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Private Equity Fund Limited Partners and Pension Funding Levels
"Despite the 'record year' described by Wall Street Journal reporter Ryan Dezember, private equity investments, like any other, necessitate careful due diligence on the part of institutional investors that seek a seat at the limited partner table.... A critical question is whether continued gains will be diminished if a portfolio company has to divert cash to top off an underfunded pension plan. One way to address the issue is for a pension plan, endowment or foundation to ask the private equity fund general partner how much attention they pay to ERISA economics."
(Pension Risk Matters)
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Private Equity Is Coming to 401(k)s
"This new breed of private equity [PE] will need to adjust to the realities of the DC market. First and foremost, liquidity will be a major challenge, as PE products must have periodic liquidity and portability to work in 401(k) plans or individual retirement accounts. PE firms are working on a number of structures that could provide appropriate liquidity. This isn't a trivial task, given the illiquid nature of the underlying holdings."
(InvestmentNews)
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An Analysis of JP Morgan's Dynamic Withdrawal Strategy
"[B]ased on [specific] assumed investment experience, the JP Morgan strategy produces a spending budget that is somewhat more volatile (when measured in inflation adjusted dollars) than the Steiner Actuarial Approach. Because it is more aggressive ... it produces higher spending budgets each year and therefore lower remaining assets at the end of the five year period.... If comparable assumptions are used, results under the two methods can be comparable, and the smoothing algorithm in the Steiner Actuarial Approach results in more real dollar stability in the retiree's spending budget from year to year."
(Kenneth A. Steiner, FSA Retired)
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Accounting and Actuarial Smoothing of Retirement Payouts in Participating Life Annuities
Working paper. "[The authors] develop stylized and realistically-calibrated models of participating lifetime annuities, an insurance product that pays retirees guaranteed lifelong benefits along with variable nonguaranteed surplus. [The authors'] goal is to illustrate how accounting and actuarial techniques for this product shape policyholder wellbeing as well as insurer profitability and stability.... [S]moothing adds value to both the annuitant and the insurer, so curtailing smoothing could undermine the market for long-term retirement payout products."
(Pension Research Council, Wharton School of the University of Pennsylvania; free registration required)
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Pension Finance Update as of February 28, 2014 (PDF)
"After a weak January, pension sponsors enjoyed a modest recovery in funded status during February, with both 'model' plans we track seeing asset gains outpace liability growth. Despite the improvement, sponsors remain behind so far in 2014: our traditional 'Plan A' improved 2% last month but is down 3% for the year, while 'Plan B' gained 1% during February but is still down 1% for 2014."
(October Three Consulting)
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Everything Changes for the Pension World's $20 Billion Club
"Looking at the 19 corporations in aggregate, the combined pension deficit fell from $220 billion to $114 billion, the best position in six years. And a lot has changed in six years: more of the pension plans have frozen new benefit accruals; liability-driven investing has grown; risk transfer has become a viable option; regulation has continued to pile up and PBGC premium increases have become a material consideration in plan decisions. All of those changes have increased the appetite of sponsors to run their plans differently than in the past: more liability-focused; less peer-sensitive; more risk-averse."
(Russell Investments)
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Massachusetts Scrutiny of 401(k) Matches Misfires
"The Massachusetts Securities Division targeted many of the wrong firms in questioning 401(k) record keepers about employers moving to an annual match instead of contributing each pay period. Among those queried that are not record keepers are BlackRock Inc. and Barclays Global Investors ... Many of the largest defined contribution record keepers were not among the 25 firms contacted.... One question Mr. Galvin wants answered is how common it is for companies to make their matches once a year instead of every paycheck, month or quarter."
(InvestmentNews)
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Advisers Warn Against 401(k) Loans
"In U.S. 401(k)s and related accounts, one out of every four plan participants has borrowed against his or her principal ... Meanwhile, an estimated $6 billion a year in loans wind up in default ... The vast majority do pay off their loans ... But those making less than $30,000 a year are most likely to get into situations where they need to take out a loan[.]"
(The Wall Street Journal; subscription may be required)
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Schwab Shoos $25 Billion of Client Assets Out the Door as It Calls the Bluff of Employers with Lopsided 401(k) Contracts
"In a move that reflects the changing economics of the advice and retirement business, The Charles Schwab Corp. fired several big 401(k) clients with a combined $25 billion of assets.... Because the employers bar Schwab from, in effect, soliciting its clients thus thwarting its efforts to win rollover dollars in sufficient numbers, Schwab saw no room for these clients in its business plan going forward, according to Steve Anderson, executive vice president of retirement plan services at Schwab. Schwab wants the freedom to e-mail and hold meetings with participants of 401(k) clients."
(RIABiz)
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Advisers' Role in Target Date Funds Grows More Complex
"[T]arget date funds are rapidly taking over the defined-contribution world.... Advisers, particularly those serving in a fiduciary capacity for retirement plan sponsors, need to ensure that the sophistication of their analysis and oversight keeps pace with that growth.... Employees approaching retirement with 401(k) accounts bulging with TDFs that have a far greater equity allocation than they realize, staring at what may prove to be a lean retirement, will join class actions and ultimately win ... ERISA attorneys and others emphasize that advisers should not count on the narrow implications of [ERISA section 404(c)(5)] to bail them out if things go awry."
(InvestmentNews)
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IRI Leadership Meets with Congressmen About Fiduciary Rule
"'(Chairman) White has accelerated this to a top of the queue priority as opposed to a longer-term priority, which is where we were just a few months ago,' [Robert] Moore, [Insured Retirement Institute] vice chairman, said ... 'That enables us in these meetings to reinforce what has been strong support from senators and congressmen about ... the sequencing of this topic. It should come from the SEC[.]'"
(InvestmentNews)
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Cost-of-Living Adjustments in Public Pension Plans (PDF)
"Cost-of-living adjustments (COLAs) in some form are provided on most state and local government pensions.... Considerable variation exists in the way COLAs are designed, and in many cases they are determined or affected by other factors.... COLAs are receiving increased attention as many states look to make adjustments to the cost of benefits amid challenging fiscal conditions and the current low-inflationary environment. This brief presents a discussion about the purpose of COLAs, the different types of COLAs offered by government retirement systems, and an overview of recent state legislative COLA actions."
(National Association of State Retirement Administrators [NASRA])
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Settlement Talks Brewing in Landmark San Jose Pension Reform Case
"After years of intense fighting, the city and its employee unions are discussing a settlement of at least parts of a pension battle that has divided San Jose over key issues ranging from taxpayer costs to police staffing. The settlement talks over Measure B pension reforms ... have an outside shot of ending a landmark court clash that leaders across the country are watching as similar pension feuds bubble up from coast to coast.... An agreement might require another ballot measure as soon as this November."
(San Jose Mercury News)
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Buffett Says More Bad News on State and Local Pension Funds During Next Decade
"Berkshire Hathaway chief executive Warren Buffett warned ... that the growing crisis in public pensions will intensify, with 'a lot' of bad news to come.... Buffett said: 'Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them.'"
(Reuters)
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[Opinion]
The Truth About Retirement Savings
"The implication from the flawed [current population survey (CPS)] data that Americans do not have enough non-Social Security retirement income diverts attention away from the successes of America's private retirement system. The gradual transition from defined-benefit to defined-contribution plans that has occurred in recent years has helped put Americans on a more sustainable path to adequate retirement savings.... There is no doubt that further pension reform is needed, but the systematic exclusion of relevant and complete retirement data from the CPS confuses reality and distorts Americans' understanding of what needs to change."
(U.S. Chamber of Commerce)
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[Opinion]
Text of Comments by American Academy of Actuaries to IRS on Notice 2014-5, Nondiscrimination Relief for Closed Defined Benefit Plans (PDF)
"The regulations related to nondiscrimination testing are already extremely complex. Any changes should be made with an eye toward simplification. In general, we believe it is better to remove the restrictions that are causing problems, rather than to add new rules, unless those rules come in the form of additional safe harbors. In addition, it is important that changes be available to all plan sponsors and not just those in a particular market segment or those whose plans fit a particular fact pattern."
(American Academy of Actuaries)
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[Opinion]
Text of Comments by ERIC to IRS on Notice 2014-5, Nondiscrimination Relief for Closed Defined Benefit Plans (PDF)
"The Agencies should issue guidance to provide plans with permanent relief as soon as possible. Additional relief should be provided with respect to benefits, rights and features. The Agencies should provide soft frozen defined benefit plans with additional options to satisfy the nondiscrimination requirements. Defined contribution plans that provide enhanced benefits to former defined benefit plan participants should be provided with additional options for satisfying the nondiscrimination requirements. Contributory plans that otherwise satisfy the nondiscrimination requirements should not be considered discriminatory merely because some highly compensated employees contribute more than some non-highly compensated employees."
(The ERISA Industry Committee [ERIC])
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Benefits in General; Executive Compensation
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Key Watchwords in Long Term Incentive Compensation: Efficiency, Diversification and Performance (PDF)
"The return of a more robust and competitive U.S. business environment -- in the midst of increased scrutiny over executive pay -- creates a powerful opportunity for companies to rethink their philosophies regarding significant portions of their total rewards packages. To maintain LTI compensation as a competitive tool, companies have eliminated or replaced stock options or moved to 100 -percent restricted stock or a mixture of options, restricted stock and cash. In the area of retirement income accumulation, many companies are opting for performance-earned awards to a defined contribution supplemental executive retirement plan (SERP)."
(Fulcrum Partners, LLC)
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McKesson Corp. Responds to Shareholder Feedback, Changes Executive Comp Program
"McKesson said the changes to pay structure announced Friday are intended to address feedback from shareholders, who voted 'no' by more than a 3-to-1 margin last year on a nonbinding resolution to approve McKesson's executive-compensation package.... [CEO John] Hammergren said he was voluntarily reducing his pension benefit because it had become 'a source of distraction' for the company. The revised $114 million pension benefit will be a fixed amount in cash, the company said, not subject to big potential moves that can result from factors like changes in interest rates. McKesson also said it had made 'adjustments' to the financial measurements it uses in determining incentive pay."
(The Wall Street Journal; subscription may be required)
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[Guidance Overview]
IRS Regs Clarify When Property Is Subject to Substantial Risk of Forfeiture
"Not only must the service provider's property interest be subject to a service condition or condition related to the purpose of the transfer for the property interest to be subject to a substantial risk of forfeiture, but the facts and circumstances at the time of the property transfer must establish the likelihood that the condition leading to forfeiture will occur, and that the service recipient is likely to enforce the forfeiture."
(Stinson Leonard Street)
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IRS Issues Final Regs Under Section 83 Regarding Substantial Risk of Forfeiture Analysis
"The Final Regulations make three important clarifications relevant to 'substantial risk of forfeiture' analysis: [1] A substantial risk of forfeiture generally may only be established through a service condition or a condition related to the purpose of the transfer ... [2] In determining whether a substantial risk of forfeiture exists, both [a] the likelihood that a forfeiture condition will occur and [b] the likelihood that the forfeiture condition will be enforced must be taken into consideration. [3] Transfer restrictions on securities (such as lock-up provisions, buyback provisions, blackout periods and limited trading windows insider trading compliance programs) generally do not create a substantial risk of forfeiture[.]"
(Proskauer's ERISA Practice Center)
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Press Releases
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