Tag Archives: hybrid retirement plan

Retirement plan considerations related to expanded determination letter program

Earlier this year, the Internal Revenue Service (IRS) released Revenue Procedure (Rev Proc) 2019-20 announcing an expansion of the determination letter program for certain retirement plans. The determination letter program, previously restricted in 2017 (Rev Proc 2016-37), will be expanded on September 1, 2019. This action opens the program up to statutory hybrid plans to apply during a 12-month window, and also allows certain merged plans indefinitely. Milliman’s Carrie Vaughn offers more perspective in this Multiemployer Review article.

Employee communications: Transition to a Sustainable Income Plan

tenBroek-HeidiRetirement plan sponsors are increasingly considering transitioning their current retirement plans to the Milliman Sustainable Income Plan™ (SIP). This allows them to have stable costs like those of a 401(k) plan, while providing participants with reliable, lifelong income like a traditional pension plan.

Communicating the change to a SIP, however, may feel daunting for plan sponsors. Effective communications ensure that employees understand how the SIP works, how it will affect them, and why a SIP is a stable retirement solution for the sponsor and for them. Breaking down plan concepts into digestible, clear messages is key. Using a variety of communication vehicles—meetings, newsletters, personalized projections, etc.—increases the odds of success. In fact, we’ve found employees are excited about SIPs once they understand how they work.

A short video created for employees can be one of your most powerful tools in communicating a new kind of benefit. The combination of images, written text, and oral explanations are very effective in conveying how a SIP works. It provides a solid foundation and a basic understanding that makes the detailed communications to follow more accessible. Below is a sample video created as an introduction to a SIP transition.

Note that the Milliman Sustainable Income Plan™ (SIP) was called a Variable Annuity Pension Plan (VAPP) at the time this video was produced.

For more Milliman perspective on SIP, click here.





Milliman Hangout: Variable annuity pension plans (VAPPs)

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Retirement security is tricky. Traditional defined benefit plans have contribution volatility that is difficult for sponsors to manage. Defined contribution plans typically do not provide participants with stable, lifelong income. Variable annuity pension plans (VAPPs), however, combine the best of both worlds—better meeting the needs of sponsors and participants. Sponsors get stable contributions like defined contribution plans and participants get lifelong income like defined benefit plans.

Milliman consultants Kelly Coffing and Grant Camp discuss some of the benefits that VAPPs offer sponsors and participants in this Milliman Hangout.

For more perspective on VAPPs, click here.





IRS issues final and proposed rules for hybrid pension plans

The Internal Revenue Service (IRS) has published a final rule covering tax-qualified cash balance (hybrid) pension plans, providing guidance on the key issue of “market rate of return.” Sponsors of hybrid plans have waited for four years for this guidance since the agency delayed the effective date of an October 2010 final rule following practitioners’ concerns that the IRS had incorrectly interpreted the statutory definition. In general, the final rule applies to plan years that begin on or after January 1, 2016.

The IRS also published a companion proposed rule to facilitate the transition for plan sponsors to adopt requirements, allowing for an election to apply the proposed rule to amendments adopted earlier than January 1, 2016. The IRS seeks comments on the proposal by December 18, 2014.

This Client Action Bulletin discusses final and proposed rules for hybrid pension plans.





Hybrid retirement plans provides sponsors with options

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Hybrid retirement plans are becoming more popular among employers seeking to offer the best features of both traditional defined benefit and defined contribution plans. A recent Employee Benefits Adviser article (subscription required) highlights variations of these hybrid plans and identifies some public and private sector sponsors that have shown interest in adopting them.

Here is an excerpt featuring some perspective from Milliman’s Mark Olleman and Kelly Coffing:

“I think we are going to see more hybrid arrangements and fewer defined contribution and traditional defined benefit plans [in the future],” says Mark Olleman, principal and consulting actuary at Milliman, Inc. in Seattle. “I think we really need more plans to provide people with a lifelong income, without providing employers unpredictable contributions.”

…Wisconsin’s plan looks more like a variable annuity pension plan. [Retiree benefits are based on a conservative assumption of] a 5% return. If the plan returns better than 5% over the long term, retirees get dividends. If it returns below 5%, the dividends will be taken away, Olleman says. Retirees receive a minimum amount [of their original benefit] regardless of how the market performs.

The big difference between public sector and private sector plans is that public sector plans need to get permission from the legislature to make changes, he said. Both sectors have shown an interest in hybrid options.

Kelly Coffing, a principal and consulting actuary for Milliman who works more closely with private sector employers, says that variable annuity pension plans have been around for a while but have not been popular with retirees. The reason? They don’t like it when their benefits go down, she said. In a VAPP, the monthly benefits move up and down based on the performance of the plan. If the assets go up, the benefits go up. If the assets go down, the benefits go down.

Despite the volatility, these types of plans always stay funded and have very predictable, rational employer costs, Coffing says. They also offer longevity pooling and inflation protection, which is something participants don’t get in a defined contribution plan.

…Milliman has attempted to smooth out some of that volatility for retirees in its latest version of the VAPP [that they call the stabilized VAPP].

“In years where returns are high, we don’t give the whole upside to participants. We [cap] the increases [to build] a reserve. When the market goes down, we can [use the reserve to] shore up the benefit to the high water mark,” she says. This way, participants don’t see a roller coaster of ups and downs in their retirement [benefits].

…Milliman’s experts say they hope the variable annuity pension plan will gain in popularity now that [final hybrid retirement regulations issued September 19, 2004 have confirmed that the stabilized VAPP is an acceptable plan design.]

To learn more about how VAPPs can provide lifelong retirement benefits, read Olleman and Kelly’s article entitled “Variable annuity pension plans: An emerging retirement plan design.”