Plan Sponsors Utilize Rollover Services and Products

When communicating with retiring employees to review their retirement benefits, half of plan sponsors surveyed use a one-on-one meeting with a financial professional.

In its report, “Opportunities in the Rollover Market Plan Sponsor Perspective,” LIMRA said 68% of sponsors expressed no preference about what retirees do with their plan balances, and 65% of sponsors said they had no preference for what participants who terminate for other reasons do with their plan assets. Over half (56%) of the surveyed sponsors said someone meets with retiring employees to review their retirement benefits, and nearly half (49%) indicated someone meets with employees who leave for other reasons. Meetings are significantly more likely to occur at businesses with at least 100 employees.

Plan provider or recordkeeper representatives are far more likely to meet with retirees than with non-retirees, the report said. Businesses with at least 500 full-time employees are considerably more apt than smaller businesses to have company representatives handle these meetings.

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The most common method respondent sponsors use to communicate about benefits with retirees is a one-on-one meeting with a financial professional (49%), followed by a toll-free call center (45%), written materials (42%), and a Web site (35%). For participants who terminate for other reasons, sponsors communicate via written materials (38%), a one-on-one meeting with a financial professional (37%), a toll-free call center (37%), and a Web site (26%).

Rollover Products and Services

Although most plan sponsors have no preference what terminating participants do with their plan money, when recordkeepers offer services and products for participants that take distributions, plan sponsors are likely to use them; 85% of the 800 defined contribution plan sponsors surveyed whose recordkeeper offers distribution services indicated they use these services.

As part of their asset retention efforts, LIMRA found nearly 8 in 10 plan providers or recordkeepers offer rollover IRA products and services. Among sponsors with providers that offer them, nearly 9 in 10 use these products or services for their employees who retire or terminate employment for other reasons.

According to the report, newer businesses (those in business less than 10 years) or businesses with higher-paid employees are somewhat more likely to use IRA rollover products/services offered by their plan providers or recordkeepers. However, there is a high likelihood of use across different business types.

Although most plan sponsors expressed no preference about what participants do with their plan assets once they terminate or retire, preferences varied by size of employer. LIMRA said the largest businesses are much more likely to express preferences, and to prefer that retirees remain in the plan, probably because by having more participants defer their balances – particularly those with higher balances – larger employers can enjoy greater advantages in fee negotiations with plan providers.

Most sponsors preferred smaller balances (less than $5,000) leave the plan, but 46% reported they leave the small balances in the plan. Only 16% said they take advantage of the fact they can legally automatically roll balances between $1,000 and $5,000 into an IRA.

Although most plan sponsors utilize rollover product and service offerings, LIMRA found the same was not true for annuity product and service offerings. Forty-seven percent of sponsors said a retiree requesting an annuity payout must take plan assets in a lump-sum and purchase the annuity on their own.

One quarter of sponsors said annuity payouts are purchased with the same trust/contract of the financial institution that holds plan assets, and only 11% said they direct the transfer of the retirees’ assets to a product of the financial institution that holds the plan assets.

Copies of the LIMRA report can be obtained by visiting www.limra.com or by contacting LIMRA’s InfoCenter at infocenter@limra.com.

IRS Issues Guidance on Benefit Limits for Underfunded DB Plans

The Treasury Department and Internal Revenue Service (IRS) have issued proposed regulations providing guidance on changes made by the Pension Protection Act of 2006 (PPA) regarding the use of certain funding balances maintained for defined benefit pension plans and regarding benefit restrictions for certain underfunded DB plans.

Under the proposed regulations, an employer would be permitted to establish a prefunding balance for a plan that represents the accumulation of contributions made for plan years beginning on or after January 1, 2008 that are in excess of the minimum required contributions for those plan years. The regulation explains that for the first effective plan year of a plan, the prefunding balance is initialized at zero dollars and an employer is permitted to elect to add some or all of the excess contributions made to a plan for each plan year to the prefunding balance as of the first day of the next plan year.

However, the proposed regulations would also provide that the prefunding or funding standard carryover balances cannot be used to offset the minimum required contribution for purposes of determining the amount of excess contributions for the year. In addition, the regulations provide that any contribution that is made to avoid the application of a benefit limitation under Section 436 of the Internal Revenue Code is not taken into account in determining the amount of excess contributions.

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An employer would be permitted to elect to use some or all of the prefunding balance or funding standard carryover balance to offset the otherwise applicable minimum required contribution for a plan year only if the plan’s prior year funding ratio was at least 80%. The proposed regulations provide a transition rule to determine a plan’s prior year funding ratio for the first effective plan year.

An election to add to the prefunding balance must be made by the plan sponsor by providing written notification of the election to the plan’s enrolled actuary and the plan administrator. The election must be irrevocable when made, must set forth the relevant details of the election, and generally must be made on or before the due date (with extensions) for the filing of the plan’s Form 5500 for the plan year to which the election relates.

Limits on Benefits for Underfunded DB Plans

In accordance with section 436(c) of the Internal Revenue Code, the proposed regulations provide that a plan satisfies the limitation on plan amendments increasing liability for benefits only if the plan dictates that no amendment to the plan that has the effect of increasing liabilities of the plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable is permitted to take effect if the plan’s funded percentage for the plan year is less than 80%.

A plan must provide that, if its funded percentage for a plan year is less than 60%, the plan will not pay any prohibited payment with an annuity starting date that is on or after the applicable section 436 measurement date. If a participant requests such a prohibited distribution, the plan must permit the participant to elect another form of benefit available under the plan or defer payment to a later date.

For plans with a funded percentage for a plan year that is 60% or more but less than 80%, a participant is permitted to elect a prohibited payment only if the present value of the portion of the payment that is greater than the amount of the monthly straight life annuity under the plan (and any social security supplement, if applicable) does not exceed 50% of the present value of the participant’s benefits.

The proposed regulations prohibit a plan from paying any prohibited payment with an annuity starting date that is during any period in which the plan sponsor is under bankruptcy until the date on which the enrolled actuary of the plan certifies that the plan is not less than 100% funded.

If a limitation on accelerated benefit payments applies to a plan, the plan sponsor is treated as having made an election to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for the plan’s funding to be at or above the applicable threshold in order for the benefit limitation to no longer apply. However, the deemed reduction can be made only if the prefunding and funding standard carryover balances to be reduced are large enough to avoid the application of the limitation.

The proposed regulations provide for benefit accruals under the plan to resume effective as of the date benefit accruals are no longer restricted. Once the limitation ceases to apply, a participant’s benefits will continue to be paid in the form previously elected unless the plan permits the participant to be offered a new election.

The limitations on benefits do not apply to a plan for the first five plan years of the plan, nor do they apply to plans for which benefit accruals are frozen effective September 1, 2005 or later.

The IRS said the regulations on benefit limitations for underfunded DB plans apply to both single employer plans and to multiple employer plans. In the case of a multiple employer plan, the rules under the proposed regulations would be applied separately for each employer under the plan as if each employer maintained a separate plan.

The proposed regulations are here.

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