When participants have been working in their occupations for 20 to 30 years, it is likely they have accumulated sizable account balances. Allowing them to self-direct their accounts during the early to middle years of their careers can have a significant impact in helping them achieve their retirement goals. For those participants who have little interest in choosing their investments or are too busy to pay attention to the benefit, investing their money into a qualified default investment alternative (QDIA), such as a target date fund, allows for an investment strategy that aligns the participant’s retirement date with his or her investment risk (i.e., portfolios shift to a more conservative allocation as the member gets older). A QDIA is a default fund for participants who do not make an election, and as long as certain criteria are met it affords plan trustees fiduciary protection under ERISA §404(c). Moving to self-direction enables additional fiduciary protection for trustees attempting to manage an investment allocation that provides expected returns for the long-term retirement horizon of a 20-year-old participant while mitigating the volatility risk of a 60-year-old participant nearing retirement. These two objectives fall on opposite sides of the investment spectrum and highlight a significant challenge that is extremely difficult to achieve.
As participants approach retirement, an important component of retirement planning is the ability to develop a holistic view of all benefits accrued: defined benefit, defined contribution, Social Security, etc. When a defined contribution plan is not valued daily, the participant is viewing dated information that does not take into account market fluctuations and contributions for the current period. Allowing the plan to be valued daily will enable them to view their account balances or request current information about their accounts. Therefore, the participant will have a better understanding of his or her retirement needs.
In the same regard, bringing increased visibility to the defined contribution plan for apprentices and journeymen allows them to create a strategy for how to invest their accounts. Based on their individual situations, participants can invest their balances more conservatively or more aggressively. There are also professionally managed investment tools and programs that can take into consideration all of the participant’s retirement accounts, such as outside assets, spousal accounts, etc. These tools can assist members with providing investment allocations of their defined contribution plans based on these other benefits.
In this article, Milliman consultant Victor Harte discusses how the firm helped one multiemployer pension fund implement the Milliman Sustainable Income PlanTM (SIP) to address issues that were adversely affecting the fund’s employers and retirees.
Here is an excerpt:
After reviewing numerous alternative plan designs, including shifting to a defined contribution plan, Milliman identified a solution that satisfied the trustees. Specifically, the trustees were looking for a way to:
• Continue to provide lifetime benefits to the members • Eliminate potential withdrawal liability concerns for new employers • Reduce the unfunded liability related to existing employers • Provide retirees with a measure of cost-of-living protection • Maintain the same level of benefits for existing and future participants
Milliman was able to help the trustees meet their goals by changing the plan to a Milliman Sustainable Income PlanTM (SIP) and by modifying the withdrawal liability procedures to make use of the direct attribution method….
…The trustees implemented the required changes for future accruals. The existing benefits are protected and will increase due to future increases in pay. The benefits provided under the new SIP are equal in value to those provided under the prior formula. Additionally, the SIP benefits for future retirees are expected to increase over time and are anticipated to provide some protection against inflation.
One of the larger contributing employers was recently sold as part of a potential bankruptcy. When these types of transactions occurred in the past, the acquiring entity refused to participate in the plan due to concerns about potential withdrawal liability. However, as a result of the plan design changes and the change in the withdrawal liability procedures, the acquiring employer agreed to participate in the plan.
To learn more about the SIP, watch the following video.
Milliman today released the results of its Fall 2016 Multiemployer Pension Funding Study, which analyzes the funded status of all multiemployer pension plans. So far this year, these pension plans experienced a funding percentage increase of 1%, rising from 75% at the end of 2015 to reach 76% as of June 30. Most multiemployer pensions estimated investment returns of over 3%, slightly below expectations. Pension liabilities for these plans increased by $9 billion.
These plans haven’t seen much movement, though it’s worth noting that about half of the total underfunding for multiemployer plans continues to be attributable to plans that are less than 65% funded and have entered critical status. About 40% of these critical plans are projected to be insolvent at some point.
Where do multiemployer plans go from here? In the aggregate, the return for the rest of 2016 needs to be 3% in order to preserve the current 76% funded status. A 9% return for the second half of the year would result in aggregate funding above 80%, while a -3% return would pull it down toward 70%.
Milliman today released the results of its Spring 2016 Multiemployer Pension Funding Study, which analyzes the funded status of all multiemployer pension plans. In the second half of 2015, these pension plans experienced a funding percentage decrease of 4%, declining from 79% at the end of June to 75% at the close of 2015. During that time, pension liabilities for these plans increased by $8 billion and the market value of assets declined by $18 billion, resulting in a $26 billion increase in the funded status shortfall. Since undergoing a minor rally in funded status that peaked in 2013, multiemployer pensions have experienced continued deterioration in funded status.
Multiemployer plans continued to be stuck in a rut in 2015. Currently at least 76 plans with $28 billion of shortfall are projected to be insolvent at some point. These plans may be beyond help at this point, and several more may be headed this direction.
Results vary by plan. Of the plans studied, 192 were over 100% funded at year-end (compared with the 279 plans over 100% funded as of June 30, 2015). The number of plans that are less than 65% funded grew from 214 to 264. The most poorly funded pensions are of particular interest, because plans in “critical and declining status” may reduce benefits in an effort to stay solvent. Currently, 31 of the critical plans that have reported results have stated they are projected to go insolvent before 2025, and this number could rise as more plans file their reports.
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.
The Multiemployer Pension Reform Act of 2014 (MPRA) changes how certain employer contributions are handled when calculating withdrawal liability payment amounts. Plan administrators should review their systems and procedures regarding invoicing employees and/or retaining employer contributions so they can isolate certain contribution amounts excluded when calculating withdrawal liability. Milliman consultant Nina Lantz provides more perspective in this paper.