Monthly Archives: July 2011

Retirement landscape series

A team of Milliman consultants has written a series of articles that look at the current retirement landscape and the array of risks facing both retirees and plan sponsors—as well as the solutions available to them. The series includes four parts (so far):

Strange days

Charles Talbert

What an odd time for retirement benefits. Congress and the president are gripping the third rail of politics, discussing possible changes to Social Security and Medicare to try to keep them solvent many years into the future. Collective bargaining faces stiff political and popular headwinds. These recent developments come on top of the well-documented, decades-long move away from the security of a defined benefit (DB) pension plan and toward the uncertainty of a defined contribution (DC) plan. Retiree medical benefits are now the exception, not the rule. And while DC plans have begun the slow climb back to pre-2008 levels, there remains much uncertainty.

The implications of all this are clear, if sobering: You and I will be responsible for the cost of our retirement income and you and I will be responsible for the cost of our medical coverage in retirement. The sooner you and I start saving, the more that interest compounding will help increase the value of our 401(k) plan account balances. We will all bear the risk that we may outlive our retirement savings accounts or that they will drop again as they did in 2008, resulting in reductions in our future monthly incomes.

Will we have saved enough money so our heirs will not have to pay to bury us?

What if we were able to participate in one of those types of retirement plans our parents were able to have, the ones that provided a monthly benefit for our lifetimes—a DB plan?

What if the cost of such a plan could be 5% of pay year after year with underlying assets invested conservatively to avoid downward investment risk on the employer’s money?

Would you and I be willing to take a pay cut to have the security of some form of income in our retirement years?

What if we used the 401(k) retirement savings account to supplement our retirement benefit, as it was originally intended, and the match and/or profit sharing went towards the cost of the defined benefit plan and the 5% shaving on our compensation could be eliminated?

We might be able to better meet the unforeseen medical expenses, have a reasonable income stream during retirement, not have to totally rely on Social Security and Medicare, not pay more in taxes, and not receive less in governmental services.

Wow, we would all win.

I know it is a pipe dream, but what if?

Retirement Town Hall rewind

If you’ve been brave enough to risk the dog days this summer recently, or were lucky enough to skip town for more pleasant climes on a summer vacation, here’s what you’ve missed on Retirement Town Hall.

Taking an interest in interest rates

Stuart Kliternick warned that changes in interest rates segments in 2012 could mean increased liabilities and urged sponsors to start running projections early. On the heels of this post, John Ehrhardt released the June results of the Pension Funding Index, citing rising interest rates for a $25 billion improvement in the funded status deficit.

In other news related to defined benefit (DB) plans, the Employee Benefit Research Group kept us up to date on recent rule changes, including International Accounting Standard 19 and the extension of fee disclosure rules.

Defined contribution plans in the spotlight

The last three polls on Retirement Town Hall have focused on 401(k) plan contributions. In Limited addition? we asked what you think the limits on annual 401(k) contributions should be. The result: just over 56% of you said that you wanted some form of unlimited employee contributions. Later in Limited addition part 2 we asked how a $5,000 pretax contribution limit would affect your contributions; 64% of you responded that you would continue to contribute above the limit.

In another recent poll we asked you to compare some incentives for getting employees to contribute to a 401(k). By a more than two-to-one margin you chose additional vacation time over gift cards and company recognition. The people have spoken… for now at least. All of these polls are still open and we invite those of you who haven’t voted to click on the links above and have your say.

Continue reading

Limited addition part 2

As a debt ceiling compromise continues to be elusive in Washington, one of the potential changes to tax policy is 401(k) plan contribution limits. As we covered in a recent poll question and in the Do 401(k) retirement plan contribution limits make sense? post, there is an argument to be made for raising the limits. Still, some would argue that allowing people to put an unlimited amount of money into a pre-tax retirement account goes in the same category as tax breaks on corporate jets. There is a contingent that is pushing for cutting the limit to $5,000 (there are even some more extreme proposals but they seem unlikely to become enacted). How would it affect you if these folks got their way?

DOL further extends applicability date of fee disclosure rules

The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) issued a final rule on July 13 that further extends the applicability dates of the interim final rule on fiduciary-level fee disclosures and the final rule on participant-level fee disclosures. Both of these regulations were published in 2010, but on June 1, EBSA published a proposal to extend the compliance dates to give employers and other affected entities more time to comply with the new requirements.

The fiduciary-level fee disclosure requirements apply to service providers of ERISA-covered defined benefit (DB) or defined contribution (DC) retirement plans; the participant-level disclosures apply to ERISA-covered 401(k) and other individual account plans that give participants the right to direct their investments.

Under the newly released final rule, the effective dates are:

Type of Fee Disclosure

Final Rule’s Extended Applicability Date Prior Proposed Rule’s Extended Applicability Date
Fiduciary-Level (under ERISA §408(b)(2)) April 1, 2012 January 1, 2012
Participant-Level (under ERISA §404(a)(5)) No later than May 31, 2012, for initial disclosures by calendar-year plans No later than April 30, 2012, for initial disclosures by calendar-year plans

Other disclosures, such as quarterly statements of fees/expenses actually deducted from participants’ accounts, must be provided to plan participants by August 14, 2012, which is the 45th day after the end of the second quarter (April-June) in which the initial disclosure was required.

EBSA intends to publish a final fiduciary-level fee disclosure regulation “before the end of the year” in an effort to serve the “best interest of responsible plan fiduciaries, plan administrators, and plan participants and beneficiaries.” The agency also is expected to issue updated guidance on the use of electronic media to provide participant-level disclosures.

EBSA’s new final rule is available here.

Your 401(k) plan has auto-enrollment, now what?

Jeff_MarzinskyThere has been a good deal of discussion on success measures for auto-enrollment, and we’ve previously established that by adding auto-enrollment a plan sponsor can immediately make its plan appear to have 100% participation. But is that enough?

Consider the basic fact that participation in a 401(k) plan is only one hurdle in making a retirement plan successful. Is a 3% contribution rate good? It may or may not be. In our recent informal online survey, the results indicated that the most popular rates, as shown in the pie chart below, tend to be those that are just enough to maximize the employer matching contribution, followed by 10% of salary