Monthly Archives: May 2012

Regulatory roundup

More key retirement-related regulatory news for plan sponsors to monitor carefully, including links to get detailed information.

DOL extends comment period on proposed amendments relating to target-date disclosure
The Department of Labor (DOL) Employee Benefits Security Administration has issued a notice announcing the reopening of the period for public comment on proposed regulatory amendments relating to enhanced disclosure concerning target-date or similar investments, originally proposed in a previously published document in the Federal Register. Written comments on the proposed regulation should be received by the Department of Labor no later than 45 days after the notice is published. A PDF with more information is available here (scroll down).

GAO: Increased educational outreach and broader oversight for 401(k) plans may help reduce plan fees
A new report from the GAO to Congress looks at issues of fees in defined contribution (DC) 401(k) retirement plans and how they affect small, medium-sized, and large plans, saying in part:

Studies have been conducted to better understand the fees 401(k) plan sponsors and their participants pay. However, these studies focus on larger plans. Thus, uncertainty remains about the amounts paid by small and medium-sized plans and the level of knowledge and expertise these sponsors have to assess the fees charged by service providers.

GAO addressed the following related to small, medium-sized, and large plans: (1) amounts plan sponsors and participants pay for services, (2) challenges sponsors face in understanding how fees are charged, and (3) actions Labor has taken to help sponsors better understand and monitor the fees charged by service providers. GAO reviewed relevant federal laws, regulations, and retirement research, and interviewed federal officials and industry experts. GAO also conducted a survey of 1,000 401(k) plans to collect information about fees paid for plan services. The response rate allowed GAO to generalize to the population of 401(k) plans for most of the survey questions.

The full report is available here.

IRS issues notice seeking comment on use of electronic media to provide transportation fringe benefits
The Internal Revenue Service (IRS) has issued Notice 2012-38 requesting public comment on additional guidance regarding employers’ provision of smartcards and debit or credit cards to provide qualified transportation fringe benefits under tax code Sections 132(a)(5) and (f).

The request for comments was prompted by changes in technology in transit benefit administration, the IRS said. The comment request follows Revenue Ruling 2006-57, which took effect January 1 this year, and provides guidance on the use of electronic media to provide transit passes to employees who commute or to reimburse them for parking or bicycle commuting.

The agencies would like comments on how electronic media may meet the statutory requirements under section 132(f) for providing transit benefits, either as vouchers or transit passes or through bona fide cash reimbursement arrangements in a manner other than those described in situations one through four in Rev. Rul. 2006-57.

Also, Treasury and the IRS request comments on the availability of terminal-restricted cards and any other electronic media qualifying as vouchers or transit passes for purposes of determining whether such items are readily available and, therefore, whether cash reimbursement arrangements for providing transit benefits should be prohibited.

Finally, Treasury and the IRS request comments on challenges employers encounter in transitioning from paper transit passes or vouchers to electronic media that qualify as vouchers or transit passes, or from cash reimbursement arrangements to electronic media qualifying as transit passes or vouchers.

Notice 2012-38 will be published June 6 in Internal Revenue Bulletin 2012-24. It is temporarily available here.

Pension Benefit Guaranty Corporation Office of Inspector General management advisory report
The Pension Benefit Guaranty Corporation (PBGC) recently released a management advisory report from its Office of Inspector General (OIG), “Ensuring the Integrity of Policy Research and Analysis Department’s Actuarial Calculations.” The report says in part:

Attached is a Management Advisory Report (MAR) prepared to inform PBGC management of a serious internal control issue that came to OIG’s attention as a result of the review of a whistle-blower complaint received through the OIG Hotline. Our review confirmed the complainant’s assertion that the Present Value of Financial Assistance Payments for multiemployer plans, as reported in PBGC’s FY 2010 Annual Exposure Report issued November 10, 2011, was unrealistically low. Based on a review of available documentation, interviews with key PBGC officials, and analysis, we concluded that PBGC had issued the report with errors and inconsistencies in both the multiemployer and single employer sections. This occurred because PBGC had not established a quality control or quality review process to ensure the integrity of reported actuarial estimates. Early in our review, the Policy Research and Analysis Department (PRAD) Director acknowledged the errors and explained that his department did not have policies in place for quality control…

The PBGC Director instructed that all estimates used for PBGC reports be reviewed outside PRAD. However, instead of requesting a quality assurance review, the PRAD Director implemented the PBGC Director’s guidance by instructing the actuary ‘to dot our numbers for the 2011 Exposure Report, both SE and ME.’ [emphasis added] As described in the attached MAR, the process of ‘dotting’ is simply verification that a particular value is correctly copied and transferred from on place to another. The process of dotting does not involve verification of underlying calculation or supporting documentation and is not sufficient for quality control. Thus, based on our review of the changes referenced in the attached response from PBGC, the revised process is still inadequate to ensure the integrity of PRAD’s actuarial estimates.

The attached MAR includes a request for PBGC to provide a written response detailing the actions to be taken to address the reported issues. As part of that response, PBGC should include information about additional enhancements – over and above the process of “dotting” – to ensure that the actuarial data published by PBGC is accurate and supported by appropriate documentation…

The full report is available here.

Different audiences, different challenges

Individuals who don’t save for retirement can be divided into three groups: those who don’t know they should, those who are unwilling (they know they should but don’t), and those who don’t have the means (they know they should but can’t). A plan sponsor likely has all three of these groups within its organization; each presents some unique challenges, but the first two groups would clearly benefit from an effective financial literacy program.

Don’t know
It’s a simple and sad fact that some people don’t understand how important it is to save for their futures—these are the truly financially uninformed. Perhaps they were never exposed to the concept of saving; or their parents didn’t save or emphasize its importance. Where else would they pick this up? In North America, it’s rarely taught in school. Lacking knowledge and awareness, they live in the moment and are surprised to find they’re unprepared for the future.

More puzzling is the group of individuals who don’t save for retirement when, at a basic level, they know they should. Why would someone saving hard for retirement take an ill-advised loan from the account to pay for a new truck? Perhaps the following starts to explain some of this seemingly irrational behavior.

  • The concept of a comfortable retirement is too nebulous and distant to motivate people to save. Instant gratification is the name of the game. Why wait when you can have it now?
  • Denial dominates the thinking. If subsisting on Social Security or a meager public pension is the consequence, it doesn’t seem real for individuals as they continue to enjoy a prosperous and bountiful lifestyle.
  • Information overload can lead to inaction. An overabundance of information can make it hard to filter out what’s important. People can reach the point of saturation and simply become paralyzed.
  • Choice costs time. When faced with too many choices, it can be overwhelming to wade through them. The more choice, the more effort—and people will often choose the path of least resistance, which is to do nothing at all.

No means
Critical needs can compete for resources. When a person is struggling to put food on the table every day, how is it possible to set money aside for the future? Sadly, given the economic downturn, more and more people are in this situation across the globe.

2012 healthcare costs for American family exceed $20,000

Milliman today released the results of its 2012 Milliman Medical Index (MMI), which measures the average healthcare costs for a typical American family of four receiving healthcare through an employer-sponsored preferred provider organization (PPO) plan. The average cost of care for this typical family in 2012 is $20,728. While the 6.9% increase over 2011 is the lowest rate of increase in the 12 years tracked by the MMI, the $1,335 increase surpasses last year’s record of $1,319.   

“The average rate of increase this year dips below 7% for the first time since we began analyzing these costs, but the total dollar increase is still the highest we have seen,” said Lorraine Mayne, principal and consulting actuary with the Salt Lake City office of Milliman. “This helps illustrate the challenge of controlling healthcare costs. When the total cost is already so high, even a slower rate of growth has a serious impact on family budgets.”

The MMI’s release date falls during an uncertain time for American healthcare, with the nation awaiting the outcome of the U.S. Supreme Court’s decision on the future of the Patient Protection and Affordable Care Act (PPACA). To date, the PPACA has had only a limited effect on healthcare costs for families covered by an employer-sponsored PPO plan; longer term, the implications may be more pronounced, and will depend on a number of dynamic and interrelated factors.

“We face a number of different potential scenarios depending on the future of reform,” said Chris Girod, principal and consulting actuary with the San Diego office of Milliman. “With this year’s MMI we have tried to map out what those different scenarios may mean for consumers, employers, care providers, and the government.”

As has been the case in prior years, this year’s analysis examines several key medical cost components:

  • The MMI includes analysis of healthcare costs in 14 cities, thereby showcasing the role that geography plays in healthcare costs. This year, the average cost of care for the typical family in all but three of these cities exceeds $20,000. Of the 14 cities analyzed, Miami is the most expensive, at $24,965, while Phoenix is the least expensive at $18,365.
  • The MMI examines how employers and employees share the cost of healthcare. This year employers will on average contribute $12,144 of the $20,728 total while employees—through payroll deductions and out-of-pocket expenditures—will pay the remaining $8,584.

“Some families may be surprised to hear their total average healthcare costs are exceeding $20,000 this year,” said Scott Weltz, consulting actuary with the Milwaukee office of Milliman. “While everyone knows the cost of healthcare is increasing, most people who receive health insurance through their employer are insulated from the true costs associated with the care they receive.” 

To view the complete MMI, click here.

DOL issues guidance on retirement plan fee disclosure rules

The U.S. Department of Labor (DOL) has issued Field Assistance Bulletin (FAB) 2012-02, which contains a set of 38 “frequently asked questions” (FAQs) and answers on the agency’s final rules on retirement plan service provider and participant-level fee disclosures, well known as the ERISA section 408(b)(2) and section 404(a)(5) disclosure rules. FAB 2012-02 does not extend the upcoming (July 1 and August 30) compliance dates that some plan sponsors had sought. However, the DOL’s enforcement actions will consider whether plan sponsors and service providers acted reasonably and in good faith if or when a plan is audited.

In general, the guidance supplements the participant-level disclosure regulation by clarifying the requirements and its implementation. It also provides additional guidance to service providers about the requirements to furnish specified information to plan administrators. The FAQs cover numerous topics under two main headings. Under disclosure of plan-related information, questions are answered about: tax-sheltered annuity programs, administrative expenses, treatment of brokerage windows, benchmarks, and glossary requirements. Topics covered under disclosure of investment-related information include: the form of disclosure, operating expenses, transitional rules, and final amendments to the regulation. The DOL also announced in an accompanying news release that a second set of FAQs focusing on disclosure by covered service providers will be released in the near future.

The FAB 2012-02 is available here.

Regulatory roundup

More key retirement-related regulatory news for plan sponsors to monitor carefully, including links to get detailed information.

DOL releases Field Assistance Bulletin on fee disclosures
The Department of Labor (DOL) has released Field Assistance Bulletin 2012-02 providing guidance on fee disclosures. This bulletin supplements the participant-level disclosure regulation by providing guidance on some of the most frequently asked questions concerning the regulation and how it may be implemented.

In addition, on February 3, 2012, the DOL published a final regulation under section 408(b)(2) of ERISA. The 408(b)(2) regulation, in relevant part, requires that certain covered service providers furnish specified information to plan administrators so that they may comply with their disclosure obligations in the participant-level disclosure regulation. Consequently, the guidance in Field Assistance Bulletin 2012-02 also serves as guidance concerning that specific requirement of the 408(b)(2) regulation. The bulletin is available here.

IRS posts VCP “Submission Kits” for plan sponsors who missed April 30 deadline
For retirement plan sponsors who missed the April 30 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) deadline to adopt a preapproved plan, the IRS has made available Voluntary Correction Program (VCP) submission kits. These kits include sets of instructions, forms, and information that will be needed about how the VCP program works. Plan sponsors with defined benefit (DB) plans can find more information here. Those with defined contribution (DC) plans can find more information here.

DOL’s ERISA Advisory Council announces 161st meeting for June 12-14
The Advisory Council on Employee Welfare and Pension Benefit Plans (also known as the ERISA Advisory Council) will hold its 161st meeting on June 12-14, 2012. The purpose of the open meeting is for Advisory Council members to hear testimony from invited witnesses and to receive an update from the Employee Benefits Security Administration (EBSA).

The Advisory Council will study the following issues:

  • Managing disability risks in an environment of individual responsibility
  • Current issues regarding income replacement during retirement rears
  • Current challenges and best practices concerning beneficiary designations in retirement and life


Corporate pension funded status declines for first time this year

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit (DB) pension plans. In April, these pensions experienced a $39 billion decrease in pension funded status  based on a $35 billion increase in the pension benefit obligation (PBO) and a $4 billion decline in the asset value. April’s drop in funded status is the first of 2012 and comes following a strong improvement in March.  

These pensions were doing well in 2012 until April reversed the momentum. As has been the case with so many of our negative months, the decline in funded status was mostly interest-rate-driven.

In April, the discount rate used to calculate pension liabilities fell from 4.88% to 4.76%, pushing the PBO up to $1.561 trillion at the end of the month. The overall asset value for these 100 pensions decreased from $1.298 trillion to $1.294 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.76% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funding ratio from 82.9% to 85.6% by the end of 2012 and to 90.7% by the end of 2013.