Qualified retirement plans continue to be affected by government scrutiny as well as larger changes in society. Here are some key areas for plan sponsors to consider in determining how their plans stack up and whether further action may be appropriate to manage risks for both the employer and the employees.
In a 2016 report to the U.S. Secretary of Labor, the ERISA (Employee Retirement Income Security Act) Advisory Council highlighted the growing risk of cybersecurity threats to retirement and other benefit plans.
The council noted the very large amounts of personal and financial information about plan participants that are stored in the electronic records necessary for the daily administration of benefit plans. This information includes Social Security numbers, home addresses and key financial data, and is shared frequently between sponsors and multiple plan vendors in an online environment.
In a subsequent report, the Council made a number of recommendations to the Labor Secretary to address cybersecurity concerns, including public outreach and education about emerging risks and the adoption of secure electronic data standards like standard data elements, electronic forms and processing, and standards for the electronic transfer of funds.
At present federal law does not specifically address the duties of benefit plan sponsors regarding cybersecurity. However, it is a reasonable inference that the general standards of care and prudence imposed on plan fiduciaries by ERISA could apply to maintaining the security of sensitive participant information.
Plan expenses litigation
The trend of plan participants suing their employers over expenses paid out of their plans’ assets continued in 2016 with several lawsuits filed against several universities over the expenses paid from their 403(b) plans. The institutions included Massachusetts Institute of Technology, and Duke, Emory, Johns Hopkins, New York, Vanderbilt and Yale universities.
A number of lawsuits in recent years have resulted in significant settlements under which plan sponsors reimbursed plans for expenses and adopted costly procedures to ensure ongoing control of plan expenses. Sponsors that have not taken action to review their plans’ expenses should consider prioritizing this as an important risk-mitigation step.
Sponsors of 403(b) plans should particularly note the entry of litigation into the 403(b) arena in light of the perception that 403(b) plan expenses are higher than those for 401(k) plans. It behooves 403(b) plan sponsors especially to not just review plan expenses but also communicate what they are doing to plan participants to address this perception.
IRS audit trends
In its announcement of retirement plan audit priorities, the IRS has indicated that the Employee Plans division will focus resources on large plans, multiemployer plans, and 403(b) and 457(b) plans. The IRS notes that these areas have been selected for increased attention because they have a historical pattern of noncompliance and also allow for greater coverage of the retirement plan participant universe.
Sponsors of the types of plans on the focus list should consider an internal review of their plans’ compliance with the rules in light of their increased risk of an IRS audit.
Health care plans
It is too early at the time of this writing to predict what changes Congress will make to the Affordable Care Act, but health plan sponsors should make sure to follow the coverage of this legislation throughout 2017 to make sure that they are prepared to adapt to any changes in the employer mandate section.
Defined benefit plans
Pension Benefit Guaranty Corporation (PBGC) premium rates, both flat and variable, are scheduled to increase by 15% and 23%, respectively, by 2019, and will be indexed thereafter.
Contributions above the minimum amount required will reduce the variable rate premium for underfunded plans. Plan sponsors should consider increasing contributions during 2017 for several reasons: First, PBGC premium rates are increasing for 2018 and 2019 and are indexed thereafter. In addition, an updated mortality table is likely to be adopted in 2018 which will increase funding requirements as well as the cost of lump sum payments for participants choosing that option.
It may even be advantageous to borrow funds to fully fund the plan. If tax reform reduces the corporate tax rates in 2018, deducting the contribution for 2017, instead of 2018, may be a wise tax strategy, as well as prudent funding policy.
Rising interest rates (which increase discount rates) will lessen the net impact of some of these changes.
Other options include offering lump sum windows to deferred vested participants, particularly those with relatively smaller benefits. It may make sense to purchase annuities for retirees with smaller benefits or even all retirees. In both cases, PBGC flat rate premiums will decrease as the affected participants are no longer part of the plan. If a plan does not currently provide for a lump sum option, the plan could be amended to allow a lump sum option for participants other than retirees receiving benefits.
Most plan sponsors have already adopted some version of the RP-2014 Mortality Tables and related improvement scales for disclosures related to both corporate and plan financial statements. These tables reflect the recent increases in mortality improvements and therefore result in more appropriately measured present value of benefits and benefit obligations.
The IRS has proposed a version of these tables to be used for funding requirements beginning with the 2018 plan year. This would increase the minimum funding requirement. In addition, a version of these tables would be used for determining the lump sum payment for plans offering this option and would increase the lump sum payment. (Most cash balance plans would not be impacted by the change in mortality for determining lump sums.)
Different types of plans are affected to different degrees by the trends discussed above. Plan sponsors should consider how their unique circumstances may be affected by these trends and prioritize follow-up actions accordingly.
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