Compliance November 6, 2012

DOL Weighs In on Single-Property Transaction

The Department of Labor (DOL) stated its position regarding whether a purchase or sale of a single property by a pension trust violates ERISA.
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The agency was asked whether certain transactions involving parcels of “employer real property” that are contributed to, or sold by, the Master Pension Trust for Certain Defined Benefit Plans of Anheuser-Busch Companies Inc. and its subsidiaries would violate the prohibited transaction provisions of section 406 of the Employee Retirement Income Security Act (ERISA).   

ERISA section 406(a)(1)(A) provides, in relevant part, that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect sale or exchange, or leasing of any property between the plan and a party in interest. However, section 408(e) of ERISA provides an exception to this prohibited transaction based on certain conditions stated in section 407, including whether a substantial number of properties are dispersed geographically.  

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In its advisory opinion, the DOL said the purpose of requiring that a substantial number of the parcels of employer real property held by a plan be dispersed geographically is to prevent adverse economic conditions peculiar to one area from significantly affecting the economic status of the plan as a whole.   

“It is the view of the Department that whether any one parcel of employer real property defined under section 407(d)(2) of ERISA satisfies the requirements of section 407(d)(4)(A) of ERISA is determined by considering the plan’s holdings in employer real property immediately after the transaction involving the parcel. Otherwise, a plan could never acquire or sell any single parcel of employer real property even if the other QERP [qualifying employer real property] requirements of section 407 of ERISA, besides section 407(d)(4)(A), would be met for the plan’s holdings after the acquisition or sale,” the agency stated.  

Advisory Opinion 2012-05A is here.

Data & Research November 6, 2012

Standard of Living May Not Be Sustainable

The National Retirement Risk Index (NRRI) shows that more than half of households may be unable to maintain their standard of living in retirement.
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This finding is based on newly released Survey of Consumer Finances data. Between 2007 and 2010, the NRRI jumped by nine percentage points because of several factors. The hardest hit households were those nearing retirement and those with high incomes.

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Bursting of the housing bubble (4.5 percentage points). The lower the value of housing, the less a household can extract at retirement in the form of a reverse mortgage, and the lower the interest rate, the more a house can borrow through a reverse mortgage. In the 2007 to 2010 period, nominal interest rates decreased sharply. This decline somewhat offset the decrease in the value of housing by increasing the dollar amount that households can potentially withdraw from their houses in retirement. At the same time that gross housing values fell, mortgage debt—which was very high in 2007—remained virtually unchanged. High levels of mortgage debt relative to the value of housing means that some households will not only be ineligible to take out a reverse mortgage, but will also face substantial mortgage payments during retirement.

Falling interest rates (2.2 percentage points). This means that households get less income from annuitizing their wealth. A retiree with $100,000 will receive $492 a month from an inflation-indexed annuity when the real interest rate is 3% compared with $413 per month when it is 1.5%. The NRRI assumes that three types of wealth are annuitized at retirement: financial assets, 401(k) balances and money received from a reverse mortgage on the household’s primary residence.

This finding is based on newly released Survey of Consumer Finances data. Between 2007 and 2010, the NRRI jumped by nine percentage points because of several factors. The hardest hit households were those nearing retirement and those with high incomes.

 

Bursting of the housing bubble (4.5 percentage points). The lower the value of housing, the less a household can extract at retirement in the form of a reverse mortgage, and the lower the interest rate, the more a house can borrow through a reverse mortgage. In the 2007 to 2010 period, nominal interest rates decreased sharply. This decline somewhat offset the decrease in the value of housing by increasing the dollar amount that households can potentially withdraw from their houses in retirement. At the same time that gross housing values fell, mortgage debt—which was very high in 2007—remained virtually unchanged. High levels of mortgage debt relative to the value of housing means that some households will not only be ineligible to take out a reverse mortgage, but will also face substantial mortgage payments during retirement.

Falling interest rates (2.2 percentage points). This means that households get less income from annuitizing their wealth. A retiree with $100,000 will receive $492 a month from an inflation-indexed annuity when the real interest rate is 3% compared with $413 per month when it is 1.5%. The NRRI assumes that three types of wealth are annuitized at retirement: financial assets, 401(k) balances and money received from a reverse mortgage on the household’s primary residence.

(Cont’d…)

Ongoing rise in Social Security’s full retirement age (1.6 percentage points). By 2001, nearly all households were required to wait until at least age 66 and many until age 67 to receive full benefits. The share required to wait until 67 continued to increase for subsequent surveys. Declining Social Security replacement rates at 65—the assumed retirement age in the NRRI—affect all households but have a particularly large impact on low-income households who depend almost entirely on Social Security for retirement income. According to the 2010 Survey of Consumer Finances (SCF), median 401(k)/IRA balances for households approaching retirement were only $120,000.

Continued low stock prices (.8 percentage points). From the peak of the stock market on October 9, 2007—roughly the time that the 2007 SCF was conducted—until the end of the third quarter of 2010—roughly the time of the 2010 survey—the Dow Jones Wilshire 5000 was down 24%. Relative to long-run expected returns, the losses were even greater. The impact of these losses was concentrated among the top third of the income distribution, which holds 86% of all equities.

“The National Retirement Risk Index: An Update” is available here.

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