Retirement Plans Newsletter

August 17, 2020

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[Official Guidance]

Text of IRS Notice 2020-64: Weighted Average Interest Rates, Yield Curves, and Segment Rates for August 2020 (PDF)

"This notice provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Section 417(e)(3), and the 24-month average segment rates under Section 430(h)(2) ... In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Section 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Section 431(c)(6)(E)(ii)(I)."

Internal Revenue Service [IRS]

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[Official Guidance]

High Risk Issue iconText of SEC Risk Alert: Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers (PDF)

"OCIE has identified a number of COVID-19-related issues, risks, and practices relevant to SEC-registered investment advisers and broker-dealers. Additionally, market volatility related to COVID-19 may have heightened the risks of misconduct in various areas that the staff believe merit additional attention. The purpose of this Risk Alert is to share some of these observations ... [which] fall broadly into the following six categories: [1] protection of investors' assets; [2] supervision of personnel; [3] practices relating to fees, expenses, and financial transactions; [4] investment fraud; [5] business continuity; and [6] the protection of investor and other sensitive information."

U.S. Securities and Exchange Commission [SEC]

[Guidance Overview]

Exceptional Usefulness and Quality iconFiduciary Rule Saga Continues: 'Five-Part Test' Officially Reinstated; Proposed Investment Advice Exemption

"While the 'Five-Part Test' is back on the books, the DOL's interpretations may limit ability to disclaim fiduciary status.... The requirement to make records available to plan participants and beneficiaries and IRA owners is novel and may create significant operational burdens for financial institutions that rely on the exemption, if finalized as proposed. It also raises the question why plan participants and IRA owners are entitled to this information, if no private rights of action are to be created under this exemption."

Morgan Lewis

Costs Continue to Fall for 401(k) Investors

"401(k) plan participants incurred an average expense ratio of 77 basis points for investing in equity mutual funds. By 2019, that figure had fallen to 39 basis points, which is a 49 percent decline.... In 2019, the asset-weighted average expense ratio incurred by 401(k) investors in equity mutual funds was 39 basis points -- lower than the industrywide asset-weighted average of 52 basis points."

Investment Company Institute [ICI]

Greater Adoption of ESG Linked to Acceptance as Fiduciary Duty

"ESG investing is reaching an inflection point, as the risks and opportunities -- and the responsibility to deal with them -- gets harder for pension funds and other institutional asset owners to ignore.... The evolution means that ESG investment decisions are more fully integrated across portfolios and all asset classes. A survey of 500 global institutional investors in the second quarter of 2020 ... found that 51% now fully integrate ESG into their investment approach, compared with 36% just two quarters earlier."

Pensions & Investments

Industry Sounds Off Against DOL Proposal on ESG

"More than 1,500 comment letters were filed from asset owners, asset managers, trade associations, record keepers, lawmakers and others, many of whom took issue with the [DOL]'s initiative, which was unveiled June 23. It's unclear if the comments could prompt the [DOL] to take another look at the rule or when a final rule might be issued."

Pensions & Investments

An Analysis of Connecticut's Public Employee Retirement Plans

"The state of Connecticut runs six defined benefit pension funds for its employees, which in the aggregate are among the most poorly funded retirement plans in the country and place increasing fiscal burdens on the state budget. [The authors] use a computer model to simulate the finances of these plans, demonstrating how sensitive the plans' funded ratios and unfunded liabilities are to changes in assumed future investment returns."

Andrew G. Biggs and Tracy Miller, via SSRN

Survival Pessimism and the Demand for Annuities

"[The authors] provide evidence that individuals misperceive their mortality risk, and study the demand for annuities in a setting where annuities are priced by insurers on the basis of objectively-measured survival probabilities but in which individuals make purchasing decisions based on their own subjective survival probabilities. Subjective expectations have the capacity to explain significant rates of non-annuitization, yielding a quantitatively important explanation for the annuity puzzle."

National Bureau of Economic Research [NBER]; purchase required for full document

A Retirement Readiness Checklist

"[1] Consider your retirement date ... [2] Assess your in-retirement income needs ... [3] Quantify and maximize pension and Social Security benefits ... [4] Evaluate the appropriateness of annuities ... [5] Determine whether your planned spending rate is sustainable ... [6] Craft a long-term portfolio based on your anticipated income needs ... [7] Pay attention to tax management ... [8] Assess insurance coverage ... [9] Attend to your estate, portfolio succession plan."

Morningstar

[Opinion]

DOL Is Protecting Public Pensions from Political Investments

"There are many laudable initiatives that individuals, religious endowments, schools, and other private entities may wish to consider. However, it is never correct to impose personal political motives on pension funds. This principle is even more prevalent given the massive financial ramifications that the economic fallout of the COVID-19 pandemic has had on pensions."

Institute for Pension Fund Integrity [IPFI]

[Opinion]

COVID-19 Has Weakened Key Elements of Retirement Security, But We Can Strengthen Them

"[C]ommunities that were already the most vulnerable to being insecure in retirement have been hit hardest by COVID-19.... The pandemic and resulting economic downturn are also affecting prospects for a secure retirement across generations. The impact for Boomers is the most immediate. While they have more years to earn and save for retirement, however, Millennials and members of Gen X face higher hurdles to security, and Gen Z may well end up in an even worse, situation."

National Academy of Social Insurance [NASI]

Benefits in General

[Opinion]

Uber Issues an Empty Threat to Cease Operations in California

"On Monday, the New York Times ran a quixotic op-ed from Uber CEO Dara Khosrowshahi.... [He] casts the blame for gig workers' sorry lot on our 'outdated' employment system that forces workers to choose between benefits and freedom. Economists and drivers counter that giving Uber drivers the benefits of full-time employees, like health insurance and paid-time off, is vastly preferable to 'flexibility.' "

Salon

Executive Compensation
and Nonqualified Plans

[Official Guidance]

Text of FASB Proposed Accounting Standards Update -- Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards

19 pages. "The Private Company Council (PCC) is proposing amendments to the Codification in response to feedback from private company stakeholders indicating that determining the fair value of private company traditional stock-option awards (share-option awards) at grant date or upon a modification to an award is often costly and complex.... During its research and outreach efforts leading to the amendments in this proposed Update, the PCC received feedback that the current price input is typically the most difficult input for private companies to estimate and substantiate to their auditors, primarily because of the lack of observable prices for private company equity shares." [Issued Aug. 17, 2020; comments due Oct. 1, 2020]

Financial Accounting Standards Board [FASB]

Selected Discussions
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1099-R Distribution Code for COVID-Related Distributions

"If an IRA or qualified plan participant is under 59-1/2 and takes a COVID-related distribution, should the trustee report it using Code 1 on Form 1099-R? Or Code 2?"

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BenefitsLink Retirement Plans Newsletter, ISSN no. 1536-9587. Copyright 2020 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 those materials. You may not alter or remove any trademark, copyright or other notices from copies of the content.

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