Tag Archives: Federal Reserve

Regulatory roundup

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

New projects focusing on filing errors on Form 5500 Series and Form 5330
The Employee Plans Compliance Unit (EPCU) of the Internal Revenue Service (IRS) has listed new projects regarding filing errors in the Form 5500 Series and Form 5330. The EPCU develops compliance projects and performs data analysis to focus on areas of potential noncompliance. The projects involve contacting plan sponsors by letter to resolve recordkeeping, reporting, and other issues without an audit. EPCU indicates that most issues are resolved without an on-site examination of the books and records of the plan, saving time and money for both the taxpayer and the IRS. To date, the EPCU has completed close to 70 projects and conducted over 38,000 compliance checks.

For more information, click here.

Defined benefit plan assets increase 2.8% in 2016
The Federal Reserve has released its quarterly report “Financial Accounts of the United States.” The report shows that public and private defined benefit (DB) plan assets totaled $11.63 trillion at the end of 2015, up 2.83% from the end of 2014. Other highlights include:

• Corporate DB assets totaled $3.14 trillion as of December 31, up 1.29% from the end of 2014. Corporate defined contribution (DC) assets totaled $5.38 trillion, up 0.19% from the end of 2014.
• State and local government DB assets reached $5.16 trillion at the end of the year, up 3.82% from December 31, 2014.
• State and local government DC assets totaled $478 billion, down 2.05% from the end of 2014.

To download the report, click here.

Regulatory roundup

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

Federal Reserve research on actuarial liabilities and funding status of pensions in the Financial Accounts of the United States
Last year, in its September 2013 release, the Financial Accounts of the United States (formerly known as Flow of Funds accounts) changed the treatment of defined benefit (DB) pensions from a cash accounting basis to an accrual accounting basis. Under accrual accounting, pension plans’ liabilities are set equal to the present value of future DB benefits that plan participants have accumulated to date, which are calculated using standard actuarial methods.

As a result of this change, the Financial Accounts now provide a measure of the funding status of private and public DB pension plans. The accounting change also had other important effects on the balance sheets—and corresponding financial flows—of the private and public pensions sectors, the nonfinancial business sector, the government sector, and the household sector. A new FEDS Notes paper discusses the accounting changes and their main effects in the Financial Accounts, including the new measures of funding status of private and public DB pension plans.

To read the entire paper, click here.

Update on the Federal Reserve’s tapering and rate increases

Young-DorianOn March 18 and 19, 2014, the Federal Reserve’s interest-rate-setting committee, the Federal Open Market Committee (FOMC), held its first meeting led by Janet Yellen, the new Federal Reserve chair. The outcome of this meeting in terms of the Federal Reserve’s plans for tapering and future increases in the federal funds rate provided more data points toward a base case that continues to increase in clarity.

This is an opportune moment to update you on this base case given the level of clarity, a level higher than we’ve seen since the global financial crisis.

FOMC schedule
The FOMC has eight scheduled meetings per year—two each quarter—one at the end of the first month of the quarter, and one in the middle of the third month of the quarter. During these two-day meetings, the FOMC has been providing increasingly longer-worded guidance on its thinking regarding any changes to the federal funds rate and its thinking regarding any changes to tapering its monthly purchases of bonds (Quantitative Easing 3, or QE3).

The FOMC began tapering after its final meeting in 2013 by reducing its bond purchases from $85 billion per month to $75 billion per month, a reduction of $10 billion per month. In its first meeting of 2014 (January 28-29), the FOMC continued its tapering, down to $65 billion per month. In its second meeting of 2014 (March 18-19), the FOMC again continued its tapering, announcing it would decrease bond purchase to $55 billion per month commencing April 1, 2014.

If the FOMC continues to decrease its purchases over the remaining six meetings in 2014, as is widely anticipated, then in the eighth meeting of 2014 (in mid-December), the FOMC will reduce its purchases from $5 billion per month to $0 (i.e., tapering will come to an end) and QE3 will be complete.

The risks to this base case are that the FOMC could either accelerate or decelerate this rate of change. Should these risks be realized, there may be noticeable reactions in the market, albeit temporary, lasting no more than three to six months and similar in nature to the May-June 2013 and September 2013 market responses.

Federal funds rate
The FOMC continues to communicate that it plans to keep short-term interest rates “low” for a long time. These short-term interest rates are driven by the federal funds rate, which is traditionally increased or decreased in increments of 0.25%.

The federal funds rate base case is that the FOMC will keep the rate unchanged until mid- to late-2015, at which point the FOMC will begin to increase the rate slowly. From a calendar perspective, mid-2015 could be as early as the late-April meeting, while late-2015 could be as late as the mid-December meeting. In terms of the FOMC increasing the rate slowly, slowly may mean a 0.25% increase every other FOMC meeting. A back-of-the envelope analysis could show the first rate increase happening in mid-June 2015 and subsequent rate increases every three months, which would put the federal funds rate at 1.00% in mid-December 2015, going to 2.00% in mid-December 2016, and continuing until ultimately leveling out somewhere around 4.00% sometime in late 2018 or early 2019.

The risks to this base case are that the FOMC could either accelerate or decelerate either the commencement of rate increases and/or the speed of the rate increase. At this point, we have little clarity on exact timing, while we do have reasonable clarity on the range of start dates.

Heading into this second FOMC meeting of 2014, one of the key news items in the financial media was how Ms. Yellen was going to improve the FOMC policy statement’s communication. When communication is the key question heading into a FOMC meeting (instead of federal funds rate changes or the execution of tapering), then there is more clarity in the market.

In 2013, the FOMC had first communicated that, when the unemployment rate reached 6.5%, it would begin to increase the federal funds rate (or at least this was how it was widely interpreted). Then this 6.5% unemployment rate was subsequently reported as the point at which the FOMC would begin to “think about” increasing the federal funds rate. Now the communication is that there is no longer a direct connection between the unemployment rate and when the FOMC will commence the rate increases—which we interpret as a standard investment mosaic process where everything the FOMC feels is relevant is pieced together to form its overall picture.

Discussions about the timing of when the FOMC will begin to increase the federal funds rate have been going on for years, but we now believe there is meaningful clarity. As we move through 2014, we expect QE3 to be tapered to $0 near year-end. If this occurs, we expect the FOMC would make its first rate increase sometime around mid-2015 to late 2015. And at this point, we expect subsequent rate increases to be slow.

Should you like to discuss these topics further, please contact us at Milliman Investment Consulting.

Federal Reserve issues statement of monetary policy change

Cottle-StevenOn December 18, the Federal Reserve announced that its bond purchasing campaign, widely known as “quantitative easing,” will begin to lessen as the U.S. economy has shown signs of improvement. The Federal Reserve first mentioned its intentions of reducing bond purchases back in the spring of 2013. Following that initial announcement, markets reacted swiftly and negatively, bringing fixed income yields up and equity prices down. Since then, the United States has steadily shown encouraging signs of improving economic activity. The latest Federal Reserve move is a gradual change, and an explicit acknowledgement that the U.S. economy is heading in the right direction and financial markets are well-prepared for a reduction in monetary stimulus.

As a response to the economic downturn in 2008 and 2009, the Federal Reserve began purchasing U.S. Treasury and mortgage-backed securities in an unprecedented effort to create liquidity, keep interest rates low, and ultimately support the economic system. The policy was designed to be accommodative, purchasing $85 billion in fixed income securities per month, in order to revive economic growth, lower unemployment, and induce a healthy, moderate amount of inflation. Since the policy began, the Federal Reserve’s balance sheet has expanded from well below the $1.0 trillion mark to nearly $4.0 trillion today. Beginning in January 2014, bond purchases by the Federal Reserve will be scaled back modestly from $85 billion a month to $75 billion. A continued reduction of future bond purchases will be dependent upon a lower unemployment rate and encouraging signs of economic expansion.

Reaction to the Federal Reserve announcement was positive, as measured by the S&P 500, which rose nearly 1.7% on the day of the news. The domestic bond market, as measured by the Barclays Aggregate, was modestly negative by 14 basis points. The reduction in Federal Reserve bond purchases could be interpreted as a vote of confidence in the U.S. economy and financial markets. Ultimately, the Federal Reserve may be initiating this exit from the financial markets as a necessary and appropriate conclusion to its unprecedented efforts to stimulate the economy. With that said, the Federal Reserve was explicit about its intention to maintain low levels of interest rates until it is comfortable with a healthy level of inflation and unemployment is at or below 6.5%.

Regulatory roundup

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

DOL posts lifetime income illustration and fact sheet
Workers participating in defined contribution (DC) plans, such as 401(k) or similar savings plans, are responsible for managing their retirement savings while employed and during their retirement years.

As described in an advance notice of proposed rule-making (ANPRM), the U.S. Department of Labor (DOL) is considering proposing a rule that pension benefit statements include the participant’s account balance as a single sum as well as an estimated lifetime income stream of level payments using both the participant’s current account balance and the projected account balance at retirement. For married participants, the statement also must include joint and survivor lifetime income payments.

Using assumptions described in the ANPRM (noted below), this calculator illustrates an annuitization approach to estimate the monthly lifetime income streams based on both the participant’s current account balance and on the projected value of the account balance at retirement. For both balances, the calculator develops two level lifetime payments: one for the life of the participant (with no benefits to any survivors) and the second for the joint lives of the participant and the spouse with a 50% survivor’s benefit for the spouse’s lifetime.

This calculator uses a simplified computation (e.g., annual contributions, mid-year retirement). Depending on the comments received in response to the ANPRM, the next version of the calculator may provide a more precise computation (e.g., monthly contributions, retirement in a specified month).

For a copy of the fact sheet, click here. For the calculator, click here.

DOL issues ANPRM on pension benefit statements
The U.S. Department of Labor (DOL) has issued an advanced notice of proposed rule-making (ANPRM) regarding the pension benefit statement requirements under section 105 of ERISA, as amended. The ANPRM describes certain rules the DOL is considering as part of the proposed regulations.

The rules being considered are limited to the pension benefit statements required of defined contribution (DC) plans. First, the DOL is considering a rule that would require a participant’s accrued benefits to be expressed on his pension benefit statement as an estimated lifetime stream of payments, in addition to being presented as an account balance. Second, the DOL also is considering a rule that would require a participant’s accrued benefits to be projected to his retirement date and then converted to and expressed as an estimated lifetime stream of payments. This ANPRM serves as a request for comments on specific language and concepts in advance of proposed regulations.

Comments are due on or before 60 days after publication in the Federal Register. The ANPRM was published on May 8, 2013.

Federal Reserve: Early withdrawals from retirement accounts during the great recession
Three economists at the U.S. Federal Reserve released a paper titled “Early Withdrawals from Retirement Accounts During the Great Recession,” which shows that for every dollar workers contributed to their pensions and individual retirement accounts in 2010, taxpayers younger than 55 took nearly half—45 cents—as a taxable distribution. Here is an excerpt:

“For families headed by someone younger than age 55, about 45 percent of total new contributions to retirement accounts in 2010 were offset by early withdrawals, but that number was 30 percent in 2004, and some of that increase is attributable to declining contributions. The analysis here of factors associated with early withdrawals in 2010 suggests that propensities to receive cash-outs or to take taxable withdrawals is higher for lower-income families, because lower-income families are much more likely to experience the sorts of shocks that lead to withdrawals and slightly more likely to take a withdrawal when they experience those shocks. These findings may help to explain why the observed cross-section distribution of retirement account balances—even within the covered population, and relative to contributions—is skewed towards higher income families.”

Read the entire paper here.

IRS PLR extending 60-day rollover period because of bank error
The Internal Revenue Service (IRS) has issued a private letter ruling (201319034) dealing with the 60-day rollover period.

The ruling concludes:

“The information and documentation submitted by Taxpayer A is consistent with the assertion that the failure to accomplish a timely rollover of Amount 1 was due to a mistake by Bank D. Therefore, pursuant to section 408(d)(3)(l) of the Code the Service hereby waives the 60-day rollover requirement with respect to the distribution of Amount 1 from IRA B.”

Read the entire private letter ruling (PLR) here.

SEC, FINRA issue investor alert on pension or settlement income streams
The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently issued an investor alert entitled “Pension or Settlement Income Streams – What You Need to Know before Buying or Selling Them.”

The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump sum amount, which will almost always be significantly lower than the present value of that future income stream.

The investor alert contains a checklist of questions to consider before selling away an income stream:

• Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pensions to someone else.
• Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream and compare this rate to alternatives such as a bank loan.
• What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional.
• Will the factoring company require life insurance? The factoring company may require you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout.
• What are the tax consequences? The lump sum payment you collect may be taxable.

For a copy of the investor alert, click here.

JCT summarizes tax reform proposals/Ways and Means working with retirement incentives
The U.S. Joint Committee on Taxation (JCT) issued a “Report to the House Committee on Ways and Means on Present Law and Suggestions for Reform Submitted to the Tax Reform Working Groups” (JCS-3-13). The 568-page document summarizes current law, key tax reform proposals, and formal submissions to the House of Representatives Ways and Means Committee working groups on tax reform. Among the tax incentives that are discussed, those dealing with the employer-sponsored retirement system are discussed specifically.

Download a copy of the report here.

What do the Fed’s policy shifts from calendar to economic targets mean for investors?

The U.S. Federal Reserve recently announced changes that will have major implications for investors and plan fiduciaries. The Fed’s decision to move to economic targets rather than date-based indications will result in a higher-rate environment. Plan sponsors and trustees would be wise to examine their plans and make adjustments now to prepare for the coming rate increases, as well as plan what actions to take when rates stabilize.

This paper offers several considerations for investors pertaining to the Fed’s policy shift from calendar to economic targets.