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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Multiemployer Alert: IRS issues final hybrid plan regulations with variable annuity pension plan implications

October 15th, 2014 No comments

By Employee Benefit Research Group

On September 19, 2014, the Internal Revenue Service (IRS) published final regulations providing guidance on hybrid pension plans that includes some items of interest to multiemployer pension plan trustees. Although mainly focused on cash balance and pension equity plans, the guidance includes provisions related to variable annuity pension plans (VAPPs), which have been drawing attention among trustees who believe there is enormous value in the defined benefit system. Some of the more onerous provisions needed to satisfy hybrid plan rules are now explicitly removed for VAPPs, and trustees adopting VAPPs have been given more flexibility in plan design. This Multiemployer Alert offers some perspective on the final regulations.

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Regulatory roundup

October 13th, 2014 No comments

By Employee Benefit Research Group

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

Comments request related to collection requirements to defer net experience loss in a multiemployer plan
The Internal Revenue Service (IRS) is soliciting public comments on Notice 2005-40 concerning information collection requirements related to election to defer net experience loss in a multiemployer plan. The notice describes the election that must be filed by an eligible multiemployer plan’s enrolled actuary to the IRS in order to defer a net experience loss. The notice also describes the notification that must be given to plan participants and beneficiaries, to labor organizations, to contributing employers and to the Pension Benefit Guaranty Corporation within 30 days of making an election with the Service and the certification that must be filed if a restricted amendment is adopted.

For more information, click here.

PBGC offers tips to expedite premium payment postings to plan accounts
The Pension Benefit Guaranty Corporation has published information to “help ensure that premium payments are quickly and accurately posted to plan accounts, we have the following requests.”

For more information, click here.

GASB issues technical plan
The Governmental Accounting Standards Board (GASB) approved the technical plan for the final third of 2014 during its August 2014 meeting. The GASB added two projects to its current technical agenda – one related to asset retirement obligations and the other to blending requirements for certain business-type activities.

For more information, click here.

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Multiemployer pension plans performed well in 2013 but many remain stuck in the mud

October 10th, 2014 No comments

By Kevin Campe

Campe-KevinMilliman today released the results of its inaugural Multiemployer Pension Funding Study (MPFS), which analyzes the cumulative funded status of all U.S. multiemployer pension plans. In 2013, these pensions were buoyed by strong investment performance—a $45 billion reduction in the funding deficit, which represents a 9% improvement in funded status.


On an aggregate basis, 2013’s strong market performance helped these plans return to funding levels similar to what they saw ahead of the global financial crisis. For plans in need of financial recovery, achieving full funded status will require returns in excess of assumed rates of return. More than half of all plans will need to earn an average of 8% or more per year over the next 10 years to reach 100% funding.

Not all of these multiemployer plans are suffering the same degree of underfunding. Our analysis found that 22% of these plans are better than 100% funded at the end of 2013. At the other end of the spectrum, 15% of these plans are less than 65% funded.

Plan maturity is a major contributor to these plans’ ability to respond to poor funded status, and the level of maturity can be measured by the ratio of active-to-total participants. Between 2002 and 2012, the overall percentage of active participants in these plans fell from 48% to 37%.

To download a copy of the entire study, click here.

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Google+ Hangout: Pension Funding Index, October 2014

October 10th, 2014 No comments

By Javier Sanabria

The funded status of the 100 largest corporate defined benefit pension plans improved by $26 billion during September as measured by the Milliman 100 Pension Funding Index (PFI).

The deficit dropped from $279 billion to $253 billion in September, primarily due to an increase in the benchmark corporate bond interest rates used to value pension liabilities. The funded status would have improved further were it not for September’s investment losses. As of September 30, the funded ratio grew from 84.1% to 85.2%.

Index co-author Zorast Wadia discusses the results on Milliman’s monthly PFI Google+ Hangout with Jeremy Engdahl-Johnson.

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