Retirement Plans Newsletter

March 21, 2016

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Study Finds Little Difference in Pension Guarantee Between PBGC and Annuities
"Annuities transacted as a result of corporate defined benefit derisking transfers are as safe and could be safer than the pensions would be remaining in retirement plans under ERISA and PBGC protection, suggests a study by the National Organization of Life & Health Insurance Guaranty Associations [NOLHGA].... 'One chief thrust of [statutory insurance company] regulation is to require that all insurers maintain -- at all times -- high-quality assets in amounts that comfortably exceed the value of their liabilities,' [Peter G. Gallanis, president of NOLHGA]. 'I do not suggest that solvency is not a concern of the regulatory system applicable to pensions -- clearly it is. But neither pension plans nor (more importantly) plan sponsors are regulated for solvency in the same comprehensive and constant manner.... An insurance company simply cannot be underfunded and continue to operate without regulatory intervention.' " (Pensions & Investments)  


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DOL Is Investigating DB Plans That Fail to Locate and Pay Benefits to Terminated Vested Participants
"[Defined benefit plan sponsors should:] [1] Ensure that the plan has implemented (and follows) a policy for locating missing participants, and that a diligent effort has been undertaken to locate missing participants. [2] Consult any third-party administrators with such responsibilities to confirm they are following appropriate procedures. Keep accurate records of all efforts to locate missing participants ... [3] Monitor forfeitures, as increased forfeitures could indicate a breakdown of the plan's procedures for locating missing participants. [4] Take actions to reduce the occurrence of missing participants[.]" (McCarter & English)  

Could DOL Rule Get Caught Up in 'Regulation Day' Madness?
"The Obama administration is racing to issue as many regulations as possible by May 17 or 'Regulation Day.' The May 17 date is significant because a number of factors make it less likely that Congress or a new president would repeal any rules issued around this date. Here is a rundown of what could happen in the weeks and months after the DOL rule is issued." (InsuranceNewsNet.com)  

Text of Second Circuit Opinion: Claim of Fiduciary Breach in Lehman Bros. Stock Drop Case Fails Fifth Third Pleading Standard
"Even without the Moench presumption rejected by Fifth Third, it remains our standard that, to plead plausibly a breach of the duty of prudence for failure to investigate, 'plaintiffs must allege facts that, if proved, would show that an "adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident." ' ... The [third amended complaint] in this case includes 'no specific allegations about what lines of inquiry would have revealed this information or who, if pressed, in fact would have disclosed it to the Plan Committee Defendants.' ... [E]ven without the presumption of prudence rejected in Fifth Third, Plaintiffs have failed to plead plausibly that the Plan Committee Defendants breached their fiduciary duties under ERISA by failing to recognize the imminence of Lehman's collapse." [In Re: Lehman Bros. Sec. and ERISA Litig., No. 15-2229 (2d Cir. Mar. 18, 2016)] (U.S. Court of Appeals for the Second Circuit)  

Seventh Circuit Holds Retirement Plan Established by a Church-Affiliated Organization Does Not Qualify as an ERISA Church Plan
"The Seventh Circuit rejected Advocate's position that ... a plan can qualify as a church plan merely by being maintained by a church-affiliated organization because the reading would make the establishment requirement of ERISA Section 3(33)(a) meaningless. Accordingly, because Advocate's predecessor that created the plan was not a church, its defined benefit plan was not established by a church and could not qualify as a church plan even though it was maintained by a church-affiliated organization. Like the Third Circuit, the Seventh Circuit held that the statute's language was unambiguous[.]" [Stapleton v. Advocate Health Care Network, No. 15-1368 (7th Cir. Mar. 17, 2016)] (Practical Law Company)  


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Managing Retirement Income Through Economic and Market Cycles
"This paper presents five 'decision rules' investors may find useful as they prepare for the distribution of their retirement assets.... [1] The standard withdrawal rate or baseline rule ... [2] The 'bull market' rule ... [3] The 'bear market' rule ... [4] The flat market rule ... [5] The high inflation rule." (Nuveen Asset Management)  

Structuring State Retirement Saving Plans: A Guide to Policy Design and Management Issues
12 pages. "Three states have already created state-sponsored retirement saving plans for small business employees, and 25 are in some stage of considering such a move ... This paper highlights a variety of issues that policymakers will need to address in creating and implementing an effective state-sponsored retirement saving plan. Section II discusses policy design choices. Section III discusses management issues faced by states administering such a plan, employers and employees. Section IV is a short conclusion." (The Brookings Institution)  

DOL Subpoena Approach Comes Under Scrutiny
"There have been several reports that the Department opened investigations of ESOPs by subpoenaing ESOP trustees and company executives. That's a rather drastic approach ... At a March 16 hearing of the House Committee on Education and the Workforce.... [DOL Secretary] Perez said he was not aware of the issue and would be 'happy to look into this.' He noted that here is no substitute for discussing an issue and finding a pathway forward." (The ESOP Association)  

No Social Security COLA This Year, But CalPERS Method Pushes Pensions Up 1.5 to 4%
" 'The law does not permit an increase in benefits when there is no increase in the cost of living,' Social Security recipients were told of the federal program's rules. 'So your benefit will stay the same in 2016.' That seems simple and straight forward. In contrast, the CalPERS method for a cost-of-living adjustment, even though its inflation index shows little or no inflation this year, seems almost comically convoluted." (Calpensions)  

California's Pension Debt Puts It $175.1 Billion in the Red
"Controller Betty Yee ... noted ... that the debts for 'postemployment benefits' will jump again in the report for the 2017-18 fiscal year, when state retiree health care must be included under GASB's rules. Gov. Jerry Brown's proposed 2016-17 budget pegs unfunded health care obligations at $71.8 billion, and he has been negotiating new contracts with state labor unions that compel employees to begin paying down those costs[.]" (The Sacramento Bee)  

Puerto Rico: Pensioners Versus Bondholders
"[One article reported] nearly zero percent funding ratio for the Puerto Rico Employees Retirement System as of June 2014 with 'just 0.7% of the assets needed to pay all the benefits that had been promised, a level unheard of among U.S. states.'... The problem in taking from Paul to pay Peter ...is that a large number of bondholders of Puerto Rico's $72 billion debt are themselves retirees or saving for retirement.... [One reporter] wrote that '30% of the debt is held by middle class Puerto Ricans ... Another 15% is held by other 'average Joe' Americans who invested in bond funds.' " (Good Risk Governance Pays)  

Benefits in General

Claim Denial Letters Must Include Plan's Deadline for Filing Suit: First Circuit
"The First Circuit held that the participant's lawsuit was not time-barred because the denial letters did not provide notice of the plan's three-year limitation period and therefore did not comply with the DOL's claims regulations.... Although the circuit courts don't all agree regarding how much notice of plan-imposed time limits is required, at least three circuit courts have taken the view that a plan's claim denial letter must include the applicable time limit for a participant's right to sue, if such a time limit is to be enforceable." [Santana-Diaz v. Metropolitan Life Ins. Co., No. 15-1273 (1st Cir. Mar. 14, 2016)] (Practical Law Company)  

Executive Compensation and Nonqualified Plans

Courts Reject ERISA-Based Participation and Vesting Challenges to Top Hat Plans
"Two recent decisions address a frequent strategy by participants denied benefits under such plans: claiming that the plan fails to meet the top hat exemption, thus making it subject to ERISA and all of its protections. Both ... decisions reject such claims, but are notable mainly for the courts' lack of interest in addressing informal guidance from the [DOL]." (Reed Smith LLP via Lexology)  

Can an Employer Terminate a Non-Qualified Plan and Pay Out Benefits in a Lump Sum Despite Participants' Elections of Other Forms (and Timing) of Payment?
"The only significant differences between the two cases are that: the case won by the employer involved an individual account deferred compensation plan, and the case the employer lost involved a defined benefit-like supplemental executive retirement plan, and the case the employer won had more precise language in the plan document as to the employer's ability to terminate the plan.... [E]mployers should review (and, where necessary, improve) the plan termination language in their non-qualified plan documents and that employer-sponsors of SERPs need to be even more cautious than deferred compensation plan sponsors." (Winston & Strawn LLP)  

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BenefitsLink Retirement Plans Newsletter, ISSN no. 1536-9587. Copyright 2016 BenefitsLink.com, Inc. All materials contained in this newsletter are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of BenefitsLink.com, Inc., or in the case of third party materials, the owner of that content. You may not alter or remove any trademark, copyright or other notice from copies of the content.

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