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HSA Holders Looking to Invest, But What Will They Find?

Plansponsor.com - Tue, 2019-11-12 13:21

Health savings accounts (HSAs) continue to offer better tax advantages than 401(k)s and 403(b)s, individual retirement accounts, and 529s, making them a valuable tool to boost retirement savings, concludes Morningstar’s 2019 Health Savings Account Landscape report.

A separate report, the 2019 Alegeus HSA Participant Profile, indicates that while only 13% of HSA participants say they invest their HSA dollars for growth, 58% say they may start doing so. More than one-quarter (28%) report they prioritize saving for future health care expenses, 38% contribute more to their accounts now than in previous years, and more than half (54%) say their account balance is growing.

These are signs that HSA participants are beginning to wake up to the importance of saving for the future, according to Alegeus.

Morningstar’s analysis found fees have decreased for HSA investments, but they vary drastically. Across the 10 investment providers it analyzed, the average cost for the cheapest passive 60/40 portfolio ranges from 0.02% to 0.69% per year.

Morningstar also says the quality of investments across HSA providers remains strong and improved for the second year in a row. At each of the 10 providers it evaluated, at least 80% of the investment options to which it assigns Morningstar Analyst Ratings earn Morningstar Medals of Gold, Silver, or Bronze.

However, although investment menu designs have improved since last year, overlapping investment options and hard-to-use, niche strategies remain present in most HSA investment menus. In addition, seven of the 10 investment providers require investors to keep $1,000 or $2,000 in a checking account before they can invest, which can create an opportunity cost.

When evaluating an HSA provider, Morningstar suggests:

  • Health savings accounts used as spending accounts should avoid account maintenance fees, limit additional fees, offer reasonable interest on deposits, and provide FDIC insurance.
  • Health savings accounts used as investing accounts should charge low fees for both active and passive strategies, offer strong investment strategies in all core asset classes, limit overlap among investment options, and avoid investment thresholds that require investors to keep money in the checking account before they can invest.

Alegeus says an optimized health care savings strategy will include both a defined contribution (DC) retirement plan and an HSA. It recommends participants first contribute enough to a DC plan and HSA to receive all employer matching dollars, then maximize contributions to an HSA and turn to contributing up the IRS limit for DC plans.

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Categories: Industry News

PBGC Proposes New Methods for Counting Inactive Multiemployer Plan Participants

Plansponsor.com - Tue, 2019-11-12 12:28

The Pension Benefit Guaranty Corporation (PBGC) is proposing modifications to the 2020 Form 5500 Schedule R (Retirement Plan Information) and its related instructions, affecting multiemployer defined benefit plans covered by Title IV of the Employee Retirement Income Security Act (ERISA).

The agency explains that Section 103(f)(2)(C) of ERISA requires that a multiemployer defined benefit plan include in its annual report “[t]he number of participants under the plan on whose behalf no contributions were made by an employer as an employer of the participant for such plan year and for each of the 2 preceding plan years.” Line 14a of Schedule R requires the plan to report the inactive participant counts for the current plan year’s filing. Lines 14b and 14c require the plan to report the inactive participant counts for the previous two respective plan years. 

The PBGC has found a majority of plans that are required to report do not provide accurate information on line 14 of Schedule R. The current instructions for line 14 require multiemployer plans to count inactive participants using the last contributing employer counting method. Under the last contributing employer method, a plan counts only those inactive participants whose last contributing employer withdrew from the plan by the beginning of the relevant plan year for which the Form 5500 relates. The plan does not count any inactive participants whose employers had not withdrawn from the plan.

The agency is proposing to modify Schedule R to provide multiemployer plans with a choice of the last contributing employer counting method and two other proposed counting methods: the alternative method and the reasonable approximation method. The PBGC anticipates that providing plans with three available counting methods will allow each plan to choose the counting method that will be most accurate and least burdensome for the plan to count its inactive participants. 

Under the alternative method, a plan would count only those inactive participants whose last contributing employer and all prior contributing employers had withdrawn from the plan by the beginning of the relevant plan year. Under this method, the plan would review the list of all contributing employers (employers that had not withdrawn from the plan by the beginning of the relevant plan year), and include on Line 14 only those inactive participants who had no covered service with any of these employers.

Under the reasonable approximation method, a plan that is unable to use the other two counting methods must make a reasonable, good faith effort to count inactive participants to satisfy the requirements of section 103(f)(2)(C) of ERISA. The plan would also be required to provide an attachment that explains the plan’s approximation method, including a description of the data and a breakdown describing the number of clearly identified inactive participants and the number of estimated inactive participants.

The PBGC is also proposing that when a plan reports a number on line 14b or 14c that differs from the number it reported for the plan year immediately preceding the current plan year, it would be required to submit an attachment with an explanation of the reason for the change.

A copy of the request will be posted on PBGC’s web site at:  https://www.pbgc.gov/prac/laws-and-regulations/information-collections-under-omb-review. Comments are requested.

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Categories: Industry News

Who Will Take Fiduciary Responsibility for DB Plan Annuity Purchases?

Plansponsor.com - Tue, 2019-11-12 07:29

With the rise of defined benefit (DB) pension plan annuity purchases over the last five years, plan fiduciaries need to understand their obligations and where things can potentially go wrong. Pension plan annuity purchases continue to be a popular de-risking strategy for plan sponsors. Moreover, many plan sponsors are making progress regarding their frozen pension plans and terminating them altogether—culminating in an annuity purchase.

Fiduciaries are required to act in the best interest of plan participants. Selecting an insurer to provide all future benefits for participants is typically the last fiduciary decision made with respect to those in a qualified pension plan. So what is involved?

DOL 95-1

In 1995, the Department of Labor (DOL) published Interpretive Bulletin (IB) 95-1, which “provides guidance concerning certain fiduciary standards … applicable to the selection of an annuity provider for the purpose of benefit distributions from a defined benefit plan … when the plan intends to transfer liability for benefits to an annuity provider.” Plan fiduciaries must act in the best interest of plan participants in selecting the insurer that can supply the “safest annuity available.” DOL 95-1 also requires that plan fiduciaries “conduct an objective, thorough and analytical search, for the purpose of identifying and selecting providers from which to purchase annuities.”

Specifically, DOL 95-1 lists six criteria that must be analyzed:

  • The quality and diversification of the annuity provider’s investment portfolio;
  • The size of the insurer relative to the proposed contract;
  • The level of the insurer’s capital and surplus;
  • The lines of business of the annuity provider and other indications of an insurer’s exposure to liability;
  • The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts; and
  • The availability of additional protection through state guaranty associations and the extent of their guaranties.

These criteria are just the minimum standard. Further items such as the provider’s risk management and administrative capabilities should be reviewed.

DOL 95-1 goes on to state, “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert. A fiduciary may conclude, after conducting an appropriate search, that more than one annuity provider is able to offer the safest annuity available.”

Qualified, Independent Experts

When hiring a “qualified, independent expert,” plan fiduciaries need to understand what that service provider will supply, as not all such providers approach pension plan annuity purchases in the same way. Sponsors should evaluate how candidates measure up in the following areas:

Fiduciary status. First and foremost, sponsors need to ask whether the service provider is taking on fiduciary responsibility. If he is not, or is unwilling to accept that role in writing, that may be a non-starter. If he will accept fiduciary responsibility for the advice he gives, plan sponsors need to dig a little deeper. Specifically, they need to learn what type of insurance, bond or financial backing is behind his fiduciary claim. Even service providers with considerable experience may not have the balance sheet, or liability insurance, backing their fiduciary status; plan sponsors should at least have an understanding of those two backstops.

Documentation. Plan sponsors also need to understand the deliverable the service provider will supply. Will it be a one-page list of the insurers that meet the DOL 95-1 criteria or something that details out the specifics? A good report will include robust documentation of the underlying analysis. There is considerable variety in what service providers deliver in this space, and plan sponsors need to be comfortable that the documentation they receive will stand the test of time.

The bid process. Plan sponsors will also want to understand how their service provider approaches the bid process. This is a gray area, and different firms view the fiduciary responsibility differently. For example, some firms consider the actual annuity placement to be a settlor function and therefore the service provider running the placement is exempt of any fiduciary responsibility. On the other hand, some firms consider the bid process to also be a fiduciary responsibility because the end result is advice on the disposition of assets from a qualified plan.

What Plan Sponsors Need To Do

Making the critical decision of placing pension benefits with an insurer carries substantial fiduciary weight. In making this decision, plan sponsors and their fiduciary committees need to ensure that they:

  • Hire qualified, independent experts with a meaningful understanding of their fiduciary role;
  • Obtain robust documentation of the process by which the independent expert qualified insurers as offering the “safest available annuity” that will stand the test of time; and,
  • Understand how their service provider views—or doesn’t view—its fiduciary responsibility with respect to the actual bid process for selecting an insurer.

Following a prudent process with participants’ best interests at heart will give plan sponsors meaningful comfort that they have fulfilled their fiduciary responsibilities in this last and final fiduciary decision for their pension plan participants.

Michael Clark is a managing director and consulting actuary in River and Mercantile’s Denver office, and is the 2019-2020 President of the Conference of Consulting Actuaries.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.

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Categories: Industry News

Ask the Experts – Contributions to 457(b) Plans Subject to FICA

Plansponsor.com - Tue, 2019-11-12 05:00
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“Are EMPLOYER contributions to a 457(b) plan subject to FICA taxes? Is the answer different for matching contributions than it is for nonelective (base) contributions?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Unlike employer contributions to a 403(b) plan, which are generally NOT subject to FICA, employer contributions to a 457(b) plan are indeed subject to FICA taxes. And the type of contribution makes no difference—all contributions to a 457(b) plan are considered “deferrals” whether contributed by the employer or employee, and are therefore subject to FICA.

The exception to this rule is if the employee is not subject to FICA taxes in general, as is the case for certain state and local government employees that are members of a retirement system. Thus, plan sponsors that make employer contributions to a 457(b) plan should make certain that the necessary steps have been taken with their payroll provider so that such contributions are properly included as wages for FICA purposes.

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NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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Categories: Industry News

TRIVIAL PURSUITS: Why Did Ellis Island Close?

Plansponsor.com - Mon, 2019-11-11 14:37

Why did Ellis Island close?

With America’s entrance into World War I, immigration declined and Ellis Island was used as a detention center for suspected enemies. Following the war, Congress passed quota laws and the Immigration Act of 1924, which sharply reduced the number of newcomers allowed into the country and also enabled immigrants to be processed at U.S. consulates abroad.

After 1924, Ellis Island switched from a processing center to serving other purposes, such as a detention and deportation center for illegal immigrants, a hospital for wounded soldiers during World War II and a Coast Guard training center. In November 1954, the last detainee, a Norwegian merchant seaman, was released and Ellis Island officially closed.

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Categories: Industry News

Full 9th Circuit Passes on Review of Schwab Arbitration Ruling

Plansponsor.com - Mon, 2019-11-11 13:52

Back in August, a three-judge panel of the 9th United States Circuit Court of Appeals issued a major decision that was taken to have shifted the standing of mandatory arbitration provisions used in the operation of retirement plans governed by the Employee Retirement Income Security Act (ERISA).

In short, the panel concluded that a previous, precedent-setting 9th Circuit decision which had held that ERISA claims are generally not subject to arbitration provisions is “no longer good law” in light of interim Supreme Court rulings. The underlying case, Dorman vs. Charles Schwab, was initially filed in 2017. Subsequently, in January 2018, a district court judge denied a motion by Charles Schwab that sought to mandate the lawsuit proceed via individual arbitration, rather than as an ERISA class action in federal court. This denial kicked off the appeals process which led to the three-judge panel’s pro-arbitration ruling earlier this year.

Now, the full 9th Circuit has backed the panel’s ruling. Technically speaking, the full court has been advised of the plaintiff’s/appellee’s petition for a rehearing “en banc,” and no judge of the court has requested a vote on said petition. Thus, the appellee’s petition for rehearing en banc has been denied.

Analysts tell PLANSPONSOR the 9th Circuit’s decision, now certified by the full appeals court, is significant because it is the first case in the nation to explicitly permit the implementation of an arbitration provision in a plan document. However, the full ramifications of this decision are still uncertain.

A Move Toward Mass Arbitration?

Moving forward, the decision has the potential to impact other cases proceeding in the 9th Circuit, which includes the district courts in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington. Without the Supreme Court weighing in or other circuit courts taking up this matter in other cases, the decision likely won’t have a big impact outside of these states. 

Joan Neri, counsel in Drinker, Biddle & Reath’s ERISA practice in Florham Park, New Jersey, also notes the case’s impact in the ERISA landscape could be muted by the fact that it does not directly address how a fiduciary breach claim seeking plan-wide relief aligns with the individual recovery sought in arbitration.

“This is something that advisers and sponsors should continue to watch in the litigation sphere before making any amendments to a plan,” she recommends.

While generally speaking plan sponsors prefer arbitration to going to court, there are some downsides to forcing ERISA claims into the arbitration route, warns Tad Devlin, a partner with Kaufman Dolowich & Voluck in San Francisco.

“For non-experienced practitioners, the ERISA statute can be a labyrinth, so this would weigh some plan sponsors in favor of going before a federal judge who has heard these types of claims,” he says. “Another disadvantage to arbitration is that it is confined to a limited review, and the arbitration award likely would be final and binding and can be very difficult to challenge or overturn. It can be almost impossible to challenge at the judicial level on a petition to vacate the award. To do so, the sponsor would essentially have to show the award decision was fraudulent or corrupt. On the other hand, in a judicial setting, you have at your disposal the district court, the court of appeals and the highest court in the land.”

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Categories: Industry News

SEC Finds Concerns About Money Market Funds and TDFs

Plansponsor.com - Mon, 2019-11-11 12:40

The Securities and Exchange Commission’s (SEC)’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert to provide investment companies, investors and other market participants with information on the most often cited deficiencies and weaknesses that the staff has observed in recent examinations of registered investment companies (funds).

The Risk Alert includes observations by the staff from national examination initiatives focusing on money market funds (MMFs) and target-date funds (TDFs). OCIE staff examined MMFs for compliance with the amendments to the rules governing MMFs that became effective in October 2016. Money market fund reform required providers to establish a floating net asset value (NAV) for institutional prime money market funds, which will allow the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rule updates also provide non-government retail money market funds with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets.

The SEC staff examined more than 70 MMFs across a wide range of fund categories, including government, prime, and tax-exempt funds, as well as MMFs that were also designated as retail MMFs, which are required to limit their beneficial owners to natural persons. For the most part, the OCIE found substantial compliance with the rules. However, it said some MMFs did not include in their credit files one or more of the factors required to be considered when determining whether a security presents minimal credit risks and is an eligible security, as defined under Rule 2a-7, and/or adequately document the periodic updating of their credit files to support the eligible security determination.

It also found some MMFs did not maintain records that adequately support their determination that investments in repurchase agreements with non-government entities were fully collateralized by cash or government securities (for government MMFs). There has been a move to government MMFs from prime MMFs since the amended rules.

In addition, some MMFs had not adopted and implemented compliance policies and procedures reasonably designed to address certain requirements under Rule 2a-7 and other areas, according to the Risk Alert.

OCIE staff also examined more than 30 TDFs, including both “to” and “through” funds, to review whether the TDFs’ assets were invested according to the asset allocations stated in the funds’ prospectuses, and whether the associated investment risks were consistent with fund disclosures (including representations made in marketing materials).

The OCIE found some TDFs had incomplete and potentially misleading disclosures in their prospectuses and advertisements, including disclosures regarding:

  • Asset allocations, both current and prospective over time. For example, the TDFs had marketing materials with asset allocation disclosures that differed from the TDFs’ prospectus disclosures.
  • Glide path changes and the impact of these glide path changes on asset allocations.
  • Conflicts of interest, such as those that may result from the use of affiliated funds and affiliated investment advisers.

Many TDFs had incomplete or missing policies and procedures, including those for:

  • Monitoring asset allocations, including ongoing monitoring.
  • Overseeing implementation of changes to their current glide path asset allocations.
  • Overseeing advertisements and sales literature, which resulted in advertising disclosures that were inconsistent with prospectus disclosures and were potentially misleading.
  • Monitoring whether disclosures regarding glide path deviations were accurate.
Evaluating TDF glide paths is important for retirement plan fiduciaries. And, lawsuits have been filed questioning reallocation decisions for TDFs.

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Categories: Industry News

Prudence, Performance and Quality in Target-Date Funds

Plansponsor.com - Mon, 2019-11-11 11:39
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Some weeks ago, PLANSPONSOR covered the publication of a new ERISApedia.com report exploring the correlation of market share and quality among target-date funds (TDFs).

The report suggests that there exists a “fair amount of correlation between market share and the quality of a target-date fund vis-à-vis its peers in the target-date category as measured by an industry-recognized fund scorecard.” In this case, ERISApedia.com analysts utilized Fi360’s Fiduciary Scores to conduct their research.

According to the study, the correlation between market share and third-party rated quality is “especially strong” in the bottom 100 target-date families by market share. In other words, none of the smallest target-date funds have favorable Fi360 Fiduciary Scores. Important to note, the research authors emphasize that, in the practical operation of retirement plans, a simple assessment of market share alone obviously cannot be used as a substitute for normal TDF due diligence. Still, they conclude, it can be instructive to analyze the market traction of a given TDF product.

Responding to this reporting, Ron Surz, a regular reader and the president of Target Date Solutions and GlidePath Wealth Management, submitted some timely analysis of his own, emphasizing the need for caution when talking about TDF “quality” in isolation of a deeper discussion of risk tolerance and performance expectations.

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As Surz has discussed previously with PLANSPONSOR, there is often a heavy weight placed on one, three and five-year performance, including in objectively generated TDF ratings. This makes sense to some extent, because risk-adjusted performance is very important to participant outcomes. But, Surz says, the “risk adjusted performance” element is often overlooked, and analysts are not necessarily concerning themselves sufficiently with how the most popular TDFs may perform in periods of severe market stress. Surz even says that many analysts “reward TDF imprudence.”

An Alternative View

Surz has generated his own “TDF Prudence Score” system that, generally speaking, favors a very different set of TDFs versus funds rated highest by a Morningstar or Fi360.

What is the reason for this? Surz says the biggest TDFs have become the biggest in part because they have taken more risk relative to their peers, and they have been rewarded for doing so by what has turned out to be the longest running bull market in U.S. history. But matters could have easily turned out differently, and markets are sure to sour one day in the future. Thus, in Surz’s view, TDF investors are not adequately being informed about the risk they carry in what many falsely believe to be safe or even guaranteed investments. Prudent TDFs, in his view, soberly balance the need for return with the need to protect retirement investors’ hard-earned dollars, especially during the critical time period that immediately precedes and follows the retirement date. 

Surz offers the following a summary of what he think fiduciaries should know about target date funds:

  1. Beware the performance trap. Imprudent concentration in U.S. stocks has won the performance horserace in the past decade.
  2. Protect against lawsuits, looking beyond costs. Fiduciaries want protection from lawsuits, so they choose popular TDFs, but they may be unsafe for beneficiaries. Surveys of beneficiaries reveal that they want a lot less risk near retirement than they get in popular TDFs.
  3. Address decumulation. More plan sponsors are encouraging retirees to stay in the 401(k), probably even more in union plans.
  4. Evaluate performance. There is no standard, but there should be.
  5. Address demographics: The only demographic that defaulted participants have in common is financial disengagement.
  6. Protect beneficiaries. Consider the trade-off between growth and preservation, especially near retirement. There are different schools of thought.
  7. Choose between “To” or “Through.” Absent a discussion of many other important factors, this is a distinction without a meaningful difference.
  8. Diversify. This remains the only free lunch in investing.
  9. Manage risk. Dr. William F. Sharpe won a Nobel Prize for the Capital Asset Pricing Model that controls risk by blending a “risk-free” asset with the global market of risky assets. Ibbotson calls this the “Separation Principal” because it dictates just two assets: risk-free and the world market.  
More Tips on How to Carefully Evaluate Target-Date Funds

Surz is far from the only analysts asking big questions about the TDF marketplace and how to best serve retirement plan participants, who, given their general lack of investment expertise, rely heavily on both their fiduciary plan sponsors and on product manufacturers to look out for their best interest. Given their widespread use as the default investment in many plans, TDFs are projected to hold more than half of all retirement plan assets by 2025.

Brendan McCarthy, head of defined contribution investment only (DCIO) national sales at Nuveen, tells PLANSPONSOR it is more critical than ever that retirement plan advisers and sponsors carefully evaluate TDFs in their lineup.

“We are seeing a huge focus on the QDIA [qualified default investment alternative], with advisers employing the three R’s,” McCarthy says. “The first is to reevaluate the TDF. The second is to replace it if it is found to not be appropriate, and the third is reenrollment, which is a great way to get a plan back on track in terms of where participant allocations should be.”

In addition, as exposed following the Great Recession of 2008, “there is an alarming amount of variation in risk composition from one target-date fund manager to the next,” Newport Group writes in a white paper, titled, “A Prudent Approach to Evaluating Target Date Funds.” The firm believes that prudent selection of a target-date manager must consider many factors beyond the basic intention of the strategy.

“Some managers will choose the conservative path and dial down equity exposure early,” the firm says. “Other managers will consider the risk of underfunding and outliving retirement assets and will maintain an aggressive posture in their portfolios for years after retirement.”

Besides the quantitative analysis of performance, there are qualitative factors to consider, according to Newport Group, most important of which is the diversification of the underlying holdings in the TDF. “Is there sufficient diversification across asset classes and sub asset classes?” Newport Group queries. “Are nontraditional and lower correlated asset classes such as REITs [real estate investment trusts], emerging markets, global bonds and high yield bonds included?”

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Categories: Industry News

Maximum Benefit and Contribution Limits Table 2020

Plansponsor.com - Mon, 2019-11-11 11:21
Maximum Benefit/Contribution Limits for 2015-2020
As Published by the Internal Revenue Service

PDF of with Maximum Benefit/Contribution Limits for 2010-2020 available here.


202020192018201720162015Elective Deferrals (401k
& 403b plans) $19,500$19,000$18,500$18,000$18,000$18,000Annual Benefit Limit $230,000$225,000$220,000$215,000$210,000$210,000Annual Contribution Limit $57,000$56,000$55,000$54,000$53,000$53,000Annual Compensation Limit $285,000$280,000$275,000$270,000$265,000$265,000457(b) Deferral Limit $19,500$19,000$18,500$18,000$18,000$18,000Highly Compensated Threshold $130,000$125,000$120,000$120,000$120,000$120,000SIMPLE Contribution Limit $13,500$13,000$12,500$12,500$12,500$12,500SEP Coverage Limit $600$600$600$600$600$600SEP Compensation Limit $285,000$280,000$275,000$270,000$265,000$265,000Income
Subject to
Social Security $137,700$132,900$128,400$127,200$118,500$118,500Top-Heavy Plan Key Employee Comp $185,000$180,000$175,000$175,000$170,000$170,000Catch-Up Contributions




$6,000$6,000$6,000SIMPLE Catch-Up Contributions $3,000$3,000$3,000$3,000$3,000$3,000

The Elective Deferral Limit is the maximum contribution that can be made on a pre-tax basis to a 401(k) or 403(b) plan (Internal Revenue Code section 402(g)(1)). Some still refer to this as the $7,000 limit (its original setting in 1987).

The Annual Benefit Limit is the maximum annual benefit that can be paid to a participant (IRC section 415). The limit applied is actually the lessor of the dollar limit above or 100% of the participant’s average compensation (generally the high three consecutive years of service). The participant compensation level is also subjected to the Annual Compensation Limit noted below.

The Annual Contribution Limit is the maximum annual contribution amount that can be made to a participant’s account (IRC section 415). This limit is actually expressed as the lessor of the dollar limit or 100% of the participant’s compensation, applied to the combination of employee contributions, employer contributions and forfeitures allocated to a participant’s account.

In calculating contribution allocations, a plan cannot consider any employee compensation in excess of the Annual Compensation Limit (401(a)(17)). This limit is also imposed in determining the Annual Benefit Limit (above). In calculating certain nondiscrimination tests (such as the Actual Deferral Percentage), all participant compensation is limited to this amount, for purposes of the calculation.

The 457 Deferral Limit is a similar restriction, applied to certain government plans (457 plans).

The Highly Compensated Threshold (section 414(q)(1)(B)) is the minimum compensation level established to determine highly compensated employees for purposes of nondiscrimination testing.

The SIMPLE Contribution Limit is the maximum annual contribution that can be made to a SIMPLE (Savings Incentive Match Plan for Employees) plan. SIMPLE plans are simplified retirement plans for small businesses that allow employees to make elective contributions, while requiring employers to make matching or nonelective contributions.

SEP Coverage Limit is the minimum earnings level for a self-employed individual to qualify for coverage by a Simplified Employee Pension plan (a special individual retirement account to which the employer makes direct tax-deductible contributions.

The SEP Compensation Limit is applied in determining the maximum contributions made to the plan.

EGTRRA also added the Top-heavy plan key employee compensation limit.

Catch up Contributions, SIMPLE “Catch up” deferral: Under the Economic Growth and Tax Relief Act of 2001 (EGTRRA), certain individuals aged 50 or over can now make so-called ‘catch up’ contributions, in addition to the above limits.

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Categories: Industry News

Firms Estimate DB Funded Status Improvements in October

Plansponsor.com - Mon, 2019-11-11 09:04

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 1% in October to 85%, as a result of an increase in equity markets, according to Mercer.

As of October 31, the estimated aggregate deficit of $371 billion decreased by $34 billion as compared to $405 billion measured at the end of September. “We saw the S&P 500 reach an all-time high in October, but persistently low interest rates have kept funded status from improving further. The looming question is whether we will see an end to this bull market in light of the historic run over the past decade. With low rates putting pressure on 2020 budgets, and the risk of a late-year market correction, plan sponsors should understand the sensitivity of 2020 pension liability and expense to rapidly changing market conditions,” says Matt McDaniel, a partner in Mercer’s wealth business.

River and Mercantile points out in its Retirement Update that discount rates remained relatively flat in October, only increasing 0.003%. However, current rates are still down over 1% since year-end 2018 and are 1.3% lower than rates from this time last year. The FTSE pension discount index finished October at 3.14%.

Softening trade and geopolitical tensions, as well as improving economic data, spurred a risk-on appetite. Given the rally, emerging market equities increased by 4.2%, outperforming both U.S. equities and international developed equities which returned 2.2% and 3.6%, respectively. Bond markets were primarily flat for the month, with the exception of high-yield bonds, which saw a small increase in returns at 0.5% as spreads compressed. As a result, equities and other risk assets performed well, which benefited funding levels for the month.

However, Michael Clark, director and consulting actuary at River and Mercantile, warns, “With changes in pension discount rates so far in 2019, many plan sponsors may be in for a big surprise when their year-end balance sheet pension liability has increased, even with the positive equity returns during the year. It’s imperative that plan sponsors understand how this might affect their financials with year-end just around the corner.”

Other firms also estimated an increase in defined benefit (DB) plan funded status for October, due to positive equity returns. The aggregate funded ratio for U.S. corporate pension plans increased by 1.1 percentage points to end the month of October at 86%, according to Wilshire Consulting. The monthly change in funding resulted from a 0.9% increase in asset values and a 0.3% decrease in liability values. Despite September and October’s increases, the aggregate funded ratio is estimated to be down 1.5 percentage points and 5.9 percentage points year-to-date and over the trailing 12 months, respectively.

According to Northern Trust Asset Management, the average funded ratio of corporate pension plans improved in October from 84% to 84.6%. Legal & General Investment Management America (LGIMA) estimates the average plan’s funding ratio increased 1% to 80.2% in October.

Both model plans October Three tracks gained ground last month: Plan A improved more than 1% in October but remains down more than 3% for the year, while Plan B gained less than 1% and is now close to flat through the first ten months of 2019. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

According to the Aon Pension Risk Tracker, S&P 500 aggregate pension funded status increased in the month of October from 84.3% to 85.1%. However, during 2019, the aggregate funded ratio for U.S. DB pension plans in the S&P 500 has decreased from 86% to 85.1%.

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Categories: Industry News

Retirement Industry People Moves

Plansponsor.com - Fri, 2019-11-08 12:53

Art by Subin Yang

Cohen & Steers Appoints Sony Music VP to Board of Directors

Cohen & Steers Inc. has appointed Dasha Smith to its board of directors and as a member of the board’s audit committee, compensation committee, and nominating and corporate governance committee

Smith’s appointment expands the board of directors to nine members and increases the number of independent directors to six. She is the executive vice president and global chief human resources officer for Sony Music Entertainment. In this role, Smith is a member of the global leadership team, responsible for global human resources and corporate responsibility strategies and operations. She plays a key role in developing Sony Music’s culture and future-forward strategies.  

Prior to joining Sony Music, Smith served as the managing director in the office of the chairman and as global chief human resources officer for GCM Grosvenor, a global alternative investment firm. At GCM Grosvenor, Smith was a member of the executive management committee, where she managed the human resources, marketing, investor relations, administration, facilities and operations, diversity and corporate and social responsibility functions.

FTJ Retirement Advisors Partners with Retirement Planning Marketplace Company

Brian Holland, director of Forrest T. Jones (FTJ) Retirement Advisors in Kansas City, has announced his firm’s new affiliation with PlanMember Securities Corporation. As a new PlanMember Financial Center, FTJ Retirement Advisors is expected to expand retirement and investment planning and financial education opportunities for investors, including educators and employees of nonprofit organizations and associations in Kansas City and other cities in Missouri.

PlanMember specializes in the 403(b), 457(b) and 401(k) marketplace, while Forrest T. Jones is a family-owned enterprise providing insurance and financial planning programs.

“Affiliating with PlanMember as a financial center is really a next step toward providing educators, non-profit organizations, associations, individuals and families with complete holistic retirement planning services,” says Holland. “We strive to provide education and guidance to all our clients, enabling them to make informed financial planning decisions that are right for their own unique situations.”  

Edelman Financial Engines Appoints Workplace Business Leader

Edelman Financial Engines has appointed Kelly O’Donnell to lead its workplace business. In this role, O’Donnell will report directly to the company’s president and chief executive officer, Larry Raffone. She is based in Boston. 

Previously, O’Donnell served as chief administrative officer and chief risk officer, overseeing the company’s strategic plan and expansion of capabilities through mergers and acquisitions.

“Kelly’s in-depth knowledge of our workplace business and longstanding industry relationships will play a key role in advancing our strategy and I am excited to have her lead our workplace business into its next phase of growth,” says Raffone. “As head of Workplace, Kelly will take ownership of our workplace strategy, marketing and distribution initiatives to ensure millions of plan participants have access to comprehensive advisory and financial planning services they all deserve.”

O’Donnell is also the founder and executive sponsor of Edelman Financial Engines’ Women in Leadership program. In addition, O’Donnell’s rich experience has made her a trusted voice for testifying on industry issues on Capitol Hill, presenting at financial technology conferences on the future of innovation in the industry, and as a trusted resource for the media and analyst community on the topic of women and investing. 

Newton Promotes Investment Director

Newton Investment Management has appointed Seyi Bucknor as head of North America.

Bucknor will lead the distribution and client service functions in the region. Prior to this promotion, he served as a commercial investment director for Newton. He joined the firm in 2018 from BNY Mellon Investment Management, where he was a co-head of the manager research group.

Additionally, Bucknor had been a managing director in the investment solutions group at GE Asset Management and a director in investment research at Rogerscasey, before joining BNY Mellon in 2012.

He holds a bachelor’s degree from Cornell University and a master’s from Columbia University.

Incapital LLC Brings in CMBS Managing Director

William White has joined Incapital LLC as managing director, commercial mortgage-backed securities (CMBS), reporting to the firm’s co-heads of fixed income, George Holstead and Laura Elliot.

White will be based in Boca Raton and will work closely with Holstead and Elliot to expand Incapital’s CMBS solutions and the firm’s broader fixed-income strategy.

“With an impressive track record spanning over 20 years in the CMBS market, we are pleased to welcome Bill to our growing team,” says Holstead. “He will play an instrumental role in expanding our CMBS capabilities, and we look forward to his contributions as we continue to expand our group and develop new solutions that meet the evolving needs of our clients.”

White joins Incapital from Raymond James & Associates, where for 10 years he served as a managing director and head of CMBS trading, responsible for overseeing the firm’s efforts in the CMBS market, as well as their commercial real estate (CRE) and collateralized debt obligation (CDO) businesses. Prior to Raymond James, White worked as a director of CMBS and CRE CLO trading at Wachovia Capital Markets and as an associate specializing in residential mortgage securitization at Bank of America Securities.

He earned a master’s in business administration and a bachelor’s degree from the University of Pittsburgh; he also holds FINRA security licenses Series 7 and 63.

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Categories: Industry News

Ways to Combat Pervasive Leakage

Plansponsor.com - Fri, 2019-11-08 12:49

While most retirement plan advisers and sponsors focus on ways to inspire participants to save more, on the flip side, leakage from retirement plans is a serious issue they also need to address.

According to a report from the Savings Preservation Working Group, “Cashing Out: The Systemic Impact of Withdrawing Savings Before Retirement,” which analyzed a variety of recent research and data, cash-outs from plans when people switch jobs are the most prolific form of leakage. This surpasses hardship withdrawals by eight-times and loan defaults by 130-times.

The Working Group found that at least 33% and as many as 47% of plan participants withdraw part or all of their retirement savings when switching jobs. This leakage runs between $60 billion and $105 billion a year.

The first thing advisers and sponsors need to do to help prevent leakage is to educate participants about the downsides of cashing out, taking out a loan that they might not repay in full, or resorting to a hardship withdrawal, says Mike Lynch, vice president, strategic markets, at Hartford Funds.

Participants need to know that cashing out of their retirement plan could jeopardize their retirement security, says Ric Edelman, co-founder and chairman of financial education and client experience at Edelman Financial Services. Participants also need to know they will have to pay ordinary taxes on the money and, if they are under the age of 59 ½, the IRS will charge them a 10% penalty, Edelman says.

“From a retirement planning perspective, this is the worst choice that they can make,” he says.

Furthermore, if a participant cashes out and immediately spends all or most of the money, they may not have adequate cash on hand to pay the upcoming taxes, warns Larry Steinberg, chief investment officer at Financial Architects, Inc.

When a participant cashes out of a plan, investment firms are required to withhold 20% of their balance in order to cover taxes, but this is just an estimate, Steinberg says. “In California, you can owe as much as 53% of a distribution, because that is the marginal federal and state tax rate for someone in the top tax bracket,” he says.

To prevent participants from taking out loans or hardship withdrawals or cashing out, employers can consider setting up automatic emergency savings accounts for them, says Mike Webb, vice president at Cammack Retirement. While these are offered by only a handful of employers, Webb is hopeful they will gain traction.

Another thing employers can do to get in front of leakage is to offer additional benefits that employees can tap into, says Tom Foster, national spokesperson for MassMutual’s workplace solutions unit. “This could include health savings accounts, 529 college savings plans, student loan programs, critical illness insurance, accident insurance, life insurance, and access to low-cost loans,” Foster says. “Sponsors can offer many alternatives, and it doesn’t cost them additional money.”

Advisers can play a critical role in this effort by “explaining to sponsors that it would be a disadvantage to them if they don’t have the right benefits to attract and retain employees,” he says.

Another thing that advisers and sponsors can do is to “offer financial wellness programs and seminars and tutorials on the basics of budgeting and setting up an emergency fund,” Foster says. And if the sponsor has decided to offer additional benefits, this is an opportunity for advisers to educate them about these various options and to help participants prioritize their dollars into these benefits, he says.

“And if the employer doesn’t offer these additional benefits, advisers can work with employees to see what financial resources they might have other than their 401(k)—be it other savings, insurance or help from relatives,” Foster says.

Foster reminds advisers and sponsors that providers have many educational tools and calculators that they can use in their efforts to combat leakage.

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Categories: Industry News

FRIDAY FILES – November 8, 2019

Plansponsor.com - Thu, 2019-11-07 14:46

In Anchorage, Alaska, anyone with unpaid parking fines at the University of Alaska Anchorage campus has the option to reduce or cover the cost of their tickets with peanut butter and jelly. KTUU-TV reported the university would take donations for their annual payment tradition until November 8 to help combat student hunger. Officials say the food goes to students in need.

In Evans, Louisiana, a woman who worked at a medical clinic has been arrested for selling fake doctor’s notes to students so they can get out of going to school. According to the Associated Press, Vernon Parish Sheriff Sam Craft says the woman was selling medical excuses for $20 each. He says two students at Evans High School received excuses on 14 occasions. Deputies said a physician received a call from Vernon Parish School Board about the absence notes. He told deputies that he didn’t treat the students nor did he authorize the excuses.

In Kankakee, Illinois, the Sheriff’s Office posted a picture on Facebook of a man wanted for failure to appear on a DUI charge. The man commented, “Where’s my costume?” The photo was then edited to add a sailor costume and hat that said, “Ahoy.” The man held up his end of the bargain and turned himself in.

A simple act of kindness.

If you can’t view the below video, try https://youtu.be/NkC7yvd0qHU.

A weather man got into the Halloween spirit with an eye-catching costume.

If you can’t view the below video, try https://youtu.be/UHm_3HHJdAY.

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Categories: Industry News

Investment Products and Service Launches

Plansponsor.com - Thu, 2019-11-07 13:53

Art by Jackson Epstein

Hartford Funds Presents Interval Fund

Hartford Funds has launched its first closed-end interval fund, the Hartford Schroders Opportunistic Income Fund.

Sub-advised by Schroder Investment Management North America Inc., the fund seeks to provide current income and long-term total return by investing in U.S. and foreign fixed and floating rate securitized credit instruments and various types of loan investments.  

The fund will invest in a variety of securitized instruments and other fixed-income investments, mortgage-related investments, private commercial real estate loans, cash and short-term equivalents, treasuries and derivatives.

Michelle Russell-Dowe, head of securitized credit at Schroders, will serve with Anthony Breaks as the fund’s portfolio managers.

“The Hartford Schroders Opportunistic Income Fund allows us to leverage the closed-end interval fund structure and give investors access to the full capabilities of the Schroders securitized platform,” says Russell-Dowe. “The fund uses liquid markets and private credit to offer a potential solution designed to fit today’s credit cycle, today’s crowded markets, and today’s volatility. The fund represents an opportunity to benefit from a broad investment universe by allowing us to deploy capital into the best opportunity, be it in the public markets or in the private markets.”

OpenInvest Partners with LGIMA for ESG Solutions

OpenInvest and Legal & General Investment Management America (LGIMA) are partnering to deliver index solutions that allow clients to target their desired financial objectives while incorporating environment, social and governance (ESG) criteria on a fully customized basis.

Under an agreement, LGIMA will use OpenInvest’s dynamic custom indexing (DCI) technology system to provide institutional clients with the ability to execute disciplined portfolios that utilize market and ESG data. Pensions, corporations and foundations that use the solution will be able to track market benchmarks and incorporate proprietary environmental and social data.

“Legal & General can use our dynamic custom indexing capabilities to help the world’s largest asset owners align their institutional funds with their missions and stakeholders,” says Joshua Levin, co-founder and chief strategy officer, OpenInvest. “We’re seeing a new technology horizon, where investing expertise melds with automated mass customization around ESG investing. We are thrilled to work with LGIMA to deliver customized, values-based investments to their institutional clients.”  

ProShares Releases Additional ETFs in Dividend Growth Suite

ProShares has added two new exchange-traded funds (ETFs) to its dividend growth suite, one focusing on U.S. technology and the other on the Russell 3000, which represents the total U.S. market. 

 “Consistent dividend growth may be one of the best indicators of a company’s health,” says Michael Sapir, co-founder and CEO of ProShare Advisors LLC. “We are committed to offering this powerful strategy across a broad array of market caps, geographies and sectors.”

The ProShares S&P Technology Dividend Aristocrats ETF will focus on U.S. technology dividend growers, according to ProShares, that have raised dividends for a minimum of seven consecutive years. ProShares Russell U.S. Dividend Growers ETF will include large-, mid- and small-cap U.S. companies. The fund follows the Russell 3000 Dividend Elite Index.

ProShares Dividend Growers ETFs focus on the companies with the longest track records of dividend growth in some of the most widely tracked U.S. and international indexes. All of these ETFs are listed on the Cboe BZX Exchange.

Fidelity Introduces Thematic Investing Funds

Fidelity Investments has launched four new thematic investment products: Fidelity Enduring Opportunities Fund (FEOPX), Fidelity Infrastructure Fund (FNSTX), Fidelity U.S. Low Volatility Equity Fund (FULVX), and Fidelity Stocks for Inflation ETF (FCPI).

Thematic investing allows investors to pursue market exposure to specific ideas or values. Investors can use thematic investing as a way of expressing a view on the market that is different from region, sector, style, or market capitalization exposure. Through research and analysis, Fidelity has identified five categories of thematic investing: disruption; megatrends; environmental, social and governance (ESG); outcome oriented, and differentiated insights.

The four new investment products are available to individual investors and through workplace retirement plans. In addition, Fidelity Stocks for Inflation Exchange-Traded Fund (ETF) will be available through third-party financial advisers. The mutual funds have no investment minimums, while the ETF has an investment minimum of one share.

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Categories: Industry News

Prudential Faces ERISA Self-Dealing Allegations in New Lawsuit

Plansponsor.com - Thu, 2019-11-07 13:04

Prudential faces a self-dealing lawsuit filed by participants in its defined contribution (DC) retirement plan, alleging various fiduciary breaches under the Employee Retirement Income Security Act (ERISA).

Filed in the U.S. District Court for the District of New Jersey, the ERISA complaint names as defendants the Prudential Insurance Company of America, the Prudential Employee Savings Plan Administrative Committee, the Prudential Employee Savings Plan Investment Oversight Committee, and some 20 “John and Jane Does.”

At a high level, the suit alleges that the Prudential defendants put the interests of the company ahead of those of the plan “by choosing investment products and pension plan services offered and managed by Prudential subsidiaries and affiliates, which generated substantial revenues for Prudential at great cost to the plan.”

The text of the complaint opens with a general recitation of the increasingly important role of DC plans in the U.S. retirement system relative to defined benefit pensions, which are slowly but surely declining in prominence. According to the complaint, the potential for disloyalty and imprudence is “much greater in defined contribution plans than in defined benefit plans.”

“In a defined benefit plan, the participant is entitled to a fixed monthly pension payment while the employer is responsible for making sure the plan is sufficiently capitalized. As a result, the employer bears all risks related to excessive fees and investment underperformance,” the complaint suggests. “Therefore, in a defined benefit plan, the employer and the plan’s fiduciaries have every incentive to keep costs low and to remove imprudent investments. But in a defined contribution plan, participants’ benefits are limited to the value of their individual accounts, which is determined by the market performance of employee and employer contributions, minus investment expenses. Thus, the employer has no incentive to keep costs low or to closely monitor the plan to ensure that selected investments are and remain prudent, because all risks caused by high fees and poorly performing investments are borne by the employee.”

The complaint goes on to suggest that, for financial services companies like Prudential, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company through the selection of the plan’s investments by, for example, filling the plan with proprietary investment products that an objective and prudent fiduciary would not choose.

Details from the Complaint

After this generalized argumentation, the complaint offers more particular facts about the alleged wrongdoing on the part of Prudential defendants. Among other things, plaintiffs allege that the defendants violated ERISA by “overpopulating the plan with proprietary mutual funds offered by Prudential and its affiliates, failing to monitor the performance of those funds, and failing to adequately disclose the amount of recordkeeping fees received by Prudential, resulting in the payment of grossly excessive fees to Prudential and significant losses to the plan and its participants.”

According to the complaint, by selecting Prudential-affiliated funds, the defendants placed Prudential’s interests above the plan’s interests.

“Instead of considering objective criteria like fees and performance to select investments for the plan, the investment oversight committee selected Prudential funds because they were familiar and generated substantial revenues for Prudential,” the complaint alleges. “Unaffiliated investment products do not generate any fees for Prudential. As a result, the committee chose many Prudential funds to benefit Prudential, the sponsor of the plan, without investigating whether plan participants would be better served by investments managed by unaffiliated companies. This is unsurprising, given that Prudential serves as the plan’s recordkeeper, and the plan utilizes a revenue-sharing arrangement to pay the majority of its administrative expenses.”

According to plaintiffs, as Prudential itself performs all recordkeeping and administrative functions for the plan, as well as manages a significant number of the plan’s investments, Prudential receives additional revenue in the form of direct participant fees and indirect fees via revenue sharing.

“Exacerbating the problems arising from these severe conflicts of interest, several of the unaffiliated investment options offered to plan participants were egregiously expensive and generally underperformed compared to benchmarks selected by the investment oversight committee.

Other Cases Show Facts Matter Most

This is far from the first self-dealing lawsuit to be filed against prominent recordkeeping and investment product providers in recent years under ERISA. Just to name a few other providers, Transamerica, Morgan Stanley and Franklin Templeton have all faced self-dealing suits. The outcomes of those cases—some of them are still pending—shows the results of the new Prudential case will very much hinge on the facts discovered both ahead of and potentially after the summary judgement phase.

For example, in Transamerica’s case, a judge has denied the fiduciary defendants’ motion to dismiss a lawsuit accusing the company of retaining poorly performing proprietary fund portfolios in it 401(k) plan. In denying the dismissal motions from Transamerica, the judge in the case wrote that, “regardless of whether an investment is affiliated with the fiduciary, the fiduciary has an obligation to act prudently in monitoring the underlying investments.” Here, plaintiffs’ complaint sufficiently alleges that the selection and retention of “substandard investment portfolios” constituted imprudent conduct.

On the other hand, Morgan Stanley this year successfully argued for dismissal of a 401(k) plan self-dealing suit filed by one of its employees. In that matter, the court decided the plaintiffs did not have standing to sue regarding the funds in which they did not invest, and they did not sufficiently prove their other claims.

Franklin Templeton, for its part, chose to settle rather than continue to fight its own self-dealing challenge once a federal district court moved forward most of the plaintiffs’ claims. In the end, Franklin Templeton did not admit to any wrongdoing, but it still agreed to pay nearly $14 million in damages and to provide certain non-monetary relief in terms of the future operations of the plan.

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Categories: Industry News

IRS Proposes Update to Mortality Tables Used to Calculate RMDs

Plansponsor.com - Thu, 2019-11-07 11:23

The IRS has issued a notice of proposed rulemaking providing guidance relating to the life expectancy and distribution period tables that are used to calculate required minimum distributions (RMDs) from qualified retirement plans, individual retirement accounts (IRAs) and annuities, and certain other tax-favored employer-provided retirement arrangements.

An Executive Order signed on August 31, 2018, directed the Secretary of the Treasury to examine the life expectancy and distribution period tables in the regulations on RMDs from retirement plans and determine whether they should be updated to reflect current mortality data and whether such updates should be made annually or on another periodic basis. The purpose of any such updates would be to increase the effectiveness of tax-favored retirement programs by allowing retirees to retain sufficient retirement savings in these programs for their later years.

The life expectancy tables and applicable distribution period tables in the proposed regulations reflect longer life expectancies than the tables in the existing regulations. For example, a 70-year old IRA owner who uses the Uniform Lifetime Table to calculate RMDs must use a life expectancy of 27.4 years under the existing regulations. Using the Uniform Lifetime Table set forth in the proposed regulations, this IRA owner would use a life expectancy of 29.1 years to calculate RMDs.

The life expectancy and distribution period tables in the proposed regulations have been developed based on mortality rates for 2021. These mortality rates were derived by applying mortality improvement through 2021 to the mortality rates from the experience tables used to develop the 2012 Individual Annuity Mortality tables (which are the most recent individual annuity mortality tables).

The life expectancy tables and Uniform Lifetime Table under these proposed regulations would apply for distribution calendar years beginning on or after January1, 2021. Thus, for example, for an individual who attains age 70½ during 2020 (so that the RMD for the distribution calendar year 2020 is due April 1, 2021), the final regulations would not apply to the RMD for the individual’s 2020 distribution calendar year (which is due April 1, 2021), but would apply to the RMD for the individual’s 2021 distribution calendar year (which is due December 31, 2021).

The document includes proposed amendments to the income tax regulations under section 401(a)(9) of the Internal Revenue Code (Code) regarding the requirement to take RMDs from qualified trusts. They also apply with respect to the corresponding requirements for individual retirement accounts and annuities described in section 408(a) and (b), and eligible deferred compensation plans under section 457, as well as section 403(a) and403(b) annuity contracts, custodial accounts and retirement income accounts.

A public hearing is scheduled for January 23, 2020, and the IRS is requesting comments on its proposals. Text of the notice of proposed rulemaking is here.

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Categories: Industry News

Fidelity Tool Helps Drive Total Employee Well-Being

Plansponsor.com - Thu, 2019-11-07 03:30

Fidelity Investments announced the availability of the Fidelity Total Well-Being solution, a tool that allows employers to optimize their benefits platform by providing a detailed analysis of employee benefit needs across the four domains of well-being: health, money, work and life.

While other solutions focus on diagnostics and recommendations to address individual silos such as financial wellness or physical and emotional wellness, Fidelity says its holistic approach provides employers with a deeper understanding of the needs and challenges facing their workers in all aspects of their lives.

Pearce Weaver, senior vice president with Fidelity Workplace Consulting, tells PLANSPONSOR, “One of the biggest drivers for creating this tool have been meetings with some of our larger clients, initially discussing financial wellness. But, clients kept saying, ‘That’s great but we’ve been collecting all these programs and point solutions and resources to cover a much broader array of wellness.’” Weaver says clients were struggling to connect employees with different resources in a way that is timely and relevant to them. Clients told Fidelity if it could measure overall well-being of employees it would help to direct employees to more relevant resources.

According to Weaver, though the solution tends to fit larger employers with more complex benefits programs, the Total Well-Being solution is available to clients of any size.

The new solution enables employers to tailor a workplace benefits and communications strategy that will have the greatest impact to employees, contribute to increased benefits engagement and support desired business objectives. The solution helps employers in three critical benefits management activities:

  • Quantify employee well-being and identify and prioritize opportunities to improve;
  • Evaluate the impact and potential of specific benefit plans and programs; and
  • Connect employees with employer-provided benefits that can best improve their well-being.

The Total Well-Being solution consists of three key components:

  • Employee Total Well-Being Assessment: Consists of a 10- to 15-minute survey for employees that provides insight to factors that contribute to, or detract from, their well-being. Developed with leading academic institutions, the assessment can help determine where an employee’s benefits needs may be unmet.
  • Personalized Employee Action Plan: Provides each employee with real-time individual Total Well-Being scores along with suggested benefits to consider that may help to improve their well-being. Weaver explains that when Fidelity fully customizes the personal scorecard it is to each employer’s benefit program. The suggestions are to a specific set of resources the employer provides.
  • Employer Analytics Dashboard: Enables employers to drill into the data to answer critical benefits strategy questions and build business cases for changes. Employers can also compare their results against Fidelity’s national data benchmark.

According to Weaver, the Dashboard was built to be very flexible so whatever type of indicative HR data the employer wants to provide Fidelity can use to give different cuts of data. At a high level, data can be sorted by gender, generation, marital status, whether the employee has children or job class, among others.

As an example of a cohort analysis, he says employers may see that Millennials in a particular income range that have student debt have lower financial wellness scores. That could be a business case for offering student loan help.

However, Weaver points out that there is an interconnectedness of domains. “We’ve found that being unwell in one area—say financial wellness—can impact other areas, such as physical wellness or life wellness,” he says. “If an employer only focuses on one domain, it could be missing information about wellness in other areas.”

Weaver says it seems like a universal area in which employers are struggling—they’ve made investments in lots of resources and have challenges in driving employees to those resources. “Anything employers can do to differentiate themselves, will help attract, engage and retain employees,” he notes.

The Total Well-Being solution was developed by Fidelity’s behavioral scientists and leading academic psychologists as well as feedback from Fidelity clients. The Fidelity Total Well-Being offering is currently available to employers in the U.S. with availability for additional countries in 2020.  For more information, current Fidelity clients can contact their Managing Director, while non-Fidelity clients are welcome to contact Fidelity Workplace Consulting at FidelityWorkplaceConsulting@fmr.com for more information.

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Categories: Industry News

Will Tech Innovation Break the Business Cycle?

Plansponsor.com - Wed, 2019-11-06 14:00

J.P. Morgan Asset Management has published its 2020 Long-Term Capital Markets Assumptions report, with a focus this year on exploring the complexities of late-cycle investing in an environment of ultra-low bond yields.

During a media roundtable held in New York to unveil the new report, John Bilton, head of global multi-asset strategy, highlighted the impact of trade uncertainty between the world’s economic superpowers and a recent reversal in the trajectory of global monetary policy.

“In an environment of very low bond yields, investors must reassess how to design the optimal portfolio, as the tradeoff is no longer between foregone risky asset returns and reduced portfolio risks—but is instead between a zero or even negative return in exchange for that risk reduction,” Bilton said.

David Kelly, chief global strategist for J.P. Morgan Asset Management, noted that global growth expectations for the 10 to 15 year time horizon remain relatively modest. He cited such headwinds to growth as aging populations in developed economies, and noted that one important tailwind for stronger-than-expected growth could be a technology-driven boost to productivity. Kelly noted that over the last year, the economic cycle matured even further, becoming the longest U.S. expansion on record and creating a sense of the “new abnormal.”

“Portfolio flexibility remains key for investors looking to manage cycle uncertainty,” Kelly said, “with those seeking higher returns continuing to be drawn to private markets and other alternatives as both a diversifier and a source of excess returns.”

Pulkit Sharma, head of investment strategy and solutions at J.P. Morgan Alternatives Solutions Group, emphasized the growing importance of alternative investments, and particularly private equity, for institutional investors.

At a high level, the trio said they expect global growth to average about 2.3% over the next 10 to 15 years, down 20 basis points from last year’s projection. The developed market forecast remains unchanged at 1.5%, while emerging market forecasts have been trimmed 35 basis points to 3.9%. Population aging is broadly to blame for the lower forecasts for global growth, the J.P. Morgan experts explained.

Projections for global inflation also remain low, and global monetary policy is expected to remain “extremely accommodative” throughout this cycle and well into the next one—leading to a significant delay in rate normalization. That fact, in combination with much lower starting yields and a modest cut to the firm’s equilibrium yield estimates, adds up to a sharp fall in projected fixed income returns—in some cases taking them negative over the forecast horizon.

Suggesting ways investors can address this muddle-through outlook, the J.P. Morgan team pointed to the alternative investments and private equity space as a developing opportunity set. They noted the 10 to 15 year aggregate private equity return forecast has been raised 55 basis points to 8.80%.

“Private equity continues to be attractive to those investors looking for return uplift, as well as those seeking more specific exposure to technology themes,” Sharma said. “This year we forecast that core U.S. real estate returns, levered and net of fees, will average 5.80% over the next 10 to 15 years. Casting the net more widely, forecast returns from global real assets and infrastructure have held up remarkably well, and given the resilience of their cash flows, they may even serve as a proxy for duration in portfolios with limited short-run liquidity demands.”

The J.P. Morgan leaders said they hope and expect that, over time, investors in defined contribution (DC) plans will gain greater access to alternatives, real assets and private equity placements. The 2020 report notes that aversion to real estate in particular seems to stem from the central role overvalued property markets played in triggering the global financial crisis back in 2008. But, the report argues, a longer-run analysis of through-cycle real estate returns suggests that the global financial crisis was an anomaly and that real estate returns generally remain robust throughout the cycle.

“This year, we forecast that core U.S. real estate returns will average 5.8% over the next 10 to 15 years, withe some way ahead of the returns available from a balanced 60/40 stock/bond portfolio,” Sharma noted.

Overall, the 2020 long-term capital market assumptions forecast modest growth and contained inflation, and they recognize the challenges to portfolio construction that zero and negative bond yields present. The environment is complicating the late-cycle playbook for those investors with an eye on tactical asset allocation. There are bright spots, but even then, investors need to appreciate the tradeoffs implicitly required to capture enhanced returns. Credit offers sizable return pickup over sovereign bonds, but with large drawdown risk when the economy turns; real estate returns are attractive, as are those in private equity, but illiquidity is a consideration; and emerging markets returns are forecast well above developed market returns in most assets, but in the short run, the persistence of trade uncertainty will remain a headwind.

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Categories: Industry News

A National Program Like OregonSaves Would Reduce Retirement Deficit

Plansponsor.com - Wed, 2019-11-06 11:34

Because OregonSaves and other state-sponsored defined contribution plans provide a “valuable experiment of approaches that could potentially reduce the nation’s projected retirement deficit,” according to the Employee Benefit Research Institute (EBRI), the organization did an analysis of the effect of a national OregonSaves program.

EBRI found that a national program would reduce the $3.83 trillion retirement savings shortfall (RSS) by $456 billion, or 12%.

However, it there were a nationwide implementation of 401(k) safe harbor plans among employers currently not offering a defined contribution (DC) or defined benefit (DB) plan, the deficit would decline by $645 billion, or 17%.

“The analysis also clearly shows that increased coverage is not the only impactful way of reducing the retirement deficit,” EBRI says in its issue brief, “What if OregonSaves Went National: A Look at the Impact on Retirement Income Adequacy.” “We added a full auto portability scenario to both of the access expansion scenarios.”

Under the national OregonSaves program with auto portability, the deficit would decline by $759 billion, or 20%. For the 401(k) safe harbor plan expansion with auto portability, the deficit would decline by $1.031 billion, or 27%.

EBRI notes that OregonSaves was launched in July 2017 with a small pilot group of employers. Since then, it has been rolling out in phases and is scheduled to finish its roll out in 2020. Contributions are made post-tax and the initial deferral rate is 5% with annual escalations of 1% up to a 10% contribution threshold.

In conclusion, EBRI says it will continue to study OregonSves and other state-sponsored DC plans because of the positive impact they can have on retirement savings shortfalls in the nation.

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Categories: Industry News

Court Finds Abuse of Discretion in Eligibility Process for Non-Profit’s SERP

Plansponsor.com - Wed, 2019-11-06 11:28

A federal court judge has ruled that a former employee of the non-profit Young Adult Institute (YAI) was eligible for, but never enrolled in, a Supplemental Executive Retirement Plan (SERP), and therefore, is owed benefits.

First, U.S. District Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York, rejected the defendants’ contentions that the plaintiff’s Employee Retirement Income Security Act (ERISA) claim is barred by the applicable statute of limitations, or by the defenses of laches or equitable estoppel.

According to the court document, in December 2001, the plaintiff met two of the three criteria of the 1985 SERP:  she (i) had worked at YAI for 15 years; and (ii) had a compensation that was not fully considered in the computation of Federal Social Security benefits.  She believed she met the third criterion, requiring that she be a management employee, because she considered her job as controller to be a management-level position.

However, the Board determined that she was not a management employee within the meaning of the SERP until she was promoted to the position of CFO on July 1, 2006, and Failla previously concluded that this determination was reasonable. Accordingly, the judge determined that the plaintiff satisfied the eligibility criteria of the 1985 SERP on July 1, 2006.

Failla said it appears that, in July 2006, none of the relevant parties believed the plaintiff would be automatically enrolled in the SERP simply because she had satisfied the eligibility criteria.  The defendants, as well as the plaintiff, believed that no person eligible for inclusion in the SERP could be included in the SERP absent express approval from the Board. 

Both parties agree that, from 2004 to 2009, the plaintiff had multiple conversations with YAI’s CEO regarding her participation in the SERP. She consistently maintained that the CEO told her that Board approval was necessary for her participation in the SERP and that the Board was certain to approve her participation. The CEO recommended to the Board that the plaintiff be approved for inclusion in the SERP a total of four times from approximately 2004 to 2008. The Board declined to approve her each time. The final time was in 2008, when the CEO was nearing the end of his tenure at YAI. The Board told him they intended to defer consideration of the plaintiff’s participation in the SERP until after a new CEO and a new chairman of the Board had been appointed, so the application could be examined with “fresh eyes.” The CEO kept the plaintiff fully apprised of each interaction.

Failla found that the plaintiff was led to believe that Board approval was required to enter into the SERP, and that such approval remained, at the least, a very real possibility through 2009. “The fact that the Board had declined to approve Plaintiff for inclusion on the SERP in prior instances would not have provided Plaintiff with clear notice that she would never be approved, because no declination was said to be final or to have been based on Plaintiff’s lack of fitness or failure to qualify,” Failla wrote in the court order.

She disagreed with the defendants’ argument that the record proves the inverse is true:  They contended that the 2008 Amendment put the plaintiff on notice that the SERP was forever closed to her. The 2008 Amendment revised Section 10.1.2 of the SERP, which had set forth the eligibility criteria, to state that “Effective July 1, 2008, the Plan’s sole Participants shall be Joel M. Levy, Philip H. Levy, Stephen Freeman, and Thomas Dern.” Based on testimony and evidence, Failla found that the plaintiff saw the amendment for the first time in July 2010. 

In addition, Failla was not convinced that the plaintiff was made aware that she would be excluded from the SERP when she saw the 2008 Amendment. The amendment did provide a list of the “sole participants” in the SERP effective July 1, 2008, but she had been told by the CEO that the Board had considered adding her to the SERP in 2008, and that the Board would take up that issue again in 2009, after a new CEO was installed. 

In the spring of 2014, the plaintiff approached the then-Chairman of the Board to discuss her SERP benefits. He informed her that, because she was nearing retirement from the organization, YAI would have its legal counsel begin to prepare her SERP package. On July 1, 2014, she received a phone call from the chairman, who told her that the Board had denied her SERP benefits. Failla found that conversation to be the first time anyone at YAI had unequivocally told the plaintiff that she would never be a participant in the SERP.

On August 12, 2016, the plaintiff submitted a formal claim for benefits with the SERP Plan Administrator.  That claim was denied on November 10, 2016. She appealed the denial on January 15, 2017, and that appeal was denied on April 17, 2017. She was informed that the April 17, 2017, letter was meant as a final decision subject to review under ERISA.

Faiila determined in a prior opinion that the Board’s decision was arbitrary and capricious, but she was unable at that time to determine if the plaintiff was, in fact, a participant in the SERP and owed benefits accordingly. Failla this time concluded that the plaintiff is a participant in the SERP and attained a vested interest in the SERP on July 1, 2006. 

Failla found the Board’s decision that the SERP required Board approval before an employee could be eligible to participate in the SERP represented an abuse of discretion. That was not included in the original eligibility provision of the SERP. Thus, the Board’s decision to deny the plaintiff SERP benefits because she had not received Board approval was premised on an unreasonable construction of the terms of the SERP itself and was not worthy of deference under ERISA.

The judge stopped short, however, of granting summary judgment in the plaintiff’s favor and finding that she had a vested interest in the SERP. Failla declined to go to this next step because additional evidence needed to be adduced to determine if the Board’s actions in 2005, which included adopting a recommendation to limit benefit accruals under the SERP to YAI’s top five executives, might have precluded the plaintiff from vesting in the SERP in 2006, before she was a top five executive at YAI.

According to Failla, “The situation changed appreciably with the Second Circuit’s decision in Levy v. Young Adult Institute, Inc.”  In that, the 2nd U.S. Circuit Court of Appeals held that the Board’s actions in 2005 did not constitute a valid amendment of the SERP, finding “YAI’s purported 2005 SERP amendment was invalid because YAI did not follow the SERP’s specific amendment procedures.”

“By virtue of the Second Circuit’s decision in Levy, and the parties’ stipulation thereto, the Court concludes that there is no longer any dispute concerning the effect of the Board’s actions in March 2005. The Board’s actions did not amend the SERP and could not have limited the individuals admissible into the SERP. Thus, the Eligibility Criteria contained in the 1985 SERP were in effect in 2006. Based on the facts contained within the administrative record, the Court concludes that Plaintiff met each of the three Eligibility Criteria on July 1, 2006,” Failla wrote.

She ordered an additional hearing, consisting of oral argument from both the plaintiff and the defendants, to determine the amount of benefits to which the plaintiff is entitled.

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