Data & Research November 4, 2014

Society of Actuaries Pledges Faster Mortality Scale Updates

More than a decade passed between the two most recent mortality table updates from the Society of Actuaries, but retirement plan fiduciaries should expect the next updated mortality improvement scales long before 2024.
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In a recent interview with PLANADVISER, Dale Hall, managing director of research for the Society of Actuaries (SOA), said one of the Society’s goals is to significantly increase the frequency of its mortality data updates. He said the Society’s Retirement Plan Experience Committee, which drives the massive research effort underlying the periodic mortality table updates, has created a goal to update its mortality improvement scales at least every three years.

“This came out of the fact that we’ve identified a pretty sizable list of things in our most recent report that will further drive mortality improvements over the coming years,” Hall noted. “It’s not news to say there are really striking shifts in mortality trends occurring in the United States. We feel it is important to bring faster and up-to-date recognition of where we are on mortality.”

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Retirement plan sponsors may flinch when they hear the Society wants to introduce new mortality updates more often, Hall admitted. Good news of added longevity aside, sponsors of defined benefit (DB) plans rely on the Society’s mortality benchmarks to assess their pension liabilities and liquidity needs. Many worry about the revised numbers, which will likely cause increased liability and lowered funded status for the typical U.S. pension plan. Hall says the SOA itself predicts between 4% and 8% liability growth for a typical pension plan upon adoption of the new tables.

It’s not just the SOA urging plan sponsors to consider the impact of increasing longevity on pension plan funded status. A recent report from rating agency Moody’s found U.S. companies will have to divert $110 billion in the next seven years to fund additional pension liabilities arising from increased life expectancy. Using data from mortality tables published by the SOA, Moody’s calculated significant increases in the amount of cash firms would have to contribute to their pension plans in order to match growing liabilities. Moody’s suggests this environment will push more sponsors and employers to consider pension risk transfers and other means of paying down benefit obligations before the new tables actually take effect.

Moody’s even applied the 4% to 8% increase in the funding obligations for 10 of the biggest listed companies in the United States. At the top of the list sits IBM’s funding obligations for its pension plans, estimated at $99.7 billion in 2013. Moody’s calculations showed this could increase to as much as $113.6 billion at the top end of the SOA’s new assumptions.

Hall was quick to point out that more frequent mortality updates should actually prevent funding shocks for plan sponsors and fiduciaries, rather than create more. More frequent updates may mean more frequent mortality-driven increases in pension benefit liabilities, he admitted, but presumably the increases would be much smaller and regularly timed, and therefore much more manageable. 

The SOA says the new mortality figures come from a peer-reviewed study of real retirement plan mortality experiences of participants in U.S. defined benefit plans—representing 10 million life years and over 220,000 deaths. In short, both men and women show approximately two years’ additional lifespan over SOA’s earlier tables. This will impact different plans more and less significantly, Hall said, based on their demographic profile and design.

“If you have a plan that is closed and there are not very many young participants, that might increase the impact of the new tables to some extent,” he said. “I’m sure you could come up with a lot of combinations that would be higher or lower, but for a typical plan, we’ll see a 4% to 8% liability increase.”

Of course, significantly accelerating such a substantial research effort will not be easy. Just the rollout process of the most recent tables started back in February 2014 with the release of an exposure draft, Hall noted. This was followed by a comment and review period that ran from February through the end of May, leading to additional tweaks and adjustments and peer review—and that was just the rollout of the finished tables. Hall said the initial research phases started as far back as 2009, when the Plan Experience Committee began collecting data from many different sources across the retirement plan and health care communities.

“From the beginning we were walking through independent reviews and audits, and after that process we had to get approval from the board of directors,” Hall added. “It’s an extensive and scientific process that leads up to the conclusion that, yes, these are the accurate tables. It will not be easy to accelerate the process, but we feel it is important to put this information out so that practicing actuaries can work with plan sponsors and auditors to make truly informed decisions in managing their pension obligations.”

Full versions of the 2014 Mortality Tables (RP-2014) and 2014 Mortality Improvement Scale (MP-2014) are available here.

Compliance November 4, 2014

Enforcing Plan Limits for 403(b)s Not So Simple

There are unique rules for 403(b) plans that make enforcing contribution and benefit limits not so straightforward.
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The Internal Revenue Service (IRS) recently announced cost of living adjustments affecting dollar limitations for retirement plans, which included an increase in the elective deferral limit to $18,000 for 2015 and an increase in the age-50 catch up deferral participants are allowed to make to $6,000 for 2015. But for 403(b) plans, according to Susan Diehl, president of PenServ Plan Services, participants are also allowed a special catch up contribution in addition to the age-50 catch up: the 15-years-of-service catch up.

The 15-years-of-service (YOS) catch up is not subject to cost of living adjustments. It is limited to the lessor of:

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  • $3000;
  • $15,000 minus prior 15 YOS catch up contributions; or
  • ($5,000 X YOS) minus prior elective deferrals (excluding age-50 catch ups).

Catch up contributions made by participants are considered 15 YOS catch ups first, up to the limit, then categorized as age-50 catch ups, Diehl told attendees of the 2014 Association of Pension Professionals and Actuaries (ASPPA) Annual Conference.

Ed Salyers, a certified public accountant (CPA) with his own practice, and former senior tax specialist with the Tax Exempt and Governmental Entities Division of the IRS, told attendees that they should keep all records of participant contributions indefinitely to defend against the IRS because the agency only keeps employee W-2s for 10 years.

There are also different rules for 403(b) plans for Employee Retirement Income Security Act (ERISA) Section 415 limits on the amount of additions that may be made to participants’ retirement accounts. Specifically, for calculating 415 limits, the 403(b) is not aggregated with another defined contribution (DC) plan offered by the sponsoring employers. So, for example, if a hospital offers both a 401(k) and 403(b) plan for its employees, they must aggregate employee deferrals in the two plans for the individual employee deferral limit, but not for the 415 plan additions limit, Diehl said. Also, if a hospital offers a 401(a) plan to which 403(b) matching contributions are made, it does not have to aggregate the two plans for the 415 limit.

An exception is when the plan participant contributes to another DC plan offered by an employer it controls. For example, Diehl said, a doctor may contribute to a 403(b) plan offered by a hospital to which he is affiliated, but may also have a private practice for which he sponsors a retirement plan. In that case, the 403(b) additions must be aggregated with the DC plan the doctor sponsors, to calculate 415 limits. According to Diehl, if there is an excess to the 415 limit, it always has to be corrected in the 403(b) plan.

Another unique provision of 403(b)s Diehl pointed out is the ability to make contributions on behalf of employees that have separated from service for up to five years after separation. For example, schools sometimes use this provision to put accrued, unused vacation pay into the plan for separate participants rather than pay them. These contributions are considered employer non-elective contributions and may not exceed 415 limits.

Finally, Diehl pointed out that non-profit employers must think differently about what entities would make a controlled group for purposes of aggregating plans sponsored by different employers. There are no owners in non-profits, so they must look at the similarity of their boards of directors. Also, if one entity’s board has the authority to name 80% of another entity’s board, the two entities are part of a controlled group. Ronald J. Triche, associate general counsel and director of Government Affairs for ASPPA, moderator of the conference discussion, added that if two entities that share a budget, training or people may elect to be a controlled group.

Salyers noted that 457 plans also have unique provisions. For the individual deferral limit, employer contributions are also counted, so for 2015, the total of both employee and employer contributions cannot exceed $18,000. However, 457 plans provide for an additional catch up contribution of the lesser of twice the basic dollar limit or underutilized amounts. For 415 limits, 457 plan additions are only aggregated with additions to another 457 plan offered by the same employer. Salyers pointed out there is no formal IRS correction for excess contributions, so 457 plan sponsors “must get it right.”

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