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50-Year Old Mortality Data Questioned in Latest ERISA Lawsuit

Plansponsor.com - Fri, 2019-06-28 11:38

A new complaint filed in the U.S. District Court for the Eastern District of Virginia resembles several others filed in the last year against MetLife, Pepsi and American Airlines, suggesting the use of outdated mortality tables in determining annuity payments causes retirees to lose part of their vested retirement benefits.

This latest complaint targets Huntington Ingalls Industries, which refers to itself on its website as “America’s largest military shipbuilding company and a provider of professional services to partners in government and industry.” With some nuances in each case, the basic argument being put forward is that these employers are failing to pay the full promised value of ‘alternative benefits,’ in that they are failing to ensure different annuity options made available in a retirement plan are actuarially equivalent to the plan’s default benefit, as required by the Employee Retirement Income Security Act (ERISA) and the terms of the plans themselves.

According to the text of the would-be class action, under the part of the Huntington plan that covers employees hired before June 7, 2004, dubbed the “legacy part,” participants accrue a retirement benefit that is a flat monthly rate for each year of service in the form of a single life annuity (SLA), described as “a payment stream that starts when they retire and ends when they die.”

The complaint suggests participants can choose from several forms of benefits other than an SLA, including joint and survivor annuities, which offer payment streams for retirees’ lives and their spouse’s lives after the retiree dies, and a “Social Security leveling option annuity,” which according to the complaint enables “early retirees to collect pension benefits until they begin receiving Social Security benefits at which point their pension benefits would be lowered.” Collectively, these options are referred to in the complaint as “non-SLA annuities.”

“To calculate the benefit amounts for retirees who receive these non-SLA annuities, defendants apply actuarial assumptions to calculate the present value of the future payments,” the complaint states. “These assumptions are based on a set of mortality tables to predict how long the participant and beneficiary will live and interest rates to discount the expected payments. The mortality table and interest rate together are used to calculate a ‘conversion factor’ which is used to determine the amount of the benefit that would be equivalent to the SLA.”

Under ERISA, the present value of the non-SLA Annuities must be equal to the value of the SLA for the forms of payment to be “actuarially equivalent.”

“Mortality rates have improved over time with advances in medicine and better collective lifestyle habits,” the complaint continues. “People who recently retired are expected to live longer than people who retired in previous generations. Older morality tables predict that people will die at a faster rate (higher mortality rate) than current mortality tables. As a result, using an older mortality table to calculate a conversion factor decreases the present value of the non-SLA annuities and—interest rates being equal—the monthly payment that retirees who select these non-SLA Annuities receive.”

The complaint states that the Huntington defendants calculate the conversion factor (and thus the present value of the non-SLA annuities) for the legacy part of the plan using the 1971 Group Annuity Mortality Table. This table assumes 90% of the employees are male, and that 90% of contingent annuitants are female, while utilizing a 6% interest rate.

“Using the 1971 table, which is based on data collected roughly 50 years ago, depresses the present value of non-SLA annuities, resulting in monthly payments that are materially lower than they would be if defendants used reasonable, current actuarial assumptions,” the complaint alleges. “By using outdated mortality assumptions to calculate non-SLA annuities under the legacy part, defendants improperly reduce plaintiff’s benefits.”

Specifically, the complaint calls for an order from the Court reforming the plan to conform with ERISA; payment of future benefits in accordance with the reformed Plan, as required under ERISA; payment of amounts improperly withheld; and such other relief as the Court determines to be just and equitable.

The lead plaintiff goes on to point out that more recent mortality tables are “two-dimensional” in that the rates are based not only on the age of the individual but the year of birth—and that the Society of Actuaries (SOA) has published updated tables five times since 1971, most recently in 2014, with the express stated purpose of accounting for changes in the U.S. population’s mortality experience. And just in May of this year, the SOA released an exposure draft of new private-sector retirement plan mortality tables.

The full text of the complaint is available here.

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Categories: Industry News

To Succeed, Financial Wellness Programs Need to Motivate Participants

Plansponsor.com - Fri, 2019-06-28 09:37

To truly help participants, financial wellness programs need to advance beyond mere education to truly motivate participants to take action to improve their financial outlook, according to Cerulli Associates.

“Many employees in today’s workforce are struggling with competing financial priorities, and they will often express these concerns to their employer,” says Dan Cook, a research analyst with Cerulli. “Plan sponsors have taken note. Nearly one-third, 32%, identify improving the financial wellness of employees as a top priority for their 401(k) plan.”

But rather than focusing on moving the needle for participants, most plan sponsors are focused on their return on investment (ROI), which can be hard to measure, according to Cerulli. “Plan sponsors have a broad range of goals for financial wellness programs,” Cook continues. “Some goals, such as increasing 401(k) contribution rates, are straightforward. Other goals, such as improving financial literacy, increasing workplace productivity and decreasing employee stress, are more nebulous and/or difficult to directly attribute to a financial wellness initiative.”

The way to help employees improve their financial situation, according to Cerulli, is for plan sponsors to move past ROI to make their financial wellness programs action-oriented. “Individuals must be triggered to enact changes that impact their financial lives in a positive way,” Cook explains. “As such, providers must consistently collect data to identify engagement strategies that resonate most with specific groups and craft digital experiences through which a participant’s ‘next best action’ is only one or two clicks away.”

Cerulli says that participants’ primary sources of financial stress are health care expenses, cited by 30.5%, followed by not having enough money saved for retirement (25.7%), paying monthly bills (10.7%), not having enough emergency savings (10.6%), credit card debt (8.4%) and student loan debt (4.7%).

Cerulli says that health savings accounts (HSAs) could help participants with their health care expenses, but few participants are knowledgeable about them, particularly that they can use them to invest. Sponsors should educate participants about using HSAs as a retirement benefit, Cerulli says, starting with their triple tax advantages. As well, sponsors should not just try to educate participants about HSAs at the annual benefit enrollment period but, rather, throughout the year.

Cerulli also says that when making changes to their 401(k), older participants prefer to interact with people in a call center, and younger ones prefer chat features. As to what motivates people to open up a 529 college savings plan, 69.1% say it is their own research. Only 15.1% do so because of the advice of a financial professional, so there is work that can be done here.

Information on how to purchase Cerulli’s full report can be viewed here.

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Categories: Industry News

OneAmerica Expands Online Services for PRT Accounts

Plansponsor.com - Thu, 2019-06-27 12:26

OneAmerica is expanding its online service for pension annuity customers whose accounts came to the company through the pension risk transfer (PRT) market.

Besides the ease of access, the expanded portal will provide the same level of service to retirees (who are currently receiving a payment/annuity) that it does to those still employed (or who are eligible but have not started to draw from their pension). That service includes the ability to see to their account, make banking changes, change tax withholding, and manage their beneficiary information.

“This portal will expand the number of self-service features and resources,” says Andrew Wilkinson, FSA, MAAA, senior vice president for OneAmerica.

The number of annuitants who have this web-based technology will jump from more than 11,000 to just fewer than 40,000 post-rollout, which is expected to occur in the third quarter, says Gene Monnin, director, Pension Risk Transfer, Retirement Services. OneAmerica is currently in the process of notifying the planned offering to third-party consultants who typically act as intermediaries on behalf of plan sponsors looking to transfer their pension liabilities.

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Categories: Industry News

Investment Product and Service Launches

Plansponsor.com - Thu, 2019-06-27 11:41

Art by Jackson Epstein

American Century Investments to Develop New Equity and Fixed Income Suite

American Century Investments announced the hiring of Eduardo Repetto, Ph.D., as chief investment officer and Patrick Keating as chief operating officer to develop a new suite of broadly diversified, tax-efficient and cost-effective equity and fixed income solutions. The new solutions will be designed by Repetto, who previously served as co-chief executive officer/chief investment officer of Dimensional Fund Advisors (DFA) until 2017. Keating also served in a variety of senior leadership roles at DFA, including chief operating officer, until he left the firm in 2017.

“Eduardo and Patrick bring new skills and capabilities that will benefit American Century clients around the world,” says Jonathan Thomas, American Century’s chief executive officer. “We plan to leverage their tremendous knowledge and expertise to build unique systematic investment processes at Avantis Investors that we believe will form a solid basis for long-term asset allocation solutions.”

Once the registration process is completed, American Century plans to offer five equity strategies across market capitalization and geography in exchange-traded fund (ETF) and mutual fund vehicles. The new strategies will seek to implement an effective and repeatable investment process that utilizes an academic-based framework that aims to identify securities with higher expected returns. The firm expects the new investment vehicles to launch later this year, with separate account formats also available.

Repetto’s career with DFA spanned 17 years. He served as chief investment officer beginning in 2007 and co-chief executive officer starting in 2009, roles he held until his departure from DFA in 2017. Repetto earned a Ph.D. in aeronautics from the California Institute of Technology, an MSc in engineering from Brown University and a Diploma de Honor in civil engineering from the Universidad de Buenos Aires. 

Prior to joining American Century, Keating was with DFA for 15 years and served as chief operating officer with responsibility for the firm’s day-to-day business functions, including the management of growth plans and capital investment. Prior to that, he was chief executive officer and executive vice president and director of Assante Capital Management. Keating earned a bachelor’s degree in economics from the University of Winnipeg, Canada. He is a CPA (Canada), a CFA Charter holder and member of the CFA Institute.

HealthSavings Administrators Releases HSA Investment Vehicle

HealthSavings Administrators has unveiled its new Investor Focus HSA [health savings account] with a curated lineup of 42 funds from Vanguard and Dimensional with low expense ratios and no trading fees. 

The new Investor Focus HSA offers all core asset types, an even balance between passive and active funds, and achieves an average Morningstar rating of 3.96 (out of 5) stars across all funds. The new menu features 12 U.S. Equity funds, 1 Sector Equity fund, 14 Allocation funds (including several target-date funds [TDFs]), seven taxable bond funds and one Money Market option. With this new lineup, expense ratios are down for both active (25 bps) and passive (10 bps) funds, and the overall weighted average of  11 bps is 75% lower than the 47 bps weighted average cited by “DevenirResearch 2018 Year-End HSA Market Report.”

“We remain steadfast in our commitment to offering the leading investor-focused fund lineup to support our account holders’ goals as they prepare for retirement,” says Jennifer Harris, vice president of product development & program management at HealthSavings. “Our tight lineup of institutional-class funds underscores this commitment and further encourages adoption among investment-minded account holders who keenly understand the value of an Investor HSA as essential for future financial freedom.” 

To learn more about the HealthSavings fund lineup, visit here.

DWS Group Launches ESG ETF

DWS Group has expanded its environmental, social and governance (ESG) product lineup with the launch of Xtrackers S&P 500 ESG ETF (SNPE). The company says the new fund is the first exchange -traded fund (ETF) to provide exposure to an ESG-adjusted S&P 500 index in the U.S. market. 

“Our clients seek solutions that not only deliver on their investment strategy, but also help them achieve their sustainability goals,” says Luke Oliver, head of Index Investing for the Americas at DWS. “Through our Xtrackers ESG ETF suite, investors are able to access environmental, social and governance adjusted core benchmarks that they can use at the heart of their portfolios, allowing them to invest in companies that are well-positioned for the future.”

“We are pleased to reach this licensing agreement and work with DWS Group on their new exchange-traded fund based on the S&P 500 ESG Index,” says Reid Steadman, S&P DJI’s Global Head of ESG Indices. “The S&P 500 ESG Index was developed to support the growth of sustainable investing. Through use of the new S&P DJI ESG scores, the index helps investors align their investments with their values while still achieving a risk and return profile in line with the S&P 500.”

SNPE follows the successful launch of the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG) earlier this year. As of June 24, DWS manages more than 1.2 billion USD in ESG equity ETFs in the U.S. The Xtrackers suite of ESG ETFs also includes the Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF; the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF; and the Xtrackers MSCI EAFE ESG Leaders Equity ETF.

SNPE seeks investment results that correspond generally to the performance, before fees and expenses, of the S&P 500 ESG Index. The index excludes companies with disqualifying UN Global Compact scores and business involvement in tobacco or controversial weapons, then targets 75% of the float market capitalization of each Global Industry Classification Standard (GICS) Industry Group within the S&P 500, using an ESG score as the defining characteristic.

Principal Global Investors Releases Interval Fund

Principal Global Investors has launched its first interval fund, the Principal Diversified Select Real Asset (DSRA) fund, which primarily invests in private real assets, including infrastructure, natural resources, and real estate.

“This launch reflects Principal’s commitment to meeting growing client interest and demand for products that offer access and exposure to diversifying private assets,” says Mike Beer, executive director of Principal Funds. “Throughout 2019, we have encouraged clients and investors to reevaluate risk within their portfolios. Offerings like DSRA are designed to help investors address market uncertainty and volatility.” 

Interval funds provide investors with exposure to less liquid investments, while granting managers greater flexibility to invest in private, non-listed assets typically aligned with longer-term investment goals. Exposure to real assets provide investors with differentiated return streams offering the potential for enhanced risk-adjusted returns and income through various market cycle environments.

The launch of the fund is an extension of Principal Global Investor’s asset allocation boutique, Principal Portfolio Strategies, which manages multi-asset and multi-manager strategies and helps solve investors’ need for income, diversification, and inflation protection.

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Categories: Industry News

Employees’ Plans to Work Longer Could Be Thwarted by Age Bias

Plansponsor.com - Thu, 2019-06-27 10:55

Increasing longevity and inadequate retirement savings have many employees planning to work past the traditional retirement age, either by choice or out of necessity.

Northwestern Mutual’s 2019 Planning & Progress Study found 46% of Americans expect to work past the traditional retirement age of 65. Nearly one out of five Baby Boomers (18%) and an equal percentage of Generation X (18%) expect to work even longer—past the age of 74. Of Americans who expect to work past age 65, 47% say it will be out of necessity.

Another study found women have lower retirement savings and are saving less than men, and more women than men report planning to retire later because they’ll need to.

Yet the Equal Employment Opportunity Commission (EEOC) continues to find age bias among employers. Most recently, it sued the State of New Mexico, Corrections Department (NMCD), alleging it discriminated against several employees by denying them promotions and job assignments as well as in other terms, conditions, or privileges of employment because of their ages, as well as suing Liberty Support Services, Inc. in North Carolina for laying off and not rehiring employees because of their age.

According to the EEOC’s lawsuit, the rest area attendants—all older than age 40—were laid off during renovations but were not told that they were being discharged. They expected to return to their jobs after the renovations were completed but learned they had been discharged and replaced with employees younger than age 40.

A report by Victoria A. Lipnic, then acting chair of the EEOC, says age discrimination can thwart employees’ plans to work longer and could affect retirement plan drawdown strategies. During a hearing in 2017, witnesses made suggestions about how regulators and employers can reduce age discrimination and help people work longer.

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Categories: Industry News

Gucci Settles Excessive Fee Suit

Plansponsor.com - Thu, 2019-06-27 09:24

Gucci will pay $1.2 million to settle a lawsuit alleging the company and its benefits committee breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering plan investments with excessive fees, among other things.

The defendants were accused of charging excessive administrative and investment fees to plan participants. In particular, the plaintiff claimed the defendants failed to “fully disclose to participants the expenses and risks of the Plan’s investment options; breached their fiduciary duties under ERISA by allowing unreasonable expenses to be charged to participants for administration of the Plan; and breached their fiduciary duties under ERISA by selecting and retaining opaque, high-cost, and poor-performing investments instead of other available and more prudent alternative investments.”

The complaint also stated that Gucci America was “particularly egregious” in regards to offering proprietary funds from its service provider Transamerica Retirement Solutions as investment options for participants.

Of the gross settlement amount, $395,000 will go to class counsel and $5,000 will go to the plaintiff as compensation for class representation, upon final approval of the court.

The settlement agreement says the defendants admit no wrongdoing or liability with respect to any allegations in the complaint.

There were no conditions of change to plan design or processes in the settlement agreement as has been seen in a few other cases that have settled.

The lawsuit against Gucci is an example of the trend of excessive fee lawsuits moving to smaller plans. A lawsuit filed by a participant in the Checksmart Financial 401(k) Plan was time-barred by a federal district court, and a $500,000 settlement was reached in a lawsuit alleging that fiduciaries to the $500 million 401(k) program offered by Pioneer Natural Resources USA breached their ERISA duties regarding investments and investment fees.

More recently, a participant in the Greystar 401(k) Plan filed a proposed class action excessive fee lawsuit against the firm. In 2017, the Greystar plan submitted financial information and other forms to the federal government under plans with assets between $100 million to $250 million.

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Categories: Industry News

Supreme Court Rules in Case With Major Implications for Retirement Plans

Plansponsor.com - Wed, 2019-06-26 14:40

The U.S. Supreme Court has ruled in Kisor v. Wilkie, a case not specifically about retirement plans or the Employee Retirement Income Security Act (ERISA), but which nonetheless could have resulted in the total upheaval of the retirement plan regulatory system established by the Department of Labor (DOL) under ERISA.

At the core of Kisor v. Wilkie is a Vietnam War veteran named James Kisor, who more than a decade ago appealed the denial of his disability benefits by the Department of Veterans Affairs. As case documents show, the underlying disagreement stems from differing definitions of the term “relevant” as used in regulations “which are created, interpreted, and enforced by the VA.”

According to Alex Hontos, a partner in Dorsey & Whitney’s Minneapolis office who specializes in government litigation and enforcement, the outcome of this seemingly unrelated case could have been monumental for the retirement planning industry, as it ultimately tested the principle that courts should defer to agency interpretations of ambiguous regulations under a precedent known as “Auer Deference.”

According to Hontos, the Auer Deference has survived, “but just barely.”  He says the Supreme Court’s multiple published opinions in the case are muddled, implying that it will likely have to return to the issue as soon as next year, because lower courts are going to come to divergent approaches.

“A fractured and divided court produces fractured and divided decisions—the Kisor case proves it,” Hontos says. 

Indeed, a summary of the ruling published on SCOTUSblog demonstrates the complexity of the ruling issued: “Justice Kagan announced the judgment of the Supreme Court and delivered the opinion of the court with respect to Parts I, II–B, III–B, and IV, in which Chief Justice Roberts and Justices Ginsburg, Breyer, and Sotomayor joined, and an opinion with respect to Parts II–A and III–A, in which Justices Ginsburg, Breyer, and Sotomayor joined. Chief Justice Roberts filed an opinion concurring in part. Justice Gorsuch filed an opinion concurring in the judgment, in which Justice Thomas joined, in which Justice Kavanaugh joined as to Parts I, II, III, IV, and V, and in which Justice Alito joined as to Parts I, II, and III. Justice Kavanaugh filed an opinion concurring in the judgment, in which Justice Alito joined.”

According to Hontos, the practical upshot of all this complexity is that courts after Kisor are less likely to defer to agency interpretations of their own regulations, but they still have room to do so.

“Business and other conservative interests had aligned against Auer Deference,” he notes. “They will be somewhat disappointed that the Supreme Court failed to overrule Auer outright. The fact that Justice Kagan’s opinion cabins Auer, however, will be a positive for those seeking to reframe the way courts defer to agency interpretations.”

Hontos adds that the liberal justices were able to preserve Auer Deference from an attack by the conservative bloc lead by Gorsuch.  

“The liberal justices were also able to reaffirm the importance of stare decisis—the legal principle of determining points in litigation according to precedent—something that has been under threat by the conservative bloc,” Hontos adds.

Reflecting on the implications of the ruling, Kevin Walsh, a principal with Groom Law, says that while the decision could have had a far greater impact, it will still “directly influence the way courts defer to federal agencies such as the DOL when they issue sub-regulatory guidance or they take positions in legal briefs that they say are providing their viewpoint on ambiguous statues or regulations.”

“The Aeur doctrine essentially says that when an agency is interpreting its own regulations, that courts should generally refer to the agency’s interpretation,” Walsh says. “My early sense is that this decision does in fact chip away at the doctrine, without actually tossing it out completely. They have driven home that there is a whole lot of stuff that a lower court should do before it goes along with the agency’s interpretation.”

According to Walsh, courts have granted Aeur Deference more broadly than the majority opinion may lead one to believe. But moving forward, the test outlined by SCOTUS in the new decision is one where there is less likely to be broad deference to agencies of the type seen in the past.

“The test they outline has a few parts,” Walsh notes. “First, a court has to make sure that the regulation in question in actually ambiguous, and before making this conclusion, the court is directed to use all its traditional tools of construction to see if it can figure out what the regulation means. By directing courts to apply their traditional tools before concluding something is ambiguous, that will almost certainly lead to fewer cases of genuine ambiguity. Next, a court has to determine that an agency’s interpretation is reasonable, and then it also has to decide that this is the type of interpretation that deserves deference.”

One of the examples the Supreme Court gives here is that, if an agency announces a position in litigation for the first time, then in this case Aeur Deference is not appropriate. The court is also supposed to ask if these questions are being asked in an area in which the agency has great and unique expertise.

“Again, moving forward, there is so much more that lower courts are going to have to do before deferring to an agency,” Walsh says. “A stricter rule being applied before deference implies that less deference will be given. It’s going to be very interesting to see how this impacts the way lower courts interpret sub-regulatory guidance. I think it really tees up, probably for next term, whether or not agencies get deference when they interpret statues when they issue regulations.”

Practically speaking, Walsh says this development could impact everything from the impact of Regulation Best Interest to the use of many different safe harbors by retirement plan fiduciaries.

“As an example, consider DOL Field Assistance Bulletin 2014-1, which sets out what a terminated retirement plan has to do before it can give up looking for a missing participant,” Walsh says. “That guidance lays out a couple of mandatory steps. But when we look at the Kisor decision, it begins to call into doubt whether or not those steps are mandatory per se. Of course, a court could still agree with what the DOL thinks is necessary, but it calls into doubt the deference that would have existed beforehand. That’s a big deal, because in our space, we constantly rely on sub-regulatory guidance, and at the same time it could somewhat limit enforcement actions.”

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Categories: Industry News

House Blocks Funding for SEC Regulation Best Interest

Plansponsor.com - Wed, 2019-06-26 13:56

The House of Representatives passed the Financial Services and General Government Appropriations Act, which includes an amendment that would block funding for the Securities and Exchange Commission (SEC) to implement Regulation Best Interest (Reg BI). Both the Investment Company Institute (ICI) and the Insured Retirement Institute (IRI) issued statements denouncing the action.

“We are disappointed in today’s vote in the House of Representatives to advance legislation that includes a provision to prohibit the Securities and Exchange Commission from proceeding to implement, administer, enforce or publicize Regulation Best Interest,” the IRI says in its statement. “This newly adopted rule raises the standard of conduct for financial professionals, expressly requiring them to act in their clients’ best interest. Reg BI represents a substantial strengthening of consumer and investor protection compared to existing law.”

For its part, the ICI says: “Regulation Best Interest ensures investors are afforded strong protections when they receive recommendations from financial intermediaries. Passage of this amendment seemingly relitigates the DOL fiduciary rule, which was vacated by the Fifth Circuit Court. Preventing the SEC from implementing Regulation Best Interest creates a legal void that leaves millions of retail savers without critical investor protections. ICI urges Congress to strip this language from the final spending bill.”

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Categories: Industry News

PBGC Proposes Changes to Several Regulations

Plansponsor.com - Wed, 2019-06-26 13:41

The Pension Benefit Guaranty Corporation (PBGC) is proposing miscellaneous technical corrections, clarifications, and improvements to its regulations on Reportable Events and Certain Other Notification Requirements, Annual Financial and Actuarial Information Reporting, Termination of Single-Employer Plans, and Premium Rates.


It is asking for comments from the public.


The major provisions of its proposed rulemaking would amend PBGC’s regulations on:

  • Reportable Events and Certain Other Notification Requirements, by eliminating possible duplicative reporting of active participant reductions, clarifying when a liquidation event occurs and providing additional examples for active participant reduction, liquidation, and change in controlled group events;
  • Annual Financial and Actuarial Information Reporting, by eliminating a requirement to submit individual financial information for each controlled group member, adding a new reporting waiver and clarifying others, and providing guidance on assumptions for valuing benefit liabilities for cash balance plans;
  • Termination of Single-Employer Plans, by providing more time to submit a complete PBGC Form 501 in the standard termination process; and
  • Premium Rates, by expressly stating that a plan does not qualify for the variable rate premium exemption for the year in which it completes a standard termination if it engages in a spinoff in the same year, clarifying the participant count date special rule for transactions (e.g., mergers and spinoffs), and by modifying the circumstances under which the premium is prorated for a short plan year resulting from a standard termination.


Recently, the Office of Management and Budget (OMB) approved changes to reportable events filings to the Pension Benefit Guaranty Corporation (PBGC) for defined benefit (DB) plans.

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Categories: Industry News

CEFEX Offers Due Diligence Reports on Advisers and Providers

Plansponsor.com - Wed, 2019-06-26 13:39

CEFEX announced a new way for plan sponsors, investment committee members and individual investors to obtain due diligence reports on their advisers and service providers.

The new CEFEX Independent Assessment Report (IAR) contains a description of CEFEX’s rigorous annual assessment including the standard and assessment methodology applied, the date and the people involved.

For plan sponsors, the IAR offers a method to document the selection and monitoring of their service providers, thereby helping them fulfill their fiduciary obligations. The IAR serves as a comprehensive expert analysis, which should be stored in their fiduciary file as a permanent record.

The IAR is a feature exclusively available to CEFEX certified advisers in the U.S. and internationally, third-party administrators (TPAs) and recordkeepers to help communicate the significance of the CEFEX assessment to clients. The new reports are available for renewal assessments conducted after May 1, 2019.

The CEFEX assessment is based on the standard described in the handbook: “Prudent Practices for Investment Advisors”, recently updated by Fi360 Inc. In the case of recordkeepers and TPAs, it is based on the “Standard for Retirement Plan Service Providers” published by CEFEX and the American Society for Pension Professionals and Actuaries (ASPPA).

According to the Department of Labor, retirement plan fiduciaries can limit their liability by implementing prudent practices including establishing a prudent process, maintaining records and documenting decisions. Plan sponsors have a duty to monitor retirement plan advisers, but may be forgetting to request or research certain information.

The IAR can be downloaded for a CEFEX certified firm from the CEFEX website.

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Categories: Industry News

Study Finds Large Disparity in Women’s Retirement Readiness

Plansponsor.com - Wed, 2019-06-26 12:29
Baby Boomer women have a median 401(k) savings balance of $59,000, less than half the $138,000 median that men have saved, according to a T. Rowe Price survey. Even Millennial women have a median savings balance that is $30,000 lower than their male counterparts.

On average, women earn a median of $27,000 less than men, and they are deferring less of their income to 401(k)s. Sixty-six percent of the women contributing less than the recommended rate say they are saving as much as they can afford. Only 10% of women are saving additional money for retirement outside of their 401(k) plan, whereas 32% of men are doing so.

Women are more likely than men to say they will continue to work in retirement due to needing the money. Forty-six percent of women believe they will need to reduce their standard of living in retirement, whereas only 37% of men share this outlook.

Conversely, nearly half of men think they will continue to live as well or even better in retirement, whereas only 33% of women share this optimistic outlook.

Within the first five to 10 years of retirement, 33% of women are either widowed or divorced, compared to 17% of men. Looking out to 11 years, the number of single or divorced women increased to 45% , while the number of single or divorced men barely changed at 18%.

“The gender gap is contributing to a domino effect on women’s finances,” says Judith Ward, senior financial planner at T. Rowe Price. “Lower earnings can have an effect on their current financial decisions, which ultimately impact women’s financial future, including their retirement savings. As women, it’s critical for us to be proactive when it comes to our money and to seek the guidance and education that is necessary to put us on a path toward a successful financial future.”

Both men and women cited ease of use as their most favored attribute for financial advice. However, women place more importance on advice that fits into their work or personal schedule, as opposed to men who place more importance on advice that alerts them to critical developments in their accounts.

T. Rowe Price’s findings are based on a survey of 3,005 adults conducted by NMG Consulting. The full findings can be seen here.

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Categories: Industry News

A Lack of Retirement Income Guidance Harms Participants

Plansponsor.com - Wed, 2019-06-26 11:40

David Lau, founder and CEO of DPL Financial Partners, a firm that bills itself as a commission-free insurance network for retirement plan and wealth management fiduciaries, uses a personal story to explain the source of his deep interest in the topic of retirement income.

“Watching my father’s experience during his late career really drove me to become interested in income insurance and annuities,” Lau says. “My dad was a successful professional who by the end of his career clearly had enough assets saved for retirement, but he kept working for five or six years after the traditional retirement age.”

Lau and his other family members assumed their father simply liked to work and would never hang it up willingly. In reality, Lau’s father choose to keep working because he thought he had to.

According to Lau, even though he had a long-term personal financial adviser, his father received no education or support about the decumulation phase of retirement and wealth planning. As a result, Lau says, his father was not presented with the clear and compelling evidence that he had amassed enough wealth to retire comfortably and confidently. It was only after starting to work with a new adviser that was skilled in the area of retirement income that Lau’s father choose to retire. 

“My father is now happily retired, and his only regret is that he hadn’t found this support sooner,” Lau says. 

With this anecdote in mind, Lau encourages all stakeholders in the retirement plan industry to think about whether there are many more people like his father out there. He suspects there are, especially given the fact that building a retirement paycheck is as challenging today as it’s ever been. More so, in fact. 

“When you look at the fact that bond returns are still so low relative to earlier periods when it was easy to just clip coupons as your retirement income strategy, this really puts the pressure on to gain skills and knowledge in this area,” Lau says.

Citing a survey his firm recently conducted, Lau points out that 79% of registered investment advisers (RIAs) say “predicable income” is more important to their retirement-focused clients than “asset growth.” Similarly, 70% of RIAs say these clients “value the certainty of not running out of money” over “achieving a certain retirement lifestyle.”

It is perhaps surprising to see, then, that only 14% of RIAs say their clients strongly like or somewhat like annuities, while more than quarter (27%) of RIAs “aren’t sure” what their clients think.

If plan sponsors could take one action based on these results, Lau says, it should be to ensure that participants understand the limitations of bucket strategies and rule-of-thumb income strategies such as the 4% rule. He also encourages plan sponsors to educate participants about just how diverse the annuity product set actually is.

According to Lau, single premium immediate annuities (SPIAs)—the classic annuity structure people commonly think of, in which the full cash value of the annuitized portfolio is given to the insurer up front—represents only about 4% of the annuity marketplace.

“In reality, where the bulk of income generated out of annuities is coming from is out of variable annuities, or increasingly, fixed annuities,” Lau says. “With this approach, the income is in fact paid out through a rider, which means that the annuitized assets retain a cash value for the retiree, which depletes slowly over time in direct relation to the amount of income that has been paid to the individual. I think that better understanding about this fact will really drive greater use of annuities, because it is the immediate loss of control using SPIAs that makes people hesitant to annuitize.”

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Categories: Industry News

Engaging With Plan Auditors Can Improve Plan Operations and Governance

Plansponsor.com - Wed, 2019-06-26 10:22

The Employee Benefits Security Administration of the Department of Labor has asked the 2019 Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council) to seek out ways through which the audits of employee benefit plans required under Section 103 of the Employee Retirement Income Security Act (ERISA) and the regulations promulgated thereunder could enhance the safety of the plan’s assets, the effectiveness of the plan in satisfying its purpose, the efficiency of the plan’s operations, and the plan’s compliance with ERISA, the Internal Revenue Code, and other applicable laws.

The focus of the current inquiry is on increasing the knowledge and understanding of the plan administrators that procure financial statement audit services and on improving the procedures that such plan administrators implement in selecting an auditor, preparing for the audit, communicating with the auditor before, during, and after the audit, and adopting changes in the plan’s documentation, operations, policies, or procedures based on the results of the audit. In its request to the Council, the DOL raised concerns about the “commoditization” of plan financial statement audits, in that plan administrators were not sufficiently availing themselves of the audit process to re-examine inputs provided to the auditors, to take advantage of the routine operational discipline that a proper annual audit process should encourage, or to learn about improvements in the plan’s documentation, operations, policies, or procedures that could arise from a robust audit engagement.

During a hearing on June 25, James Haubrock, CPA, chair of the Executive Committee of the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan Audit Quality Center (EBPAQC), testified about how the audit process can help plan administrators fulfill their fiduciary responsibilities by providing an opportunity and discipline to demonstrate due diligence by reviewing and enhancing plan governance, operations, records, internal control, compliance and reporting. He said by actively participating in the audit process, plan administrators are better able to make proper assertions relevant to the amounts, transactions and disclosures reported in the plan’s financial statements.

“The audit process provides an opportunity and discipline for the plan administrator to demonstrate due diligence by reviewing and enhancing matters relating to plan governance, operations, records, internal control, compliance, and reporting. The plan administrator’s fiduciary responsibilities include plan administration functions such as maintaining the financial books and records of the plan, and to file a complete and accurate annual return/report for the plan on a timely basis. The auditor can provide feedback on the effectiveness of and suggestions for improving processes and controls in place related these fiduciary responsibilities and efficient and effective plan operations,” Haubrock stated.

He explained that to gain an understanding of the plan and its environment and assess audit risk, the plan auditor generally reviews plan committee minutes and other documentation. Discussions with the plan auditor about the review of this documentation can provide the plan administrator with valuable information about potential deficiencies and risks in the oversight process.

In addition, if the auditor identifies any instances where the plan is not operating in accordance with the plan document, that information should be communicated to the appropriate parties. The plan auditor also will check to see that those operational errors identified have been corrected, Haubrock said.

According to Haubrock, an important responsibility is maintaining the financial books and records of the plan, including ensuring contracts, policies and agreements, and other relevant documents are up-to-date and any amendments are approved and adopted; plan records are properly maintained and they are current, complete and accurate; and the sum of individual participant accounts from the recordkeeper are reconciled to trustee/custodian’s trust statements. The audit process can help the plan administrator address all of these areas.

“The auditor is required to obtain an understanding of the plan and its environment, including the plan’s internal control. As such, the auditor may identify areas where enhancements should be made to control policies and procedures. For example, the auditor may suggest appropriate controls related to valuing and reporting hard-to-value investments. The auditor is required to communicate significant deficiencies and material weaknesses in internal control, and may make suggestions for improvement,” Haubrock stated.

He added that auditors can assist plan administrators in understanding parties-in-interest and the related rules, which may help them avoid entering into prohibited transactions.

The ERISA Advisory Council intends to complement its 2010 Report on Employee Benefit Plan Auditing and Financial Reporting Models, the focus of which was on the auditors and the quality of the audits being performed.  At that time, the Council found there were significant problems with retirement plan audit quality, auditor quality, or both. It recommended that the Department of Labor (DOL) should require plan administrators to identify on the Form 5500, or other annual report, whether or not the plan auditor is a member of the AICPA EBPAQC; and the DOL should establish a fiduciary safe harbor in the initial selection of plan auditors who are members of the AICPA EBPAQC.

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