Retirement Plans Newsletter

April 1, 2016

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Compliance Analyst - Pension
Transamerica
in CA

Actuary, Manager Actuarial Department
Means & Associates, LLC
in CA

Retirement Plan Coordinator
Benefits Administrators, LLC
in ANY STATE, KY

Sales Consultant - Retirement Plans
Polycomp Administrative Services, Inc.
in CA

Senior Benefits Analyst
Memorial Health System
in IL

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Text of PBGC Report to Congress: Multiemployer Fund Likely to Be Exhausted by 2025 (PDF)
"PBGC projects that current premiums ultimately will be inadequate to maintain benefit guarantee levels.... The multiemployer program had a net deficit of $42.4 billion as of the end of FY 2014, the result of liabilities of $44.2 billion and assets of $1.8 billion....

"[There is more than a 40 percent likelihood that the assets of PBGC's multiemployer insurance program will be exhausted by 2024 (43% if no plans elect to suspend or partition, 41% using best estimate assumptions of future suspensions and partitions) and over a 90 percent likelihood of exhaustion by the end of the projection period (93% if no plans elect to suspend or partition, 92% using best estimate assumptions of future suspensions and partitions).

"It is more likely than not that PBGC's multiemployer fund will be exhausted by 2025, whether or not plans make use of suspension and partition."

(Pension Benefit Guaranty Corporation [PBGC])  


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Weighty New Conundrum for Sponsors of Underfunded DB Plans
"For any particular underfunded plan, the question for its sponsor is whether to use the funding-relief mechanisms to reduce the minimum annual amount it must contribute to the plan under PBGC regulations. That choice would keep contributions low, but it would impose what's in effect a heavy tax on underfunded liabilities in the form of PBGC premiums. It also would, in effect, 'kick the can down the road' -- plan sponsors will, after all, have to fully fund their plans eventually." (CFO)  

Mercy Health Targeted in Latest Church Plan Class Action
"Another Cincinnati hospital has been sued for treating its pension plan as an ERISA-exempt church plan. The proposed class action -- which accuses Mercy Health of underfunding its pension plan by nearly $210 million -- asks a question that more than a dozen recent lawsuits have asked, including one filed two weeks ago against fellow Cincinnati hospital St. Elizabeth Medical Center Inc.... According to the complaint, Mercy Health is the largest health system in Ohio and the fourth largest employer in Ohio, operating 23 hospitals and employing 32,000 people." (Bloomberg BNA)  

Derisking with Lump Sum Payments: Participant Disclosure
"The employee communication [reproduced in this article] is designed to help participants who have separated from employment, but who have not yet begun to receive their pension, make an informed decision when presented with the opportunity, during a lump sum window (referred to in the communication as a 'Special Election'), to receive an immediate lump sum payment or to commence immediate annuity payments. Such an employee communication would supplement (not replace) legally required communications distributed as part of the normal benefit election process." (Trucker Huss)  

Eight Observations on Custom Target Date Funds (PDF)
"[1] The process of evaluating participant demographics for the creation of a glide path leads to interesting findings for heterogeneous populations. [2] The existence of a DB plan can be accounted for in different ways.... [3] There are benefits to customizing the underlying asset allocation beyond the high-level glide path. [4] Custom target date funds typically utilize a thoughtful mix of active and passive management. [5] Many effective plan sponsors are selecting multi-manager structures to manage the sleeves and core line-ups that populate their custom target date funds. [6] There are benefits to being dynamic in both the short term and the long term.... [7] The selected glide path manager will also be an operational partner.... [8] Performance evaluation is important and should be based on clearly stated (documented) objectives." (Russell Investments)  


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Sen. Warren Calls for SEC Probe of Firms Opposing DOL Fiduciary Rule
"Sen. Elizabeth Warren, D-Mass., is calling on the [SEC] to investigate several critics of the [DOL's] fiduciary rule, claiming they misled investors through duplicitous statements.... Warren noted that the companies -- Lincoln National, Jackson National, Prudential and Transamerica -- claim the proposed rule is 'unworkable' and will have a dire impact on their businesses. [On the other hand], in conference calls with investors, executives for the four companies all waved off the rule's effect on their ability to grow profits, Warren said." (InsuranceNewsNet.com)  

District Court Holds That Private Equity Funds Were Part of Same Controlled Group for Purposes of Pension Liability
"Should this decision be upheld or followed by other courts, it would reshape existing practice in the private equity industry. Investors would no longer be able to rely on the corporate organizational form to ensure that no controlled group exists for purposes of pension liabilities. Rather, each investment would need to be analyzed to determine whether there exists an identity of interest and unity in decision-making amongst the various investors sufficient to give rise to a partnership-in-fact under the nebulous factors articulated by the court." [Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund, No. 10-10921 (D. Mass. Mar. 28, 2016)] (Winston & Strawn LLP)  

Court Ruling Signals Potential ERISA Liability for Private Equity Fund Sponsors (PDF)
"The district court's application of the First Circuit's new 'investment plus' standard is a noteworthy and potentially troubling development for PE sponsors ... The court's allusion to 'the larger ecosystem of Sun Capital entities' in the course of its analysis suggests a potentially expansive view of the 'investment plus' standard, one that could have a significant impact on PE fund operations, particularly if applied beyond the First Circuit." [Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund, No. 10-10921 (D. Mass. Mar. 28, 2016)] (Skadden, Arps, Slate, Meagher & Flom LLP)  

Summary of GASB Statement 73 (PDF)
8 pages. "[T]he Statement requires all employers and [non-contributing employers] with pensions to follow the rules provided under Statement 68, with certain adjustments and exceptions.... DB and DC pensions are not within the scope of Statement 68 if they are not administered through trusts that meet the GASB's trust criteria ... For example, in some cases, a state may have a DB pension plan for a relatively small group of employees in which the assets are not held in trust. This type of plan would be subject to Statement 73." (Gabriel Roeder Smith & Company)  

Summary of the Quarterly Survey of Public Pensions for 2015: Q4 (PDF)
"For the 100 largest public-employee pension systems in the country, assets (cash and investments) totaled $3,243.3 billion in the fourth quarter of 2015, increasing 0.9 percent from the third quarter level of $3,215.9 billion.... Compared to the same quarter in 2014, assets for these major public pension systems decreased 3.0 percent from $3,343.6 billion." (U.S. Census Bureau)  

Planning for Constant Real-Dollar Spending in Retirement -- Is It Setting the Bar Too High?
"While over-estimating future spending requirements/desires is certainly one way to inflate estimated assets needed for retirement, there are other ways to do this, including: [1] Underestimating future investment returns; [2] Overestimating future inflation; [3] Overestimating the period of retirement; [4] Underestimating the value of retirement assets; and [5] Underestimating actual future spending vs. budgeted spending. Thus, it can be somewhat risky for a retiree to focus on one planning assumption as a justification to reduce total retirement savings." (Ken Steiner, FSA Retired)  

Why Most Retirement Income Plans Lead to Over-Saving and Over-Working
"[T]he most-quoted 'safe withdrawal' research takes an approach that ... consistently assumes that retirees increase their spending by inflation each and every year of retirement. To sustain such spending growth, they stipulate withdrawal rates of 4% (if not less).... They become square-pegs-for-round-holes approaches by assuming retirement spending is static. Instead, it is dynamic over one's retirement-ebbing and flowing as 'life' and 'bucket lists' intersect -- and in a steadily decreasing pattern." (The Wall Street Journal; subscription may be required)  

Affluent Households and the Retirement Tax Cliff
"Leveraging the unused space within an individual's top tax bracket may provide an opportunity to take a proactive distribution from a retirement account and convert those funds to a Roth IRA.... For affluent and high net worth (HNW) households, the major building blocks that could make a successful Roth conversion strategy include the individual's top marginal tax bracket, time before RMDs begin and having the right mix of account types. Among the risks to consider: longevity, portfolio returns and legacy concerns." (J.P. Morgan Asset Management)  

Executive Compensation and Nonqualified Plans

[Guidance Overview]

2015 Executive Compensation Recap, Key Developments and Notable Trends (PDF)
30 pages. "In 2015, consistent with prior years, an overwhelming percentage of Russell 3000 companies obtained majority 'Say-on-Pay' support.... Institutional investors are demonstrating both a heightened level, and an increased expectation, of engagement on executive compensation matters.... Rigor of performance goals is becoming the key focus area for proxy advisory firms and institutional investors.... ISS implemented a 'scorecard approach' for evaluating equity plans.... Shareholder proposals relating to accelerated equity vesting upon a change in control increased in popularity.... Performance-based awards continue to be the most common long-term incentive vehicle.... The SEC finalized the CEO pay ratio rule.... The SEC proposed rules on the remaining executive compensation-related Dodd-Frank items." (Frederic W. Cook & Co., Inc.)  

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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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