Milliman has published 2015 retirement plan calendars for single-employer defined benefit (DB) plans, multiemployer defined benefit plans, and defined contribution (DC) plans. Each calendar provides key administrative dates and deadlines.
Defined benefit plan features of VAPPs
As with traditional defined benefit plans, benefits in a VAPP are paid for the lifetime of the participant and beneficiary. While the level of the benefit may not be guaranteed, stabilization strategies exist to dramatically reduce the possibility of retiree benefit declines and the participant does not need to worry about running out of money during retirement. VAPPs pool longevity risk within the plan and have professional asset management like a traditional defined benefit plan, enabling the plan to provide larger average benefits per dollar contributed compared to individually directed defined contribution accounts. These defined benefit plan characteristics are desirable for employers looking to attract and retain top talent.
Defined contribution plan features of VAPPs
As with defined contribution plans, VAPPs have controllable employer costs and no funding surprises. VAPPs maintain their funded status in all market conditions, which eliminates concerns about underfunding. This means that plan sponsors can set a target contribution level such as a fixed dollar amount or fixed percentage of pay, similar to a defined contribution plan. Additionally, participants participate in market upside, providing a portable benefit (meaning that a participant is not harmed by switching jobs mid-career) and expected inflation protection during retirement.
Variable annuity pension plans (VAPPs) are hybrid retirement plans that provide employers an alternative design to the traditional defined benefit (DB) plan and the defined contribution (DC) plan. VAPPs can stabilize contributions for sponsors while offering participants lifelong income. This reading list highlights various aspects related to VAPPs.
• Milliman Hangout: Variable annuity pension plans (VAPPs)
Milliman consultants Kelly Coffing and Grant Camp talk about the VAPP’s features in this video. They also discuss the value VAPPs offer sponsors and participants.
• “Making the case for variable annuity pension plans (VAPPs)”
VAPP retirement benefits increase or decrease depending on whether a plan’s investments return more or less than the established “hurdle rate.” A benefit stabilization strategy preserves funding stability and diminishes benefit declines. Coffing and Camp discuss the strategy in this article.
• “A balanced approach to retirement risk”
VAPPs address several sponsor concerns like funding and accounting volatility. The design also helps alleviate participant concerns related to money management and inflation. Milliman’s Camp offers more perspective in this blog.
• “Variable Annuities: A retirement plan design with less contribution volatility”
Multiemployer plan trustees seeking sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions may want to consider the VAPP design. This paper by Olleman, Coffing, and Preppernau explains the advantages that VAPPs offer single and multiemployers as well as their employees.
In the Federal Register of January 12, 2015, the Pension Benefit Guaranty Corporation (PBGC) requested that the Office of Management and Budget (OMB) approve a revised collection of information about the de-risking activities of pension plans as part of their annual premium payment filings. The proposed data set includes participant counts split between participants in and not in pay status for both lump-sum windows and annuity purchases in the last two years. For lump-sum windows, the participant counts include those eligible for the window and the actual number who elected a lump-sum under the window. For annuity purchases, the participant counts are limited to those for whom an annuity was purchased. If accurate data are not available, then reasonable estimates are acceptable. Finally, data are not required to be reported if the lump-sum window closed or the annuity purchase was made less than 60 days before the premium filing is made. So for a calendar year plan that files the 2015 premium filing on October 15, 2015, the information to be provided encompasses de-risking activities from January 1, 2014, through August 16, 2015.
It will be interesting to watch what the PBGC does with the information it collects. According to the PBGC press release that announced this request, it is interested in collecting this data because “information about risk transfers is critical to PBGC’s ability to assess its future financial condition.” Back in 2013, Joshua Gottbaum, then executive director of the PBGC, reported to the ERISA Advisory Council that pension plan lump-sum cash-outs to retirees are like cigarettes: they are legal, many people like them, and they are bad for you. With the current financial condition of the PBGC and its role in protecting participants’ pension rights, it may be that the PBGC is interested in providing more detailed regulation on the de-risking activities of pension plan sponsors.
During the past several years, we have seen many of our clients undertaking both lump-sum windows and looking into annuity purchases. For the 2014 year-end accounting disclosures, historically low interest rates combined with updates to mortality assumptions have driven up the calculated pension obligations. As a result, companies will be reporting very large pension deficits on their balance sheets. Because of the impact of pension plans’ funded status on corporate financial statements, the interest of companies in de-risking activities will continue and may even increase from prior levels.
Please contact a Milliman consultant to discuss if lump-sum windows are right for your situation.
Retirement security is tricky. Traditional defined benefit plans have contribution volatility that is difficult for sponsors to manage. Defined contribution plans typically do not provide participants with stable, lifelong income. Variable annuity pension plans (VAPPs), however, combine the best of both worlds—better meeting the needs of sponsors and participants. Sponsors get stable contributions like defined contribution plans and participants get lifelong income like defined benefit plans.
Milliman consultants Kelly Coffing and Grant Camp discuss some of the benefits that VAPPs offer sponsors and participants in this Milliman Hangout.
Investment committees face a variety of considerations when managing pension plans. In the past, these committees focused mainly on strategies for investments, but now they need to consider multiple dimensions. Taken together, the multiple aspects affect the value of plan assets and liabilities when effectively managing a pension plan. They also affect the development of an investment strategy for the plan assets. As a pension plan sponsor, it is important to fully understand the various areas that will affect the volatility of assets, liabilities, and contributions on the pension plan and to develop a strategy that will lessen this impact. This paper authored by Jeff Marzinsky offers some perspective.
Unclaimed pension benefits that sit as uncashed checks are deemed plan assets and are the responsibility of plan fiduciaries, according to U.S. Department of Labor guidance. These outstanding benefits could cause some consternation for sponsors when creating policies and procedures to better manage them.
In this article, Millman’s Skyler Marchand outlines guidelines that can help fiduciaries navigate the complexities of uncashed checks and avoid administrative pitfalls that may arise. Here’s an excerpt:
How do I identify the uncashed checks?
Ask your trustee or custodian or your TPA for a list of all uncashed checks.
Can the expense associated with unclaimed benefit administration be applied to the plan?
The full administration associated with locating “lost” participants and paying out benefits can become costly when you factor in certified mailing costs, stop pay and/or reissue fees, vendor search fees, and administration time. Reasonable fees associated with unclaimed benefits may be paid from the plan or offset directly from lost participant accounts.
Avoid the pitfalls
Before you are able to pay these fees from the plan, they must be disclosed in your annual 404(c) fee disclosure notices and distributed to participants before the fee goes into effect.
What steps should be taken once unclaimed benefits are identified?
Many plan documents provide guidance on unclaimed benefits, procedures for locating lost participants, and the forfeiture of prolonged unclaimed benefits. To establish your plan’s procedures you should first refer to your plan document. However, many documents are very general or silent on some of these issues and the plan sponsor must determine what to do. When we advise plan sponsors on options for establishing procedures, we reference the DOL steps outlined for terminating plans2 and use it as a guideline for creating procedures for active qualified plans. Generally, we recommend three main steps to process uncashed checks; 1) notification, 2) reversion of assets back to the plan, and 3) forfeiture of benefits for lost participants….
The article also provides a scenario in which uncashed checks are void or become “stale” 180 days after the issue date and the process is repeated on a quarterly basis.
Overpayment of pension benefits that is 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.