The
Society of Actuaries (SOA) released an updated mortality improvement scale for
pension plans that incorporates two additional years of Social Security
mortality data that have been recently released.
The
updated scale—MP-2015—reflects a trend toward somewhat smaller improvements in longevity. The improvement scale includes Social
Security Administration mortality data from 2010 and 2011.
“The
data continues to show that people are living longer, but longevity is
increasing at a slower rate than previously available data indicated,” says
Dale Hall, managing director of research for the Society. “The new improvement
scale will ensure the pension actuarial community has the most up-to-date
information available to help them accurately measure private retirement plan
obligations.”
In
October 2014, the Society released the RP-2014 base mortality tables and MP-2014 improvement scale, the first
update to the SOA’s pension plan mortality tables in more than a decade. At
that time, the SOA indicated the mortality improvement scale (used to project
mortality rates) would be updated more frequently as new longevity data became available.
The
SOA’s preliminary estimates suggest that updating to the MP-2015 scale might
reduce a plan’s liabilities by between 0% and 2%, depending on each plan’s
specific characteristics.
According to Hall,
“Every plan is different, and it is important that professionals working in
this field perform their own calculations on the impact to their plan. It is up
to plan sponsors, working with their plan actuaries, to determine whether to
incorporate MP-2015 into their plan valuations.”
Recent
litigation has been making plan sponsors nervous.
With
a Supreme Court decision expanding fiduciary responsibility for employer stock in retirement plans, plan
sponsors wonder about their own stock holdings in their retirement plans. Where
the percent of plan assets in company stock has been creeping up, can that be
reduced? Or should they liquidate from company stock in the plan? Does merely offering
company stock as an investment option make them more prone to participant
litigation?
“We
think a lot of plans have questions about company stock. That’s nothing new.”
says Mark Teborek, senior consulting analyst with Russell Investments and
author of a white paper “Revisiting Company Stock in Defined Contribution Plans.” “But with the aftermath of the Fifth Third [Bankcorp v. Dudenhoeffer] case,
there was renewed interest in what to do next.”
Sources
agree that company stock can have a valuable place in investment portfolios—some
companies offer it for their match contributions, and ownership gives employees
a vested interest in performing well. A corporate tax benefit can be an added
bonus. Still, litigation is always a risk.
“There’s
no way to avoid the litigation risks, if you’re going to have company stock in
your plan,” says Jeremy Blumenfeld, an Employee Retirement Income Security Act
(ERISA) attorney with Morgan, Lewis & Bockius LLP. “You can take all the
right steps, you can engage in the highest level of prudence and monitoring of
your investments, but that won’t prevent you from getting sued.”
NEXT: Company stock losing popularity
The
typical circumstances inviting a lawsuit involve the company disappointing the
market in some way, Blumenfeld says. “You have a bad quarter, or the company
loses a big contract, or there is some underperformance relative to
expectations.” The stock needs to only fall 10%, if “there are high allocations
and high dollars in employer stock investments,” he says. “You’re not likely to
see litigation with very small allocations to employer stock investments, even
though the litigation issues are often the same.”
Still,
even before what Blumenfeld calls the “whole line of cases [that]culminated
last year in Fifth Third Bancorp,” the
prevalence of company stock on plan investment menus was declining.
The
Defined Contribution Institutional Investment Association (DCIIA), citing
research from Vanguard, says the percentage of plans that offer company stock decreased from 11% in
2005 to 9% last year, and of participants accepting the offer, from 40% to 29%
over the same 10-year period. The percentage of participants invested at 20% or
more fell from 17% to 8%. Referencing statistics from Employee Benefit Research
Institute (EBRI) and the Investment Company Institute (ICI), DCIIA reports that,
as of 2013, 7% of 401(k) account balances were invested in company stock.
One
reason for the change has been automatic enrollment—a method that plan sponsors
preferring to remove the stock by attrition might adopt. Because of that
practice, recently hired participants are less likely to hold company stock, experts
say.
Further,
recognition that plan participants benefit when their holdings are diverse has
prompted many sponsors to encourage broader investment—meaning reducing exposure
to single stock positions, employer stock as a prime example.
Just
a small percentage of the companies still offering their own stock plan to
eliminate it entirely, though, says Lew Minsky, DCIIA executive director. “A
much greater number are putting significant limitations on how much of
somebody’s balance can be allocated to it.”
NEXT: How to limit employer stock allocations
Plan
fiduciaries have, historically, chosen from several options to keep company
stock allocations in check, Teborek says. Still popular is education, by which
plan sponsors can stress the value of diversification—by way of current
technology, plan sponsors can do that more economically than before. To
overcome participant inertia, though, more proactive steps may be needed.
One,
as Minsky said, is to limit, or cap, participants’ employer stock holdings to a
percent of their total assets. This can address the reality that, whether a
stock is their employer’s or otherwise, individuals tend to over-allocate,
challenged by how to diversify appropriately, he says.
As
with all important financial decisions, the cap amount should be decided with
the help of the plan’s financial adviser. Variables to consider might be type
and size of the company, its stability, including anticipated corporate changes
over the next several years, and its work force demographics, along with how
much the plan currently holds in employer stock investments and how those have
performed over the long term, says Blumenfeld.
While
some plan sponsors might fear a cap could be viewed as asset allocation advice,
Blumenfeld sees no cause for concern. “Fiduciaries are not suggesting in that
context that, if they put a limit of 25%, everybody should hold 25%. They’re …
essentially saying, ‘Instead of giving you 0% to 100% for your investment
options, we’re only giving you zero to 25% for this one particular investment
option.’”
Where
a cap can get complicated is when the stock value grows and participants’
holdings now exceed the maximum, he says. Plan sponsors typically address this
by prohibiting new investment in the stocks or limiting the percentage, while letting
the participants keep what they have, he says.
Potentially
another complication, says Teborek, is that a cap “may send a mixed message to
participants about whether the company believes company stock is a suitable
investment.” Rather, he says, limits work best in tandem with what he and others
may consider the most promising strategy—one many plan sponsors already have
available in their plan’s design ...
NEXT: A highly effective tool
Automatic
features, used strategically, can be highly effective for reducing employer
stock over-load in the plan. As indicated earlier, auto-enrollment can minimize
choice. And, when enrolled into the qualified default investment alternative
(QDIA)—possibly a target-date fund (TDF)—participants tend to stay. “You see plans
re-enrolling everyone into the target-date fund or the default, and also [participants]
sticking with those asset allocations several years later,” Teborek says.
Minsky
agrees, going so far as to call re-enrollment into the default investment
structure a trend “that has a lot of advantages, one of which would be
potentially limiting exposure to company stock.”
A
common source of company stock in retirement plans has been the company match.
Employers that want to continue this practice and reduce allocations might
consider shortening the vesting period for company stock, says Holly Verdeyen, director,
defined contribution investments at Russell. This way, “participants have more
opportunity, sooner, to be able diversify themselves.” As three years is the
maximum vesting period for company stock, she recommends reducing it to as
little as one, so people can act before they forget the investment, exchanging
it, say, for a diversified fund.
For
plan sponsors that decide to eliminate the plan’s holdings entirely, it should
be planned out carefully. Even plan sponsors not deciding to liquidate might prepare
for the possible need to do so down the road, Teborek says. He recommends
discussing with the investment committee possible scenarios under which the
plan would need to take action, then putting a strategy on paper.
Blumenfeld, on the other hand, advises making any
such decisions at the time, based on the circumstances then. Even if a plan is
sued, he says, liquidation may be unwarranted. “The fact that somebody files a
lawsuit against the plan fiduciaries is not a reason for them to change their
behavior or change the investment options in a plan. If they continue to believe
those are good investment options they should continue to offer them,” he says.
“If they don’t, an investment shouldn’t be an option—even if there’s no litigation.”