Here are a few key regulatory developments from the past week:
For a list of healthcare-related developments, visit our sister blog at www.healthcaretownhall.com.
Pension plans may be one of the best kept secrets of employers. It’s not a surprise when you think about it. Employees don’t interact with this benefit much during their careers. For years, employers have given pension plan information to new hires via an orientation packet, which has typically been a ream of paper containing an overwhelming amount of information.
While small changes may have been made, the changes themselves usually haven’t resulted in a significant communication campaign and so employers are silent … and employees are unaware. If employees know they have this benefit, in most cases they don’t understand the value or how it works. What kind of benefit is this?
For many years, I’ve seen clients spend significant money (certainly more lately) to maintain a healthy pension plan and spend little to nothing to see that people understand and appreciate the effort. Go figure.
Effective pension plan communication can start with something as simple as providing a better explanation with required notices. If participants don’t understand the information, in this economy particularly, they will imagine the worst. If it isn’t good news, employers should be straight with their employees about what’s happening, and why and how they’re affected. If you have a pension plan weathering the storm, explain how the benefit works, define unfamiliar terms, share an example, and demonstrate the value. Show how the pension plan fits into the overall benefit strategy by providing a total compensation or total reward statement. Just don’t keep one of your most valuable benefits a secret!
Recently the Department of Labor (DOL) released a proposed rule that would amend both the qualified default investment alternative (QDIA) regulation and the participant-level disclosure regulation.
So what’s the new proposal looking for? More details on target date funds (TDFs), some charts and graphs on the asset allocation of the investment, and details on the “target” or relating to the TDFs included in a retirement plan.
Disclosure is important. Over the next year, participants will be getting much more information regarding their retirement plans. Will participants read through these new and newly proposed TDF disclosures and the other pieces—I hope that they do, and get a better understanding of the retirement plans that they participate in, the investment options available, and the costs. Regarding TDFs, participants must be provided with clear explanations of where their money is being invested, if they have not provided direction.
Much of the requirements rest on the shoulders of plan sponsors to the retirement plans that employees participate in. As fiduciaries to retirement plans, sponsors will be front and center in the disclosure requirements, or at least responsible for assuring they are met. So it is important for sponsors to have a good grasp of what the investments are in their plan and, in the case of QDIAs and disclosures to participants, that the disclosures are being made.
More importantly, for the TDFs in a retirement plan the sponsor must have a detailed understanding of the allocations and glide-paths and whether the funds are designed to be “to” or “through” funds.
The DOL release can be found here. The Client Action Bulletin on this subject is available here.
The Department of Labor (DOL) has issued a proposed rule designed to enhance the details of target date, life-cycle, or similar fund disclosures in 401(k) and other plans that give participants the right to direct their own investments. Read the Client Action Bulletin on this topic here.
Investment Management Weekly picks up on the results of the latest Milliman Pension Funding Index, and in particular looks at the most optimistic and most pessimistic two-year forecasts:
…according to the “most optimistic scenario,” pension plans could reach a full funded status by 2012 should they assume a 12.1% annual asset return and discount rate of 6.45%, the study said.
At the other end of the spectrum, through a pessimistic view, Milliman stated in the release that a 4.1% return and 3.95% discount rate would drop funded status below 65% by the end of 2012.
Here are those projections:
Penton Insight looks at the resurgent popularity of variable annuities, and in particular the desire for guaranteed lifetime withdrawal benefits. Here is an excerpt:
One of the most popular variable annuity features is the guaranteed lifetime withdrawal benefit. No matter how the underlying investments perform, policyholders typically are guaranteed at least 5 percent of their benefit base in income annually for as long as they live. Eighty-seven percent of those who buy variable annuities elect this rider, LIMRA says. “From my perspective, variable annuity sales are definitely picking up,” says Kenneth P. Mungan, actuary with Milliman, a Chicago-based actuarial firm. “Customers are clearly attracted to the guaranteed living benefits, and I expect that trend to only increase over time.”…
Is your current retirement plan a clunker? You may think so. Worse, your participants might think so. Worst of all, your potential participants (recruits) might think so. Is the solution you’re looking for a cash balance plan? A cash balance plan is a hybrid retirement design that combines features of both defined contribution (DC) and defined benefit (DB) plans—truly the best of both worlds.
Recent legal decisions and regulatory guidance have paved the way for a renaissance of this plan design. It creates hypothetical account balances for all participants, and instead of subjecting them to actual market fluctuations, guarantees a positive interest credit each year. With the recent economic landslide fresh on everyone’s mind, participants may find that structure quite attractive. Participants no longer bear the investment risk, yet they retain the accessibility and portability of their retirement assets should they change jobs and desire a lump sum cashout or rollover. And, as a DB plan, annuity options at retirement are available as well.
Employers can design the plan many different ways. One example would be to guarantee interest credits equal to 10-year Treasury yields. Employers then invest the assets in long duration fixed income instruments. Any positive earnings spread between what’s granted to accounts versus what’s actually earned in the portfolio would reduce costs, and potentially result in a 5%-of-payroll DC-like plan that only costs 4%. Participants looking to take on more risk than 10-year Treasuries can adjust allocations to their other DC plans or personal savings accounts, and view the cash balance DB plan as a security blanket.
This plan design appears to be no clunker, and just may be win-win for everybody. For further insight, read more in this Milliman article published by two Milliman consultants.
The Employee Benefit Research Institute (EBRI) has a new blog. Click here to see more.
Paraphrasing the Greek philosopher Heraclitus, “Change is constant.” Those of us involved in the retirement industry together with our clients have witnessed such constant change in the form of new legislation and regulations coming at a furious pace. Much of this legislation is intended to help employees achieve a more secure retirement, but that does not mean all of the change has been positive.
Now a national debate is beginning that has the potential to impact the private pension system. This debate will focus on the exploding federal debt and on options for improving fiscal responsibility. One step in this process has been the formation of the National Commission on Fiscal Responsibility and Reform, a bipartisan coalition led by Alan Simpson and Erskine Bowles.
Milliman released the latest Pension Funding Index today. After two strong months, the 100 corporate pensions measured in the PFI suffered a $22 billion decline in funded status in November, based on $8 billion in asset losses and $14 billion in liability increases.
“We were going strong for a couple months but that momentum faded in November, and it seems likely that these 100 pensions will end 2010 with a decline in funded status compared to where they were at the end of 2009,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index. “Companies are now turning their attention to 2011 and what it will take to improve funded status in what looks likely to be a big year for pension expense.”
Here are the updated surplus/deficit figures:
See the latest study here.