Monthly Archives: June 2011

Limited addition?

You won’t get much argument from anyone if you want to put more money away for your retirement. Socking away money is rarely a bad idea. Yet, as Jeff Marzinsky pointed out earlier this month in his Do 401(k) retirement plan contribution limits make sense? post, there are some hard and fast rules about how much you can contribute to a 401(k) plan. Granted, it would (literally) take an act of Congress to increase or toss out 401(k) contribution limits, but for the sake of argument we want to know what you think…

An early warning on 2012 segment rates

Most plans that begin their plan years in January elected to value their liabilities using the interest rate method of segment rates with four-month look-back periods. This was because this methodology allowed plans to include favorable monthly yield curves from September 2008 through May 2009 in the 24-month average used to calculate segment rates for both 2010 and 2011 valuations. These higher interest rates kept the liability low.

However, when plans begin to budget for 2012 valuations, those rates will no longer be used in the calculation of the segment rates. The interest rates segments that will be used in 2012 will be much lower than in 2011. A comparison of the September 2010 segment rates (which are the rates used for January 2011 valuations for plans using the interest rate method of segment rates with four-month look-back periods) to the current segment rates (June 2011) and the projected September 2011 segment rates if the yield curve remains the same are as follows:

Month First Segment Rate Second Segment Rate Third Segment Rate
September 2010 3.78% 6.31% 6.57%
June 2011 2.27% 5.43% 6.34%
September 2011 2.06% 5.27% 6.32%

The projected segment rates to be used for 2012 valuations will result in an increase in target liability of about 5%-7%, and could increase by as much as 10% in plans where a large percentage of the liability is due to retired participants.

Moreover, asset performance to date in 2011 has been lower than expected, and it is unclear what will happen for the remainder of 2011. When one combines these two events, the resulting 2012 contribution could be much larger than in 2011—which is significant because contributions are already reaching record high levels. Milliman’s annual Pension Funding Study identified a record $59.4 billion in contributions by the 100 largest corporate pensions in 2010.

In addition, plans would certify to lower adjusted funding target attainment percentages (AFTAPs) in 2012, and in the process be more susceptible to (a) having PBGC 4010 filing requirements, (b) being considered “at-risk,” and (c) having benefit restrictions imposed.

Unlike the calculation for 2011 contribution requirements, there are no funding relief options available for 2012. Because of the potential increases in what plans will have to contribute not only because of minimum requirements but to avoid the potential problems listed above, now is the time for plan sponsors to consider funding strategies to mitigate the upcoming liability increases. By running projections of 2012 valuation results now, plan sponsors have more time and more options to decide how to deal with the potential problems that could arise in 2012.

Retirement Town Hall rewind

Need a recap on all the latest news in the world of retirement benefits? You’ve come to the right place. If you haven’t been to Retirement Town Hall in a while here’s what you’ve missed…

Roscoe Haynes warned us of the risks for retirees who take a lump sum cash-out from a defined benefit (DB) plan in Going back to work at age 85. Still, we wanted to know how you would choose to receive your benefit if you retired today so we asked in this week’s poll question: Reaping the benefits.

No matter how one receives one’s benefit, employees are thinking more and more about retirement benefits when they consider job offers and/or staying with a company. In Employees place new value on retirement plans, Bill Most dug up some interesting facts on how retirement benefits can affect recruitment and retention and what they could mean for your company. 

Accounting rules!
We are enthusiastic about accounting here at Retirement Town Hall but we’re using the word “rules” as a noun not a verb. There were a substantial number of accounting rules issues to cover in the past few weeks. First off, Tim Connor pointed out that Disclosures about employer participation in multiemployer DB plans might cause confusion and accomplish little. Then the Employee Benefits Research Group covered the latest on rules governing sponsors filing bankruptcy petitions in Benefits alert on PBGC’s final rule setting plan termination date. Finally, we went global with coverage of how the International Accounting Standards Board (IASB) adopts international accounting rule on employee benefits.

Don’t miss another Retirement Town Hall post. Follow us on Twitter @millimaneb to stay up-to-date.

Reaping the benefits

Making the best use of a retirement benefit is about making smart choices, but the decision making doesn’t stop at the planning stage. You’ve still got some decisions to make about how to draw down your retirement money. Nobody wants to go broke because they outlived their money, but nobody wants to  live on a shoestring unnecessarily either. Getting this right means making smart decisions. So this week, we’re asking you…

IASB adopts international accounting rule on employee benefits

The International Accounting Standards Board (IASB) has released an amended version of its Financial Reporting Standard IAS 19, Employee Benefits, completing its project to “improve” the accounting for pensions and other post-employment benefits. For U.S. employers that will be required to comply with this standard, the effective date is for fiscal years beginning on or after January 1, 2013.

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Employees place new value on retirement plans

William Most

If you are a regular reader of this blog you know we often look at attitudes surrounding defined benefit (DB) plans, and we are always curious to see data that indicates strong interest for a DB pension plan. Earlier this year Employee Benefit News reported that a DB pension plan can seriously impact employees’ interest in working for a company and their willingness to stay at that company. It seems that, as the country rebounds from the recession, a DB plan has gained a cachet while defined contribution (DC) 401(k) plans are less enticing to today’s workers.

The Employee Benefit News article cites a recent survey that revealed that 60% of new employees with companies that have a DB plan regarded the plan as an important part of why they chose to work there. Furthermore, 72% of employees with a DB plan said it was an important reason why they would stay. Comparatively, just 20% of workers with a DC plan said that the retirement plan played a role in their decision to work for their employer.

Now, if you’re reading this, chances are you prefer DB plans to DC plans. At least you told us that in a recent Retirement Town Hall poll in which 58% of respondents, regardless of how near or far they are from retirement age, said they would choose a DB plan. Only 7% of respondents said they would favor a DC plan. The remaining 35% favored a hybrid DB/DC plan (all numbers as of June 21—the poll is still open so there may be some minor fluctuation). A preference for DB plans is probably nothing new to you, but what is new is how many people agree with you.

One of the most telling points from the Employee Benefits News article is that in 2009 only 28% of young employees cited the DB plan as an important reason to work for their current employer. By 2010 that number had swelled to 43%. In other words, today’s younger employees, despite decades of erosion of jobs that offered DB plans, are warming up to the idea of a DB plan.

The recession seems to have stirred up positive sentiments about DB plans from people who may have given retirement plans little thought in the past. As the priorities of the workforce change, companies that want to attract top talent will find that a DB plan offers yet another valuable recruitment and retention tool. I’ve said it before, on this very blog, and I’ll say it again: The need is there—will companies hear the call?

Benefits alert on PBGC’s final rule setting plan termination date

The Pension Benefit Guaranty Corporation (PBGC) has released a final rule that, for certain purposes, sets an underfunded single-employer defined benefit (DB) plan’s termination date as the date the sponsor files a bankruptcy petition. The final rule also uses the bankruptcy petition filing date to determine the benefits that are guaranteed upon plan termination under the PBGC’s priority classification. This will generally reduce the amount of participants’ guaranteed pension benefits.

Under the final rule, any benefits that might otherwise have accrued to participants after the bankruptcy petition filing date and before the date the plan is terminated (i.e., trusteed to the PBGC) will not be guaranteed and only benefits that were nonforfeitable when bankruptcy was initiated will be guaranteed.

For example, plan participants with fewer than five years of service on the bankruptcy filing date will receive no guaranteed benefit if the plan has a five-year “cliff” vesting requirement. Similarly, disability retirement benefits or early retirement subsidies will not be guaranteed for participants who would become entitled to such benefits after the bankruptcy petition filing date.

The final rule implements provisions included in the 2006 Pension Protection Act (PPA) to address concerns that the funded status of plans often deteriorates significantly while the plan sponsor is in bankruptcy. As the plan termination date often comes after the sponsor has been in bankruptcy for some time, the PBGC’s losses can increase substantially during bankruptcy proceedings if benefits accrue for active participants, non-guaranteed benefits are paid to retirees, or the sponsor makes no contributions to the plan.

The final rule is effective July 14, 2011, but applies to bankruptcy filings on or after September 16, 2006.

For additional information about the PBGC’s final rule on benefits guaranteed in bankruptcy terminations, please contact your Milliman consultant.

Disclosures about employer participation in multiemployer DB plans

Timothy Connor

In September 2010, the Financial Accounting Standards Board (FASB) issued an exposure draft of a proposed standard, Subtopic 715-80, which would require companies to disclose estimates of withdrawal liability as a proxy for their proportionate share of any underfunding in multiemployer defined benefit (DB) plans. They received a lot of commentary from various stakeholders (over 300 letters). Most of the feedback strongly opposed the use of estimated withdrawal liability, noting the extraordinary costs involved in preparing the calculations and seriously questioning the appropriateness or usefulness of those figures.

At its meeting on May 31, the FASB reached a conclusion similar to the majority. An employer would not have to disclose estimated withdrawal liabilities as proposed in the exposure draft.

While on the surface it seems as if additional information couldn’t hurt, disclosure of withdrawal liability has too many problems. Significant variance in methodologies and assumptions used by multiemployer funds can often result in two similarly situated companies participating in different funds with similar funded percentage levels stating vastly different withdrawal liability exposures. Another problem is the lack of timeliness of withdrawal liability estimates. In many cases, the amounts could be more than a year out of date. Further distortions arise from pension law regulations that provide all sorts of exceptions and adjustments to withdrawal liability. For instance, certain industries have special rules that may exempt an employer from liability, and certain events can constitute no withdrawal or only a partial withdrawal. Ultimately, the biggest hurdle may have been the time and likely costs involved, because many legitimately voiced that disclosure as initially proposed would have been extremely burdensome and provided very little, if any, of the transparencies that the FASB desired.

As a substitute to the exposure draft requirements, the board tentatively approved a tabular disclosure of other items intended to give users enhanced information on the multiemployer plans to which a company makes material contributions on behalf of its employees. Among these items are plan identifying information, Pension Protection Act (PPA) zone status, PPA rehabilitation plan or funding improvement plan information, recent annual contributions, surcharges, and collective bargaining agreement (CBA) expiration dates.

The FASB may revisit other disclosures at a future meeting, including quantitative information on an employer’s level of participation in a plan and expected future contributions. The FASB plans to have a final update issued by year-end, so discussion and decisions on these issues can be expected to occur rapidly.

Going back to work at age 85

Retirees who are offered a lump sum cash-out from a defined benefit (DB) plan frequently elect the lump sum. Reasons include:

  • I am a sharp investor.  I will make out better with the lump sum.
  • My investment advisor can get high returns.  I will make out better with the lump sum.
  • If I retire with the monthly benefit and then die soon after, the retirement plan gets to keep all that money and my heirs lose out.
  • The lump sum is a huge amount of money.  I can buy the boat I’ve been looking at and still have plenty.

Although the lump sum looks like a big chunk of change, it is calculated to provide only enough money to last as long as the “average” life expectancy.  Thus roughly half of all retirees who take the lump sum can expect to live too long, and run out of money.  Of these retirees, a significant number should expect to live at least another 10 years after the money runs out.  That’s a long time to try to scrape through.  And some of these folks will live even longer.

For couples, the argument for an annuity is even more compelling.  While one spouse might feel very comfortable making investment decisions and managing a retirement portfolio, the other won’t necessarily be as financially astute.  Considering the likelihood of at least one partner surviving more than 10 years past their average combined life expectancy, when the money would be projected to run out, this could be a risky approach.

The lump sum option converts retirement security into retirement insecurity.

Plan sponsors frequently express concern over choices made by retiring participants.  Unfortunately, ERISA prohibits plans from taking away the lump sum option, at least on benefits that have already been earned.  Employers should keep this in mind when considering whether to add a lump sum option to a defined benefit pension plan.