Compliance April 27, 2016

PBGC Hopes to Introduce Late Premium Penalty Reductions

The Pension Benefit Guaranty Corporation is proposing to cut penalties for late payment of premiums in an effort to reduce costs and make it easier for plan sponsors to maintain traditional pension plans.
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The Pension Benefit Guaranty Corporation (PBGC) is proposing to cut its penalties for late premium payments amid increasing criticism that the cost of its mandatory insurance coverage stands among the chief causes driving private employers out of the defined benefit pension market.

“We think penalties should be no more than necessary to encourage timely payments,” explains PBGC Director Tom Reeder. “I’m committed to doing everything I can to help companies keep their pension plans.”

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Under current laws and regulations, PBGC uses a two-tiered penalty structure that rewards self-correction. A lower rate of 1% of the late payment per month late applies when a delinquency is corrected before PBGC notifies the sponsor, while a higher rate of 5% applies if the correction is made following PBGC notification. Penalties in the first category are capped at 50% of the late amount, and 100% in the second instance, PBGC explains.

Under a new proposed rule released this week, PBGC would essentially reduce penalties for late payers by half. Additionally, for sponsors with “good payment histories that pay promptly following notification of late payment,” PBGC will reduce the penalty by 80%. The proposed changes will apply to both single-employer and multiemployer plans, and will apply to late premium payments for plan years beginning in 2016 or later. (A premium rate summary is available here.)

In an example case shared by PBGC in which a $100,000 premium is paid two months late by a plan sponsor who discovered the underpayment and corrected it before PBGC sent notice, the current regulations would lead to a $2,000 penalty. Under the proposed regulation, the penalty in this situation would be half that amount, or $1,000.

If the same plan sponsor did not discover the missed premium payments before PBGC sent notice, currently the payment would amount to $10,000 penalty, or 5% of $100,000 for two months. Under the proposed regulation, PBGC would therefore assess a $5,000 penalty. In addition, if the sponsor qualified for the good payment history waiver, PBGC would automatically waive 80% of that amount, reducing the penalty from $5,000 to $1,000—the amount that would have been assessed due if the plan had self-corrected. 

Data & Research April 27, 2016

J.P. Morgan Underscores Value of Re-Enrollment

The firm has issued a white paper in honor of the 10-year anniversary of the PPA.
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In a new white paper, “Retirement Reset: How re-enrollment can help strengthen U.S. retirement security,” J.P. Morgan Asset Management celebrates the advances that the Pension Protection Act brought forth when it was passed 10 years ago. Most notably, it paved the way for automatic enrollment and automatic escalation and the development of target-date funds and other appropriate asset allocation portfolios as the qualified default investment alternative (QDIA), J.P. Morgan says.

This has led to considerable progress for defined contribution (DC) plan participants—but the fact remains that “many Americans remain woefully unprepared for a retirement that may last upwards of 30 years,” the investment firm says.

John Galateria, head of North America Institutional at J.P. Morgan, says the Pension Protection Act “sets a strong foundation and made great strides, creating new opportunities for stronger DC plans and greater potential for increased retirement security. But the reality is the U.S. retirement system is still falling short. Although some progress has been made on the savings front, advances have been far more limited in getting participant assets allocated appropriately to help get them across the retirement finish line.”

NEXT: The value of re-enrollment

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J.P. Morgan reminds advisers and their plan sponsor clients of the value of re-enrollment, particularly into a TDF or age-appropriate asset allocation model. The white paper notes that “for plan sponsors, a re-enrollment can bolster confidence that participants are on a sensible investing path—and have a decent chance of staying on the path. Re-enrollment may also provide stronger protection from investing liability. We believe that for both participants and plan sponsors, re-enrollment offers clear, tangible benefits. This strategy quickly improves asset allocation for many participants, especially when the plan’s QDIA is a target-date fund.”

J.P. Morgan looked at the returns of a TDF over a 25-year span starting in 1990 compared to a money market fund. Even with the downturn in 2008 and the subsequent lower returns in the U.S. equity market, the TDF portfolio strongly outperformed the money market fund.

Surprisingly, J.P. Morgan says, only 7% of plans have conducted a re-enrollment. In line with this, the firm urges advisers and sponsors to ensure that participants are saving enough and saving early enough—particularly as most sponsors default participants at a 3% average annual deferral rate.

In conclusion, J.P. Morgan says, “We are pleased to see that a growing number of asset managers have become strong public advocates of re-enrollment. We urge all plan sponsors, regardless of their chosen asset manager or recordkeeper, to work with their financial advisers/consultants and legal advisers to actively consider how re-enrollment can bolster their DC plans and may give their employees a better chance of a successful retirement.”

J.P. Morgan’s white paper, “Retirement Reset,” can be downloaded here.

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