View Points January 2, 2014

Time for Plans to Open and Say Ahhhh

Everyone knows it’s smart to get physicals on a regular basis. Preventive care helps detect problems before they become a health crisis. 
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But unless an unmistakable injury or illness crops up, many people often put off trips to the doctor for far too long. Plan sponsors—especially small-business owners—can find it extremely difficult to carve time out of a busy schedule to conduct a thorough retirement plan review.

Most employers routinely review their retirement plan’s investment performance, but it’s just as important to scrutinize plan operations. Compliance missteps? Plan falling short of the employer’s business objectives? Discovering these issues earlier rather than later allows an employer to get the plan back on a healthy path—before problems become too costly.

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Establishing annual plan reviews is more than just a good practice for sponsors. Financial professionals can showcase their expertise as well as the depth and breadth of their support services with strategies that facilitate regular plan checkups. An effective plan review process can be a critical component of a financial professional’s value proposition and can help reinforce client relationships.

It can also be a useful talking point to use with prospects. New client meetings are a perfect time to highlight expertise in this area. If the financial professional wins the account, the foundation of a good annual plan review has already been established. 

Plan Wellness

A healthy plan is one that meets the employer's business objectives and is compliant with related laws and regulations. Of course, one of the biggest benefits of a healthy plan is that it keeps employees engaged and inspires them to save for a financially secure retirement.

The annual plan review is the best time to revisit key benchmarks such as current salary deferrals, average deferral rates and the percentage of employees participating.

Each employee’s retirement readiness should be evaluated based on their level of plan participation and where they are in their career path. Older and longer-tenured employees will have different expectations than younger and newly hired personnel.

Financial professionals can play a critical role in developing an employer’s strategy to build plan awareness among employees and drive participation. The goal is to match plan objectives with an actionable engagement strategy, such as “lunch and learn” seminars, webinars, one-on-one counseling, email updates, payroll stuffers, e-newsletters and other tactics to educate and inspire employees.  

Financial professionals are not involved in day-to-day administration or compliance oversight for their clients’ retirement plans. Under the Employee Retirement Income Security Act (ERISA), that is the responsibility of the plan sponsor, usually with the help of a third-party administrator. Yet it is clear that many clients and prospects are too busy running their core business to pay much attention to plan health unless a problem presents itself.

Set Priorities

Financial professionals can help employers prioritize their business objectives for the plan and find solutions to improve overall plan health. They are also in a great position to help educate plan sponsors about their fiduciary responsibility to ensure regulatory compliance by highlighting ERISA’s five standards of conduct: loyalty, prudence, diversification, adherence to plan documents and commitment to paying reasonable expenses.

Helping employers better understand their duties is the first step toward helping them mitigate their fiduciary risk. Next is helping ensure they have the appropriate products, services and tools to meet their obligations.

Financial professionals can introduce employers to tools to proactively monitor plan wellness. The Internal Revenue Service (IRS) and Department of Labor (DOL) have created several plan checkup tools and corrections programs that enable employers to evaluate a plan and fix plan errors at minimal or, in some cases, no cost—if the problem is discovered by the employer. Much like preventive health care, these programs are designed to encourage employers to proactively monitor and correct issues before they become big problems.

Common mistakes the IRS finds when conducting plan examinations include:

  • Not covering the proper employees.
  • Not giving employees required information/notices.
  • Not depositing employee deferrals on time.
  • Not depositing employer contributions on time.
  • Not following the terms of the plan document.
  • Not administering participant loans correctly.

The annual compliance testing season winds to a close in the spring for most plans, so it’s critical to introduce a plan checkup well in advance to prospective clients and existing clients. Testing failures, low participation rates and contribution limits are more pressing concerns for employers at this time of year. Add a conversation about whether the plan is meeting its business objectives, and you can have a valuable discussion about plan wellness.

Items on the adviser’s to-do list could include:

  • Incorporate plan wellness support in your value proposition. Consider updating your value proposition to include this if it is not already in place. Add plan wellness to your quarterly meeting agenda or set a special meeting.
  • Display tools that you can offer clients, such as a compliance calendar, education policy, annual plan review checklists and plan document checklists.
  • Do your homework. Review plan metrics and compliance testing results before the meeting (many service providers like Guardian Retirement Solutions have tools available to support you in this effort).
  • Offer solutions, such as the IRS checklist for conducting a plan checkup, or a referral to their third-party administrator or plan corrections resource if a compliance problem is identified.

An ounce of prevention is worth a pound of cure, as the old saying goes, and so it is with retirement plan health. By paying early and regular attention to the operational stability of clients’ plans, financial professionals can offer that ounce of prevention and reinforce the trust they have worked so diligently to earn. 

Steve Davis is national sales manager at Guardian Retirement Solutions

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

The Markets January 2, 2014

Pension Funding Up Sharply in 2013

The pension funded status of the U.S.’s largest corporations jumped by 16 percentage points in 2013, year-end analysis shows.
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Researchers at Towers Watson ascribe the growth mainly to higher stock market returns and rising interest rates. In developing the analysis, researchers examined pension plan data for the 418 Fortune1000 companies that sponsor qualified defined benefit (DB) pension plans and have a fiscal year ending in December.

Results indicate that the aggregate pension funded status for the companies is about 93%, a substantial jump from 77% at the end of 2012 but still well below the 106% pre-recession funded status observed in 2007.

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“The strong stock market and higher interest rates last year gave plan sponsors the one-two punch they needed to cut the funding deficit of their corporate pension plans by nearly 75%,” explains Alan Glickstein, a senior retirement consultant for Towers Watson. He also points out that, despite strong gains last year, the funded status of the largest U.S. corporate pensions still hovers well below 100%—a level reached only three times since 2000.

In dollar terms, pension plan funding improved by $285 billion last year, leaving a deficit of $99 billion at the end of 2013. Other figures show total pension plan assets increased by an estimated 9% during the year, to $1.409 trillion.

Dave Suchsland, a senior retirement consultant at Towers Watson, tells PLANADVISER that the Moving Ahead for Progress in the 21st Century Act (MAP-21) gave plan sponsors significant relief last year on contributions made to pension funds on behalf of plan participants.

MAP-21, in part, changed funding rules for corporate pensions to allow the use of higher interest rates in determining cash contribution requirements. The law was a primary driver in bringing contribution requirements down, Suchsland explains.

Lower contributions are good news for both sponsors and participants, he adds, as companies should see better balance sheet results and improved plan security for 2014.

Towers Watson estimates that companies contributed $48.8 billion to their pension plans in 2013—a 23% decrease from 2012.

Suchsland also predicts that 2014 will see “a lot of action on de-risking,” due in large part to the substantial improvement in funded status.

“I think there will continue to be a surge in interest for settling pension liabilities,” Suchsland says. “You’re going to have a lot more organizations seriously considering the annuity market and settling some of these liabilities with the insurance companies.”

Another factor sponsors may consider while examining pension liability annuitization in 2014 is increasing Pension Benefit Guaranty Corporation (PBGC) premiums. Effective October 15, the per-participant flat premium rate for plan years beginning in 2014 is $49 for single-employer plans, up from a 2013 rate of $42.

PBGC premium payments are used to fund the agency’s operations and pension benefit insurance programs.

“The premium increases are more significant when looking at the long-term future,” Suchsland explains. “In any year, the change is not going to be gigantic, but if you add the increase up for the plan’s lifetime, those are big numbers. I suspect the PBGC premium increases are going to cause more companies to start thinking about these settlement options.”

The idea is that, by paying a lump sum to annuitize pension liabilities, a plan sponsor can avoid paying the PBGC premiums year after year. This becomes more important as a pension plan’s funded status improves—leading to a decrease in the gap between the plan’s liabilities and the cost of annuitization.

In looking ahead, Suchsland says it’s still difficult to predict what the markets will be doing a full year from now and what impact they may have on large corporate pensions.  

“There is still room for interest rate rises over time,” Suchsland says. “We have to wait and see what happens with the equity markets as well. They were up quite a bit in 2013, and that had a big impact on these results. If there’s giveback there, it will obviously hurt plan sponsors.”

More on Towers Watson’s year-end analysis is available here.

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