The Markets December 20, 2013

Funding Improvements and Pension Offloading

Defined benefit (DB) plans have enjoyed a funded status boost of late, but what does this mean for their future?
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According to a UBS “Portfolio Advisor” report, in 2013, U.S. stocks continued to surge and bond yields have remained near yearly highs—improving both sides of pension balance sheets. A subset of large corporate pension funds is approaching fully funded status.

The report says this has been achieved in no small part thanks to sponsors’ record contributions in the past few years. UBS estimates companies have been writing checks to pensions to the tune of $60 billion to $80 billion annually in the past few years.

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The company notes it is no small secret that many DB plan sponsors are looking to transfer their responsibilities for pension liabilities. While that goal seemed remote when funded ratios were in the 70% to 80% range, sponsors of fully funded plans are in a position to move forward on immunizing and offloading pension liabilities.

“That would help lower corporate earnings volatility going forward, but it would also potentially create a great generational divide. While current retirees and those approaching retirement would enjoy a decent level of income promised by fully funded pension plans, employees in the early stages of their career and future generations would not see that kind of benefit at retirement,” the report says.

The UBS data also shows a trend of moderate rebalancing among pension plans. The firm estimates defined benefit funds will sell $15 billion to $19 billion of equities and buy $6 billion to $8 billion of fixed income—including both public- and private-sector funds. Within key equity asset classes, UBS sees sizable $17 billion to $21 billion sales of U.S. large cap. Flows in other equity sectors should be very small.

For the last three years, U.S. pensions have conducted moderate stock sales and small fixed income purchases during the fourth quarter.

Products December 20, 2013

Millennium Proposes Uncashed Checks Fix

Millennium Trust Company released a white paper that addresses the growing problem of uncashed checks faced by retirement plan sponsors.
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The paper analyzes the source and magnitude of the problem, along with the legal and financial ramifications for sponsors if not addressed effectively.

Speaking at a conference earlier this year, Susan M. Halliday, senior benefits law specialist with the U.S. Department of Labor (DOL), mentioned an advisory opinion letter in which an attorney argued that, once a distribution is made from the plan, the money is no longer considered part of the plan assets. The DOL disagreed, implying it considered benefits plan assets until a check is cashed or a wire transfer is successfully made (see “Unanswered Questions About Uncashed Checks”).

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“After providing notices to participants that, if they do not make an election for distribution, their accounts will be automatically rolled into an individual retirement account (IRA), how long should plan sponsors or recordkeepers wait for a response,” Janice M. Wegesin, president of JMW Consulting Inc., queried during the same presentation.

Wegesin said this is not a small problem, since estimates show that the highest average uncashed benefit check amount is around $42,000. So, with a lack of guidance, it is a good idea for plan sponsors or recordkeepers to establish written procedures for handling uncashed checks.

“Data from across the country shows that the problem of uncashed checks represents a serious and growing dilemma for retirement plan sponsors,” says Terry Dunne, Millennium Trust senior vice president and managing director of the Rollover Solutions Group. “With administration costs continuing, escheatment not being an option in many cases, and the threat of possible fines and lawsuits increasing the longer plan sponsors fail to follow through on their responsibilities, it becomes clear that automatic rollover IRAs provide an easy solution to the problem,” he contends.

Millennium Trust was one of the first to offer an extensive suite of automatic rollover services Millennium Trust’s automatic rollover service is designed to help plans meet the DOL’s safe harbor requirements for the automatic rollover of plan assets to IRAs.

To receive a copy of the research paper, contact Diane Pressley at 630-368-5614 or dpressley@mtrustcompany.com.

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