January 12, 2015
- Council Comments Emphasize Need to Extend Relief for Frozen Pension Plans
- GAO Report Recommends Additional Protections for 401(k) Automatic Rollovers
- PBGC to Revise De-Risking Reporting Guidelines
Council Comments Emphasize Need to Extend Relief for Frozen Pension Plans
In January 12 written comments, the Council urged the U.S. Department of the Treasury and the Internal Revenue Service (IRS) to extend previously issued temporary relief from the nondiscrimination rules for defined benefit pension plans closed to new employees.
As we have previously reported, the increasingly necessary practice of defined benefit plan sponsors “soft freezing” their plans (closing them to new entrants) has created new challenges for employers. These plan sponsors have often increased contributions to defined contribution plans and have used various approaches to assist older employees with the transition to the new system, such as grandfathering existing participants. However, over time, some of these transition approaches can become technically inconsistent with current regulations prohibiting discrimination in favor of highly compensated employees due to turnover among lower compensated employees and movement of some of those employees to highly compensated status over time.
Generally, to avoid claims of nondiscrimination, both the old and new plans must pass one of three tests – requiring the plans to be primarily “defined benefit” in character, broadly available, or meet a minimum aggregate allocation gateway – before they can combine the plans for another round of nondiscrimination testing. Because of the difficulty in meeting those tests, in some cases, employers have already been compelled to change important benefits on a prospective basis and participants could experience much broader adverse effects in the coming years if this problem is not corrected through permanent guidance.
As we reported in the December 13, 2013, Benefits Byte, in late 2013 the IRS released Notice 2014-5, which provided short-term relief effectively for 2014 and 2015 from the imposition of certain nondiscrimination rules on defined benefit pension plans that have been closed to new hires. Notice 2014-5 allowed the plans to be tested together (or "aggregated") on a benefits basis for plan years beginning before January 1, 2016, but only if (1) the plans qualified for testing in 2013, based on meeting the "primarily defined benefit in character" rule or "broadly available" in the plan year beginning in 2013, or (2) the defined benefit plan passed nondiscrimination on its own in 2013. This allowed plans that did not already have a problem to aggregate the defined benefit and defined contribution plans for testing purposes in their 2014 and 2015 plan years, even if they would not have met the test in those plan years. The Council responded to Notice 2014-5 with written comments, urging a more permanent solution (see the February 24, 2014 Benefits Byte).
The Council’s newest letter stressed the need for both a three-year extension of the temporary relief and a permanent solution to the issues inadvertently caused by the nondiscrimination rules, because the temporary relief provided in Notice 2014-5 expires at the end of 2015, and many companies will need to make decisions about 2016 in the next few months. Without a very prompt extension of the temporary relief from the nondiscrimination problems, many employers will be forced to take corrective action very soon for 2016 and that corrective action could include a complete freeze of benefits for participants who had previously been accruing benefits. To avoid the loss of benefits for thousands of employees, the Council urged that the temporary relief be extended another three years through 2018, or until a more permanent solution can be achieved, and that the temporary relief should also apply to:
- the benefits, rights, and features issue with respect to both defined benefit and defined contribution plans (e.g., regarding the level of matching contributions).
- the ability to use matching, ESOP, and 403(b) contributions in determining whether a defined benefit/defined contribution plan satisfies the nondiscrimination tests.
- the minimum participation issues.
- the use of make-whole contributions in defined contribution plans to make up for a complete freeze of a DB plan.
For more information, contact Lynn Dudley, senior vice president, global retirement & compensation policy, at (202) 289-6700.
GAO Report Recommends Additional Protections for 401(k) Automatic Rollovers
In a new report released on December 22, 2014, the Government Accountability Office (GAO) examined the effects of job changes on the savings of 401(k) plan participants who leave savings in a former employer’s 401(k) plan.
Under current law, when a participant has saved less than $5,000 in a 401(k) plan and changes jobs without indicating what should be done with the money, following a notice to the participant, the plan can transfer the account savings into an Individual Retirement Account (IRA),which the GAO called a “forced transfer.” The GAO report, 401(k) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts, studied the following aspects of forced transfers (automatic rollovers):
- What happens over time to the savings of participants in forced-transfer IRAs: Using current fee and return data from 10 providers, the GAO projected forced-transfer IRA outcomes over time and found that because fees outpaced returns in most of the IRAs analyzed, these account balances tended to decrease over time. GAO also described the provision in the law that allows a plan to disregard previous rollovers when determining if a balance is small enough to force out; for example, a plan can initiate a transfer for a participant with a balance of $20,000 if less than $5,000 is attributable to contributions other than rollover contributions.
- The challenges 401(k) plan participants face keeping track of retirement savings in general:GAO indicated that many 401(k) plan participants have difficulty keeping track of their savings, especially when they change jobs. The report noted that although the Social Security Administration (SSA) provides information to individuals on benefits they may have from former employers, the information is not provided in a consolidated or timely manner.
- How other countries address similar challenges of inactive accounts: GAO reviewed the process with which inactive accounts were handled with six other countries: Australia, Belgium, Denmark, the Netherlands, Switzerland and the United Kingdom. The report found that these countries use forced transfers that help preserve account value and provide a variety of tracking tools, referred to as “pension registries.”
The GAO report made several recommendations to the U. S. Department of Labor (DOL) and the SSA, including:
- Congress should consider amending current law to permit alternative default destinations for plans to use when transferring participant accounts out of plans.
- Congress should repeal a provision allowing plans to disregard rollovers when identifying balances eligible for transfer to an IRA, thus reducing the number of eligible transfers
- The SSA should make information on potential vested plan benefits more accessible to individuals before retirement, such as by consolidating information on potential vested benefits with the Social Security earnings and benefits statement. (The Council has expressed concern about these Social Security benefits statements and hosted a Benefits Law Briefing webinar on the topic.)
- The DOL should expand the investment alternatives currently available under the DOL’s safe harbor regulation (generally money market funds, certificates of deposit and other low investment risk vehicles).
- The DOL should convene a taskforce to explore the possibility of establishing a national pension registry.
Both the DOL and the SSA disagreed with some of the recommendations. The DOL asserted that the current conservative investment options are appropriate and the SSA was concerned that recommendation would open the agency to questions from the public on ERISA, which the SSA considers to be out of the scope of its mission. However, the GAO maintained the need for all the recommendations.
As part of the Council’s new strategic plan, A 2020 Vision: Flexibility and the Future of Employee Benefits, we have recommended that the $5,000 threshold for employers to cash out retirement plans be increased to reduce administrative expenses associated with small accounts. For more information, contact Lynn Dudley, senior vice president, global compensation and retirement policy, at (202) 289-6700.
PBGC to Revise De-Risking Reporting Guidelines
In a new filing with the White House Office of Management and Budget (OMB) on January 12, the Pension Benefit Guaranty Corporation (PBGC) indicated that it will revise the 2015 premium filing procedures and instructions “to require after-the-fact reporting of certain risk transfers through lump sum windows and annuity purchases.”
These risk transfers are a reference to defined benefit plan “de-risking” strategies, such as transferring all or a portion of their pension plan's assets and liabilities to an insurance company through an annuity buyout or directly to plan participants through a voluntary lump-sum distribution. PBGC notes that “risk transfers can substantially reduce the premiums
that plans otherwise would pay to PBGC. Because PBGC premiums and the investment income earned on them are a major source of income for PBGC, information about risk transfers is critical to PBGC’s ability to assess its future financial condition.”
While a September 2014 information collection request previously indicated PBGC’s interest in requiring the reporting of such risk-transfer activity, the January 12 document clarifies that such reporting will be “after-the-fact.”
In November 2014 comments to PBGC on the initial notice, the Council recommended that the reporting requirement apply to transactions that closed at least 120 days prior to the premium filing, rather than 30 days, to allow sufficient time to collect, review, and confirm the data. The Council also recommended measures to keep company-specific data confidential and clarify the types of transactions that must be reported.
The Council testified on de-risking issues before the U.S. Department of Labor ERISA Advisory Council in June 2013, describing the key motivations behind de-risking activity. The testimony emphasized that the legislative and regulatory environment for pension plans has made sponsorship increasingly difficult over the past few decades by increasing cost, uncertainty and risk.
PBGC’s updated notice also announces that it will be changing certain premium declaration certification procedures, offering the option for a plan to provide a telephone number specifically for inclusion in PBGC’s Search Plan List on PBGC’s Web site and updating premium rates.
Comments on the updated notice will be accepted through February 11, 2015. For more information, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement and compensation policy, at (202) 289-6700.