RMDs 2020: To infinity and beyond!

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed and signed into law on December 20, 2019, is the first piece of legislation to affect required minimum distributions (RMDs) since the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), which eliminated RMD requirements for 2009.

Beginning in 2020, there are two significant mandatory RMD changes to qualified plans and traditional IRAs:

  • A mandatory increase—to age 72 from age 70-1/2—for the required beginning date for mandatory distributions (effective for distributions required to be made after December 31, 2019, for employees or participants who attain age 70-1/2 after December 31, 2019).
  • A requirement that defined contribution (DC) plan (and IRA) distributions generally be made to non-spouse beneficiaries within 10 years of the death of the account holder (effective for RMDs to beneficiaries who die after December 31, 2019).

These changes do not affect participants currently in pay status. For example, if a participant born prior to June 30, 1949, turned 70-½ prior to December 31, 2019, that person is required to continue RMDs and must have the first RMD for 2019 paid no later than April 1, 2020. RMDs will also continue in 2020 and 2021.

Note that, if an active participant turned 70-½ in 2019 but was not required to take an RMD under the plan document; then that person’s RMD must follow the law and the Internal Revenue Service (IRS) regulations in effect prior to the enactment of SECURE and RMDs will begin in the year of retirement regardless of age. Participants who turn 70-½ in 2020 or later are under the new age 72 regulation.

While not related to SECURE, note that the life expectancy tables used to calculate the RMDs have changed. The revised life expectancies are longer; therefore, the amounts participants and beneficiaries are required to receive, as RMDs will be lower. This change will not go into effect until 2021 at the earliest and is likely to result in a lower tax liability for RMD recipients (except for Roth accounts, for which distributions are tax-exempt).

These changes are mandatory under SECURE and are required to be implemented effective January 1, 2020. Milliman is currently reviewing procedures, and updating our recordkeeping systems to account for the legislative change.

The SECURE Act does give plan sponsors a two-year delay in amending the plan document. Amendments are not required before the last day of the plan year that begins on or after January 1, 2022.

Please contact your Milliman consultant for additional details.

Milliman adds Ironworkers Local 8 as a retirement services client

Milliman today announced it has added the Wisconsin Ironworkers Union Individual Account Retirement Fund as a defined contribution client. The plan includes over 3,300 participants and $215 million in assets.

“We had a retirement plan that was valued once a month and the Board of Trustees wanted to move it to daily valuation to allow the members of Local 8 to better plan for their retirement,” says Tony Mayrhofer, Business Manager and Trustee. “We selected Milliman for their extensive experience converting plans like ours from balance-forward to daily valuation, with participant-direction, without having to change the unique investment structure that we had in place. Our members are very pleased with the change and can now view their accounts at any time. I couldn’t be happier with the program that we now have in place.”

Milliman will provide recordkeeping, communications and ERISA consulting services for the plan.

We are grateful the Board of Trustees chose Milliman for their retirement needs. The trustees and staff at Local 8 are great to work with and it really was a nice collaborative effort with the other fund professionals in making the transition successful.

For information on Milliman’s employee benefit services, click here.

Mortality projection considerations

How much longer will people live in the future? This is difficult to predict. The Society of Actuaries (SOA) has created very precise projections of mortality improvement that are updated each year. These annual updates are reasonable and based on the most current information, but the precision can cause volatility in the annual calculations of pension costs and liabilities.

In this paper, Milliman consultants Mark Olleman and Matt Larrabee present two alternative options for mortality projections based on historical mortality improvement data. These alternatives are intended to reduce volatility from changes in the mortality improvement assumption, and therefore lead to more stable long-term pension cost and liability calculations, while providing a reasonable estimate of the long-term pension liability in accordance with the Actuarial Standards of Practice.

Helping women reach financial goals

A recent survey by Prudential reported that 54% of women are primary breadwinners, but men on average were more likely to say they are on track to meet their financial goals. Only 54% of women have put aside money for retirement compared to 61% of men. And when asked about their financial future, 52% of women said they were very worried compared to 42% of men.

Women face unique obstacles in securing the necessary roadmap for retirement. But as Milliman’s Christine Jello, Suzanne Norman, and Pat Renzi say in their article, “Women and retirement,” there is reason to be optimistic that, through innovative technology and an industry aware of women’s purchasing power, more resources are becoming available to help them chart their financial futures.

Corporate pensions see an overall investment gain of 15.66% in 2019, but funding still drops due to discount rate lows

Milliman today released the year-end results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In 2019, corporate pension funding ended down $30 billion for the year, with the funding ratio dropping from 89.4% at the end of 2018 to 89.0% as of December 31, 2019.

Plan assets outperformed expectations, posting an annual return of 15.66% and a gain of $174 billion. But record-low discount rates resulted in plan liabilities increasing as well, by $204 billion during 2019. As of December 31, the Milliman 100 discount rate had fallen 99 basis points, from 4.19% at the end of 2018 to 3.20% a year later. This marks the lowest year-end discount rate that has been recorded in the 19-year history of the Milliman 100 Pension Funding Index (PFI).

For corporate pensions during 2019, the funded status environment was like trying to fill a bucket full of holes with water – funding levels would rise given superb asset gains but then quickly recede given offsetting liability movements attributable to ever-falling discount rates. Looking ahead to 2020, many plan sponsors can expect to have a rise in pension expense given the funded status losses suffered by plans during 2019.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.80% by the end of 2020 and 4.40% by the end of 2021) and asset gains (10.6% annual returns), the funded ratio would climb to 104% by the end of 2020 and 121% by the end of 2021.  Under a pessimistic forecast (2.60% discount rate at the end of 2020 and 2.00% by the end of 2021 and 2.6% annual returns), the funded ratio would decline to 82% by the end of 2020 and 76% by the end of 2021.

To view the complete Pension Funding Index, click here. To see the 2019 Milliman Pension Funding Study, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Regulatory roundup

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

PBGC’s 2019 Annual Report of the Participant and Plan Sponsor Advocate
The Pension Benefit Guaranty Corporation (PBGC) published the “2019 Annual Report of the Participant and Plan Sponsor Advocate.” By law, the Office of the Advocate must submit a report, no later than December 31 of each calendar year, to certain statutorily designated Congressional committees detailing the fiscal year activities of the OPPSA ending during such calendar year.

The annual report summarizes participant and plan sponsor assistance requests, as well as the activities and effectiveness of the Advocate during the preceding year. The report also details significant problems identified by the Advocate and specific legislative and regulatory changes to address the problems.

To read the 2019 annual report, click here.

Updated Revenue Procedures for employee plans and exempt organizations released
The IRS has published Internal Revenue Bulletin 2020-1, which includes the various revenue procedures, revised for 2020, for issuing letters, rulings, determination letters, and technical advice on specific issues related to employee benefits. The documents are Rev. Proc. 2020-1, Rev. Proc. 2020-2, Rev. Proc. 2020-3, and Rev. Proc. 2020-4.

For an electronic version of Internal Revenue Bulletin 2020-1 containing these revenue procedures and user fee schedules, click here.

2020 W-4 issued
The IRS has issued 2020 Form W-4. The new design reduces the form’s complexity and increases the transparency and accuracy of the withholding system. While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.

To download a copy of the 2020 Form W-4, click here.