Funded Status Has Improved? Now What?
PlanSponsor | July 31, 2018 | By
Corporate DB plans have experience
funded status improvement, and LDI strategies help plan sponsors
preserve this; however, investment committees are looking for new
asset classes that can provide greater returns at a reasonable
level of risk.
Northern Trust Asset Management
(NTAM) believes it is critical for corporate defined benefit (DB)
plan sponsors to understand the impact the DB plan has on overall
corporate financials, and it ties this in to pension investment
strategy in an new report, “Corporate Pensions: The Bottom Line.”
According to the report, during
2017, corporate DB plans experienced their greatest improvement
in funded status in the last five years—improving from 81% to
85%—the largest one-year increase since 2012 to 2013. While the
equity markets were a significant contributor to that growth,
another significant contributor came from corporate cash
During 2017, corporations in the
S&P 500 contributed $77 billion in cash to their DB plans.
NTAM says that is a material capital allocation to what is essentially
a debt obligation for many plan sponsors and a tie-up of capital
that cannot be used for corporate growth or distributed to
shareholders. However, a key benefit to these large contribution
is the effect on corporations’ income statement—the pension
expense recorded on corporate income statements has fallen to its
lowest levels since the financial crisis. In 2017, the average
pension expense was just 3.4% of total operating income—a
significant drop from 5.2% in the prior year.
As corporations are allocating
more capital to their DB plans, they are better able to manage
their pension costs and improve the funded health of their plans.
And, they are looking hard at their investment strategy to try to
preserve improved funding and seeking ways to reduce the
outstanding deficit of their plans. Click
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Pension Risk Transfer Options
PlanSponsor | June 20, 2018 | By
Judy Faust Hartnett
DB plan sponsors want to keep
control of their plans as they de-risk.
The transferring of risk, or
de-risking, from defined benefit (DB) plans has become a focus of
pension plan providers over the past few years.
Risk transfer or de-risking
transactions addressing pension plan risks can include several
options: the purchase of annuities from an insurance company that
transfers liabilities for some or all plan participants (removing
the risks cited above with respect to that liability from the
plan sponsor); the payment of lump sums to pension plan
participants that satisfy the liability of the plan for those
participants (either through a one-time offer or a permanent plan
feature); and the restructuring of plan investments to reduce
risk to the plan sponsor.
At the 2018 PLANSPONSOR National
Conference, David Hinderstein, president, Strategic Retirement
Group, Inc., in White Plains, New York said, “Many pension plans
are frozen and these plan sponsors have been waiting for
something to happen. They are hoping and hope has become
Maintaining a frozen pension plan
is expensive, according to Hinderstein, and it means contributing
fees to the Pension Benefit Guaranty Corporation (PBGC). The
flat-rate-per-participant premium for single employer plan
increased 130% since 2013. The variable rate is a percentage of a
plans unfunded status.
Hinderstein said, “Plan sponsors
have begun to take action to deal with liabilities but there are
a few service providers that can help plan sponsors keep their
frozen plans which slows down the process. Why derisk? To help
fund the plan they are derisking.”
An example of a partial risk
transfer is how FedEx recently entered into an agreement to
purchase a group annuity contract with Metropolitan Life
Insurance Co. to transfer about $6 billion in pension plan
obligations. By taking on a portion of the payment obligations of
the FedEx DB plan, it will help the company secure its pension
obligations and provide its retirees with financial security.
Companies are chunking out their liabilities so that those funds
do not grow.
In addition, many plan sponsors
are offering terminated employees lump sums payments. Hinderstein
said there is on average a 65% take rate.
Mike Devlin, principal, BCG
Pension Risk Consultants, which specializes in assisting plan
sponsors with managing their pension risk, stressed the
importance of a plan sponsor keeping control of its plan as it
derisks. He said, “Restructuring the plan through an IRS
determination letter can be complex and interest rates are
unpredictable. Instead transact under your own conditions and you
can predetermine the timing with the market as to what you do.
Plus, never move all your retirees at one time. Figure out how
much you will save over X amount time and do what makes sense
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In Focus at DOL: Missing and Terminated Participants
| July 16, 2018 | By John Manganaro
Over the last few years, all
three federal agencies that regulate retirement plans have been
focusing on missing participants; advisers have a key role to
play when it comes to helping clients ensure compliance.
A recent web seminar covered the
topic of missing participants with Mercer experts Margaret
Berger, principal, Princeton, New Jersey, Brian Kearney,
principal, Washington, D.C., Norma Shaiara, principal,
Dealing with missing participants
is a big issue for defined benefit (DB) and defined contribution
(DC) retirement plans. Sponsors of ongoing retirement plans
(including frozen plans) may need to rethink their procedures for
tracking down missing participants in light of the Department of
Labor’s (DOL)’s expanded audit initiative and Internal Revenue
Service’s (IRS)’s recent informal guidance.
Over the last few years, Congress,
the Governmental Accountability Office (GAO) and all three
federal agencies that regulate retirement plans have been
focusing on missing participants according to Shaiara. “This
comes at the time of the silver tsunami, when Baby Boomers are
retiring at a rate of ten thousand per day. This increasing
number of participants turning 65 or 70.5 are required to take their
defined benefit or defined contribution benefits.”
What types of retirement plans
need to worry about missing participants? All Employee Retirement
Income Security Act (ERISA) plans and tax-qualified plans
including 401(a) and 403(b) plans. Most DB plans say that
benefits for terminated participants will typically begin at the
normal retirement age although the plan could be written to meet
required minimum distribution rules (RMD) after age 70.5.
Therefore, if a DB plan participant is missing at retirement age,
there may be a failure to follow the terms of plan if the benefit
isn’t paid out which could be a qualification problem under the
tax code and could be a fiduciary breach under ERISA. For both DB
and DC plans, RMDs generally must begin by 4/1 of calendar year
after the year a participant turns 70.5 unless the participant is
still working for the employer.
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