If you haven’t been to Retirement Town Hall in a while you’ve missed some breaking news in the retirement benefits world and some in-depth analysis.
Inside the DB preference
Mark Olleman gave us a behind-the-scenes look at the new report he co-authored with Ilana Boivie of the National Institute on Retirement Security in Public DB plans get some love.
We’ve covered target-date funds before and there’s new analysis in the October edition of the Milliman Benefits Perspectives. Here, Jeff Marzinsky sums up the four key points in Target-date funds: Plan sponsor considerations.
Payroll taxes went down in 2011 from 6.2% to 4.2%, which is due to a one-time change in the law. Ideally, Americans would have used that extra cash to increase their retirement savings, but at this point, it’s hard to tell what they did. Although there is some speculation that the reduction could be renewed in 2012, payroll taxes could go back up to 6.2%. For Americans who were able to save, only time will tell if those who have gotten used to socking away more in their retirement savings will revert back to smaller contributions in 2012 (compared to 2011) because they can’t afford to do it or if it’s too painful.
Here’s some good news about defined benefit (DB) plans: Public employees, in overwhelming numbers, are showing that they understand and appreciate the value of their defined benefit pension plans.
We know this is true because we studied the data from seven statewide retirement systems that offer employees the choice between a DB and a defined contribution (DC) plan such as a 401(k). The systems included in the study were Colorado Public Employees’ Retirement Association, Florida Retirement System, Montana Public Employees Retirement Association, North Dakota Public Employees Retirement System, Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, and South Carolina Retirement Systems.
With the release of the September 2011 Consumer Price Index (CPI) by the Bureau of Labor Statistics, the Social Security Administration (SSA) and the IRS have announced cost-of-living adjusted figures for Social Security and retirement plan benefits, respectively, for 2012. For the first time in the last three years, almost all the figures published will increase.
Milliman has launched a new publication, “DB Digest,” which focuses on best practices in pension administration. The first issue, which features an article by David Benbow called “Form 8955-SSA, Participant Statement: More Than Meets the Eye,” is available here.
There are some changes coming for Social Security in 2012 so this week’s poll is a two-parter.
The biggest change is the cost of living increase for Social Security recipients. The 3.6% increase to Social Security is supposed to be a cost of living adjustment to keep seniors up to speed with inflation, but some economists are predicting an increase in consumer spending as a result of this increase.
How is an increase in Social Security benefits possible with the economy in the shape it’s in? Payroll taxes. Everybody’s going to see a payroll tax increase in 2012.
For 2012, Social Security benefits will increase 3.6%. Beginning on January 1, 2012, the Social Security taxable wage base will increase to $110,100. The Social Security Old-Age, Survivors, and Disability Insurance tax rate will remain at the current 6.2% on wages up to the wage base, assessed on employees and employers, in addition to the 1.45% tax rate assessed on all wages for Medicare Hospital Insurance.
The Social Security normal retirement age for individuals born in 1947 (age 65 in 2012) is 66. Individuals born in earlier years may have a lower normal retirement age, and those born later may have a higher normal retirement age, with a maximum age of 67 for those born in 1960 and later. Other 2012 figures that have increased include:
The maximum amount an individual may earn in calendar years prior to attaining normal retirement age without a reduction in benefits is $1,220/month ($14,640/annually); the maximum during the calendar year of attaining normal retirement age is $3,240/month ($38,880/annually). No earnings test applies to individuals beginning in the month they attain normal retirement age. In calendar years prior to attaining normal retirement age, the SSA withholds $1 in benefits for every $2 in earnings in excess of the earnings threshold, and $1 in benefits for every $3 exceeding the earnings threshold in the calendar year of attaining normal retirement age.
The amount of earnings required for a quarter of coverage is $1,130.
The “old law” contribution and benefit base is $81,900.
The domestic employee coverage threshold remains at $1,800.
For 2010, the national average wage index is $41,673.83.
The “bend points” – the dollar amounts in the Social Security Primary Insurance Amount (PIA) formula that is used to determine the Average Index Monthly Earnings (AIME) – for 2012 will be $767 and $4,624. Thus, the Social Security monthly PIA formula will be 90% of the first $767 of AIME, plus 32% of the AIME over $767 and through $4,624, plus 15% of the AIME over $4,624 (and then rounded down to the next multiple of $0.10). An alternative PIA formula producing a lower amount may apply to individuals who have been covered by a retirement plan during employment that is not covered by Social Security.
In Notice 2011-85, the IRS announced a delay of the effective or applicability dates for the interest crediting rules affecting cash balance and similar hybrid defined benefit (DB) plans. These final and proposed regulations, both published in October 2010, include rules to establish a regulatory “market rate of return” and have been roundly criticized by sponsors of cash balance plans and their advisors.
Notice 2011-85 states that, for these defined benefit plans:
The interest crediting rate rules under the October 2010 proposed regulation (IRC section 411[b]) will be effective no earlier than January 1, 2013, for plan years beginning on or after the date the yet-to-be-issued final rule will specify.
The current application date of the market rate of return rules under the October 2010 final regulation that are effective January 1, 2012, are similarly postponed.
The deadline to adopt interim or discretionary amendments relating to vesting and other special rules (IRC sections 411[a] in general and 411[b]) is extended to the last day of the plan year for which the yet-to-be issued final rule will apply.
The IRS expects to grant relief from the anti-cutback requirements (IRC section 411[d]) if an amendment reducing or eliminating protected benefits is timely adopted and the benefit reduction or elimination is only of an amount necessary for the plan to satisfy the age discrimination and market rate of return rules (IRC section 411[b]).