Monthly Archives: November 2010

Actuaries chart retirement course

U.S. News & World Report looks at the challenge facing retirees and the role actuaries might play in surmounting this challenge. Here is an excerpt:

There are roughly 110 million middle-class households. According to financial planning research, at most two million, or about 2 percent, receive financial planning services. The Society of Actuaries (SOA) hardly sounds like the group that would be riding to the rescue of the other 108 million. Think again. Actuaries specialize in analyzing and understanding the financial consequences of risk. What better skills could you have in fashioning and executing a successful financial plan for retirement?

In two recent studies sponsored by the SOA, it has assembled a wealth of research and practical advice aimed at middle income retirement needs.

Read the full article here.

DOL issues proposed regulation on target date disclosure

The U.S. Department of Labor (DOL) issued this announcement today:


The Department published in the Federal Register of October 24, 2007 a final regulation (the qualified default investment alternative regulation) providing relief from certain fiduciary responsibilities for fiduciaries of participant-directed individual account plans who, in the absence of directions from a participant, invest the participant’s account in a qualified default investment alternative. On October 20, 2010, the Department published a final regulation that requires the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans (the participant-level disclosure regulation).

This proposed regulation contains proposed amendments to the qualified default investment alternative regulation to provide more specificity as to the information that must be disclosed in the required notice to participants and beneficiaries concerning investments in qualified default investment alternatives, including target date or similar investments. This document also contains a proposed amendment to the participant-level disclosure regulation that would require the disclosure of the same information concerning target date or similar investments to all participants and beneficiaries in participant-directed individual account plans.

Written comments on the proposed regulation should be received by the Department of Labor no later than 45 days after publication of the regulation in the Federal Register. The proposed regulation is scheduled to be published on November 29, 2010.


IRS issues new guidance on Roth rollovers

New guidance out today:

The IRS has issued Notice 2010-84 providing guidance under § 402A(c)(4) of the Internal Revenue Code, relating to rollovers from § 401(k) plans to designated Roth accounts in the same plan (“in-plan Roth rollovers”), as added by § 2112 of the Small Business Jobs Act of 2010 (“SBJA”), P.L. 111-240. The guidance in this notice also generally applies to rollovers from § 403(b) plans to designated Roth accounts in the same plan.

The guidance, in the form of 20 questions and answers, discusses what amounts are eligible for in-plan rollovers, plan loans, tax consequences of an in-plan rollover and specific issues regarding plan amendments.

Find the full guidance here. You might also find this useful.

Fighting fire with fire

Bloomberg looks at how low interest rates are driving corporate decision-making:

Companies facing the biggest pension deficit since at least 1994 are selling bonds at the fastest pace in more than seven years to plug the hole, betting that future returns will exceed their borrowing costs.

United Parcel Service Inc., the world’s largest package- delivery business, Dow Chemical Co., Northrop Grumman Corp. and PPG Industries Inc. sold at least $5.25 billion of investment- grade U.S. corporate bonds in November to fund their pensions, making it the busiest month since June 2003, according to data compiled by Bloomberg.

The Federal Reserve’s effort to hold down interest rates to stimulate the economy has caused corporate pension obligations, which are pegged to bond yields, to rise by $105.8 billion this year to $1.44 trillion as of October, according to Milliman Inc. Now, companies are taking advantage of borrowing costs at about the lowest on record as Goldman Sachs Group Inc. says interest rates will rise as the global economy recovers.

“They’re fighting fire with fire,” John Lonski, chief economist at Moody’s Capital Markets Group in New York, said in a telephone interview. “They’re being victimized by low bond yields, so why not go ahead and use them as an offset?”

DOL issues proposed regulation implementing the annual funding notice requirement

This is from the U.S. Department of Labor (DOL); the full proposed regulations are available here:

The Department of Labor has issued a proposed regulation that, on adoption, would implement the annual funding notice requirement in the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA) and the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA).

As amended, section 101(f) of ERISA generally requires the administrators of all defined benefit plans, not just multiemployer defined benefit plans, to furnish an annual funding notice to the Pension Benefit Guaranty Corporation (PBGC), participants, beneficiaries, and certain other persons. A funding notice must include, among other information, the plan’s funding target attainment percentage or funded percentage, as applicable, over a period of time, as well as other information relevant to the plan’s funded status.

The document also contains proposed conforming amendments to other regulations under ERISA, such as the summary annual report regulation, which became necessary when the PPA amended section 101(f) of ERISA. The proposed regulation would affect plan administrators and participants and beneficiaries of defined benefit pension plans, as well as labor organizations representing participants and beneficiaries and contributing employers of multiemployer plans.

Comments on this proposed regulation should be received on or before 60 days after the date of publication in the Federal Register. Publication of the proposed regulation is scheduled for November 18, 2010.


Corporate pensions improve funded status by $79 billion in October

Milliman released its latest monthly Pension Funding Index (PFI) today. The 100 corporate pensions tracked in the PFI experienced a second consecutive strong month, with funded status improving by $79 billion in October.

Pension and Investment has the story; here is an excerpt:

John Ehrhardt, Milliman principal, consulting actuary and co-author of the Milliman 100 Pension Funding Index, said in an interview that it was one of the more impressive two-month improvements since the inception of the index but that pension plans have “a long way to go” before reaching full funding. The pension plans were up a combined $67 billion in September.

“It’s almost two years before we get back to 100% funding,” he said, noting that if pensions can maintain a 12.1% annual return and steadily increasing interest rates from 5.25% to 6.5%, then the plans would reach full funding by summer 2012. October ended with a discount rate of 5.27%.

Commission on Fiscal Responsibility Reform issues draft report

President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform presented a draft report on Wednesday aimed at rebalancing the budget by slashing spending on most federal operations, curbing increases in Social Security benefits, and cutting more than $100 billion a year in tax breaks for individuals and corporations. The report aims to cut $4 trillion from deficits over the next decade.

The plan makes five basic recommendations:

  • Enact tough discretionary spending caps and provide $200 billion in illustrative domestic and defense savings in 2015.
  • Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.
  • Address the “Doc Fix” not through deficit spending but through savings from payment reforms, cost-sharing, and malpractice reform, along with long-term measures to control health care cost growth.
  • Achieve mandatory savings from farm subsidies and military and civil service retirement.
  • Ensure Social Security solvency for the next 75 years while reducing poverty among seniors.
  • The Commission is due to make its final recommendations by December 1, 2010.


A copy of the 50-page draft report released by the bipartisan Commission on Fiscal Responsibility and Reform is available here.

No rush to annuities

Financial Advisor Magazine looks at 401(k) participant investment decisions in a new article. Here is an excerpt:

The Obama administration is looking into the use of immediate annuities to help workers reduce longevity risk in their retirement savings plans. And as of this writing, Senate bill S. 2832 was under consideration by the Committee on Health, Education, Labor & Pensions. The bill would require plan sponsors to show on their annual benefit statements how the value of retirement accounts translates into lifetime guaranteed monthly income payments.

MetLife has a suite of four annuity products in qualified plans. Other carriers with immediate annuity or annuity-like lifetime income products for employees about to retire are Genworth, Prudential and Mutual of Omaha.

It could take time, however, before plan sponsors aggressively include annuities in their plans. They have expressed concerns about employees moving their entire retirement savings into an immediate annuity offered by the plan. State guarantee association insurance funds only cover up to $100,000 in annuity income if an insurer goes bankrupt.

Due diligence must be conducted on the financial strength of the insurance company, its risk-based capital measures, its reserves, its general account investment portfolio and the duration of its fixed-income investments. Other issues include annuity portability, cost, risk and fiduciary exposure.

“Plan sponsors have historically been reluctant to get involved in product issues unless forced to,” says Noel Abkemeier, an actuary at Milliman Inc. in Williamsburg, Va. “They feel their fiduciary responsibilities deter them from appearing to endorse a product. This may make it difficult to get products inside a plan.”

Progress in managing equity-market risk

Best’s Review (subscription required) looks at the question of how to shore up equity-market risk, and how insurance-linked products have improved in this respect. Here is an excerpt:

In terms of equity-market risk, insurers fared better during the financial crisis that started in 2008 than during the market collapse in 2002, said Scott Hawkins, vice president and annuity analyst at Conning Research & Consulting. In 2008, separate accounts in individual annuities decreased by 21%, and general reserves increased by $75 billion. By contrast, in 2002, when fewer contracts were in force and account values fell by 13%, general reserves had to be increased by $92 billion. “What happened between those years was that insurers created hedging programs,” he said. “Milliman did a study of those hedging programs and concluded that more than 90% of those they evaluated were successful.”

In a recent white paper on financial risk management, Prudential Annuities identifies common risks as market, actuarial and investor behavior. Market risk includes equity, interest-rate and credit risks. Actuarial risk includes both longevity risk–that the policyholder may live longer than expected–and mortality risk–that the individual will die sooner and that the company will have to pay a guaranteed minimum death benefit. Investor behavior risk has to do with how investors utilize product features, such as when to begin drawing a GLWB, and asset allocation risk, the chance that an investor will choose an aggressive allocation that could cause a big difference between contract value and the protected withdrawal value.