Administration February 24, 2015

Well-Funded Public Pensions Share Common Traits

The Center for State and Local Government Excellence examined four public pension systems with a long tradition of being well-funded to determine what they have in common.
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Well-funded public pension systems in the U.S. share a number of common practices, according to a new research paper from the Center for State and Local Government Excellence.

The Center examined four public pension systems with a long tradition of being well-funded—Delaware Public Employees’ Retirement System, Illinois Municipal Retirement Fund, Iowa Public Employees’ Retirement System and North Carolina Retirement Systems—to determine what they have in common.  According to a report from the Center, the systems have all lowered their annual investment assumption to 7.5% or less in recent years and have adjusted employer and employee contributions as needed to meet funding requirements.

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While each of the defined benefit plans has a unique history and legal framework, they share these practices:

  • a commitment to fund the annual required contribution in both good and bad financial times;
  • conservative, realistic assumptions that are adjusted based on experience; and
  • changes to benefit levels and contribution rates as needed.

For example, plan design changes to the Delaware plan for employees hired after January 1, 2012, included:

  • Increased employee contribution from 3% to 6% of salary over $6,000;
  • Increased normal retirement age from 62 with five years of service or 60 with 15 years of service to a new normal retirement age of 65 with 10 years of service or 60 with 20 years of service; and
  • Increased vesting period from five years to 10 years of service.

The funded ratio for the Delaware plan as of 2014 is 95.8%. The funded ratios for the plans studied range from 87.6% to 99.8%.

“Even as the public focuses on the new accounting standards issued by the Governmental Accounting Standards Board, the most important issue for taxpayers, employees, and employers alike is that there is a clear plan to fund the government’s pension obligations,” says Elizabeth K. Kellar, president and CEO of the Center for State and Local Government Excellence, in the report.

The report, “Success Strategies for Well-Funded Pension Plans,” may be found at www.slge.org.

Ask the Experts February 24, 2015

(b)lines Ask the Experts – Recordkeepers Not Meeting Statement Requirements

“We sponsor an Employee Retirement Income Security Act (ERISA) 403(b) plan with four different recordkeepers.
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“Two of the vendors include vested benefit information, as required, on their participant statements, while two are unable to do so. What is the consequence of this failure on the part of two of our recordkeepers? Must we as a plan sponsor furnish such information separately?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

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Good question! First of all your should be aware that the participant’s vested benefit, or the earliest date on which benefits will become fully vested, is not the only requirement for participant statements. The following information is also required to be provided as well:

1) The value of each investment to which the participant’s assets have been allocated; and

2) Presuming you allow participants to direct investments in your plan, (a) an explanation of any limitations or restrictions on any right of the participant or beneficiary under the plan to direct an investment; (b) an explanation, written in a manner calculated to be understood by the average plan participant, of the importance, for the long-term retirement security of participants and beneficiaries, of a well-balanced and diversified investment portfolio; and (c) a notice directing the participant or beneficiary to the Internet Web site of the DOL for sources of information on individual investing and diversification.

Though the Department of Labor is also considering a requirement to include retirement income projections on participant statements, there is no current requirement to do so, although some recordkeepers provide such projections on their participant statements as best practice.

To return to your original question, the vesting requirement is a plan-level, as opposed to contract-level, requirement Thus, all of the plan’s recordkeepers must comply with the requirement to provide vested benefit information on participant statements for the plan to be in compliance with this requirement. If the vested benefit information requirement is not satisfied, ERISA 105(a)(2)(C) requires a separate annual statement containing such information as is necessary to enable a participant or beneficiary to determine their nonforfeitable vested benefits.

This is one of the many difficulties associated with maintaining 403(b) plans with multiple recordkeepers, as detailed in prior Ask the Expert columns.

Thank you for your question!

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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