we could argue that half of the employee population would defer 9% of pay to get the 3% match. This would produce a total annual contribution of 12% of pay per year, without the employer matching anymore compensation than it did in the current formula.

Figure 1: Match Formulas

Figure 1

To emphasize the impact of different deferral rates on an employee’s account balance at retirement, using the proposed new match formula, see the chart below:

Figure 2: Potential Savings

Figure 2

A recent Employee Benefits Research Institute Retirement Confidence Survey asked workers what action they would take if they were automatically enrolled into their retirement plans, deferring 6%. Nearly three-quarters, 74%, responded that they would stay at that rate or increase their contribution rates. This survey addressing employee behavior offers strong incentive for a 6% auto-enrollment rate. In my opinion, plan sponsors should incorporate this type of employee behavioral analysis into the plan design process. A current client has maintained participation rates near 90%, with a 6% auto-enrollment rate. And of those deferring, 84% defer at a rate greater than or equal to 6%.

While matching contributions are an important feature, the researchers argue a more beneficial tool for a plan is a general (i.e., nonelective) contribution. And if the employer can afford to, and the plan is designed for the population correctly, the nonelective contribution can provide a more substantial retirement benefit. There are, of course, trade-offs, and with nonelective contributions comes stricter annual testing.

Something else to think about—reenrolling all current employees when the plan adds the auto-enrollment design. I have witnessed firsthand the success of such an endeavor with another Milliman client who did this 18 months ago. The plan went from 63% participation to 97%—and has maintained that level.

As an administrator of defined contribution plans, I know automatic arrangements can be difficult to administer, but the recent relaxation by the Internal Revenue Service (IRS) of correction rules (Revenue Procedure 2015-28), and the evidence provided by the surveys mentioned above, simplify the decision. If employers enroll new employees in plans automatically, they are clearly likely to stay, and the automatic arrangement often becomes the obvious choice. But the rate needs to be high enough to be worthwhile. Plan sponsors must evaluate the goals of their plans. Is the objective to simply have higher participation, satisfy tax incentive rules, and ensure that workers save something toward retirement? Or is it to truly build a serious retirement benefit for employees? In that likely case, additional studies of the employee population and their saving behavior must be incorporated into plan designs.