From far away, we conjectured that the headline-grabbing stories about companies moving to “mark to market” pension accounting that occurred in the past 18 months were woefully incomplete in key details. At that time, the stories talked about changes companies made to their Financial Accounting Standards Board (FASB) financial reporting under Accounting Standards Codification (ASC) Topic 715. These changes, for the most part, meant that the annual gains and losses that plans experienced because of interest rate declines and poor equity returns would hit earnings immediately rather than be deferred. This was resulting in some pretty big numbers. Part of our conjecture was that these companies were first-movers in adopting what some believed were going to be mandates once international accounting standards became the rule.
Furthermore, our numero uno on the conjecture list of why they were doing this was that they would implement an investment approach based on liability-driven investing (LDI) to protect against those nasty interest rate and market declines, with their resulting losses. When we saw repeat headlines about some of those same companies again taking massive hits to earnings because of their pension accounting, I was dumbfounded. I hate being wrong but admit I was.
We’ve talked a lot recently about the record contributions facing corporate pension plan sponsors. Announcements by several large companies offer further perspective. Here is an excerpt from a Bloomberg article:
Payments may total $400 billion from 2011 through 2015 to ease underfunding at the 100 largest defined-benefit programs, according to consultant Milliman Inc., which estimated that assets in January were enough to cover less than three-fourths of projected payouts…
Companies from defense contractor Lockheed Martin Corp. (LMT) to aviation-electronics maker Honeywell International Inc. are caught in a vise: the Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.
“They’re going to have to kick money in,” said John Ehrhardt, a consulting actuary at Seattle-based Milliman. “We’re basically seeing historically low interest rates driving historically high employer contribution requirements.”
If you’ve been too busy this month planning some special event for your sweetheart for Valentine’s Day (or a party for that big Abe Lincoln/George Washington fan in your life) here’s what you’ve missed on Retirement Town Hall.
An early start
When’s the best time to start on your nest egg? As soon as you’re out of the nest. That’s why we highlighted the keys to Retirement planning for Millennials in a recent post. We began wondering if those in the retirement benefits world practiced what we preached. So we followed the Millennials post with a poll question asking you about Getting started in your own retirement planning.
IRS’s Revenue Ruling 2012-4 provides retirement plan sponsors guidance that permits their qualified defined benefit (DB) plans the ability to accept a direct rollover from their qualified defined contribution (DC) plans, allowing participants to purchase an annuity that is incremental to the amount the DB plan would ordinarily provide. The ruling, which only applies to an employer that sponsors both a DB and a DC plan, is effective for rollovers beginning on or after January 1, 2013, but may be relied upon for rollovers made before that date. The DB plan will need to be amended to permit such direct rollovers if it does not currently do so.
The new guidance uses an example to illustrate the conditions that a plan must satisfy, including the following:
The annuity payable from the DB plan must be converted on an actuarially equivalent basis from the amount rolled over from the DC plan using the applicable interest rate and applicable mortality table prescribed in Internal Revenue Code section 417(e)
If the assumptions used are more favorable in the conversion (i.e., a higher interest rate or a mortality table with shorter life expectancies), the “excess” portion of the annuity will be subject to the nonforfeitable rules applicable to benefits derived from employer contributions and must be taken into account under the (section 415) annual benefit limits
If the assumptions used are less favorable in the conversion (i.e., a lower interest rate or a mortality table with longer life expectancies), the DB plan will fail to satisfy the nonforfeitable rules (under section 411(a)(1)) applicable to accrued benefits
The DB plan annuity, increased by the rollover conversion, must commence within a period of not more than 180 days after the date of the rollover election, and interest must be credited at 120% of the federal midterm rate (under section 1274) for the period between the rollover date and the annuity starting date
At present, it is unclear how many plan sponsors will actually adopt such rollover provisions.
Claiming Social Security as soon as you’re eligible might be the fastest track to a regular check in your early 60s, but the payouts are reduced if you begin earlier than your full retirement age. What’s more, benefits further increase for each year you delay claiming until you reach 70, so delaying claiming can lead to a bigger check down the road. We want to know how this is affecting your plans.
The Department of Labor (DOL) issued a long-awaited final rule on disclosures required of ERISA-covered retirement plan service providers to the plan fiduciary, delaying the application date that was included in the 2010 interim final rule (see Client Action Bulletin 10-16). The final rule also coordinates—and thereby delays—the dates for fee and investment information disclosures to plan participants in 401(k) and other self-directed individual account plans. The final rule is effective on July 1, 2012, and applies to existing and new contracts or arrangements between covered plans and service providers as of that date. A failure to comply with the final rule subjects the service provider to the penalties imposed for violations with the DOL’s prohibited transaction rules, as well as to IRS excise taxes.
The IRS has proposed a rule intended to encourage defined benefit retirement plan sponsors to offer distribution options consisting of both a lump-sum form of payment and a lifelong stream of income, by reducing regulatory and plan administrative complexities. For plan sponsors already offering a “bifurcated” benefit, the proposed rule may simplify benefit certification processes.
Theoretically, those of us who read and write this blog know, and care, a lot about retirement planning. Yet there was a time when we didn’t know so much and maybe even a time when we didn’t care. (For many 20-somethings, that time is now. If you’re one of them, check out Retirement planning for Millennials.)
For some, awareness of retirement planning might have come early. Others may have had a late awakening. So we want to know…
In order to better reflect the anticipated increase in plan sponsor contributions for years 2012 and 2013, our Pension Funding Index will now assume a 40% increase above the 2010 known level for purposes of our funding projections for these years, for an estimate of $91 billion assumed in both 2012 and 2013. The actual contributions for the fiscal year ending in 2011 will be compiled in our 2012 Pension Funding Study, which is due for release by the end of March.