Data and Research September 12, 2019

Public-Sector Employees Shouldering More Risk in Retirement Plans

NASRA says since 2009, more than 35 states increased required employee contribution rates, and more states maintain plans in which the employee contribution rate may change, depending on the pension plan’s actuarial condition or other factors.

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Many people in the private sector may not realize that for the vast majority of employees of state and local governments, both participation in a public pension plan and contributing toward the cost of the pension are mandatory terms of employment.

In a recent report, the National Association of State Retirement Administrators (NASRA), says since 2009, more than 35 states increased required employee contribution rates. As a result of these changes, the median contribution rate paid by employees has increased to 6% of pay for employees who also participate in Social Security, and has remained steady at 8% for those who do not participate in Social Security.

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Contribution requirements for certain employee groups in some states that previously did not require some employees to make pension contributions were established in recent years for newly hired employees, existing workers, or both.

NASRA says a growing number of states are exposing employee contributions to risk. More states maintain plans in which the employee contribution rate may change, depending on the pension plan’s actuarial condition or other factors. NASRA’s report, “In-Depth: Risk-Sharing in Public Retirement Plans,” describes a range of variable employee contribution rate arrangements, including those based on the plan’s actuarial funding level, the plan’s normal cost, and a rate that is tied to a percentage of the employer rate.

In addition, an increasing number of public employees now participate in hybrid retirement plans, which combine elements of defined benefit and defined contribution plans, and that transfer some risk from the employer to the employee. In one type of hybrid plan, known as a combination defined benefit-defined contribution plan, employees in most cases are responsible for contributing all or most of the cost of the defined contribution portion of the plan.

Data compiled by NASRA, based on U.S. Census Bureau data, shows in the period from 1989 to 2018, investment earnings made up 63% of public pension’s sources of revenue, with employer contributions making up 26% and employee contributions 11%.

The report, “Employee Contributions to Public Pension Plans,” may be downloaded from here.
Compliance September 12, 2019

Inherent Murkiness of ERISA Litigation Prevents Progress

There has actually been relatively little helpful legal insight published by the courts, due to the fact that many ERISA cases end with settlements, while others are dismissed early on for pleading deficiencies.

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During a conference call with retirement industry analysts and reporters, Mayer Brown attorneys Nancy Ross and Brian Netter dove into the labyrinth of Employee Retirement Income Security Act (ERISA) lawsuits.

Netter is a partner in the Washington, D.C., office of Mayer Brown’s litigation and dispute resolution practice and co-chair of the ERISA Litigation practice. Ross is a partner in Mayer Brown’s Chicago office and also co-chair of the ERISA Litigation practice.

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According to the pair, there is an ongoing proliferation of lawsuits that continue to be filed under ERISA—about fees being too high, about inappropriate investment options being offered by plans, and about conflicts of interests alleged to exist between plans and their service providers. Plaintiffs in the cases have named as defendants both individuals and different types of institutional entities—from employers to recordkeepers to mutual fund companies.

“To date, there has actually been little direction or guidance published in these cases by the courts,” Ross suggests. “This is because the majority of these cases have settled, while others are dismissed very early on for pleading deficiencies. That’s the general pattern we have seen. Those cases which are not dismissed go into an expensive discovery process, which often means settlement talks begin in earnest.”

In Ross’ estimate, one negative outcome of all the litigation is that plan sponsors feel they cannot embrace innovative plan designs or investment options without fear of litigation. One positive consequence, she says, is that fiduciaries running these plans have come to better understand their risks and responsibilities.

“A recent development in this long-running litigation trend is the proliferation of plaintiffs’ lawyers pursuing these types of claims,” Netter says. “When these lawsuits first became popular, it was only a few law firms active in the space. Today, more and more firms are trying to get in on the action, attracted by the large settlements. Their playbook is the same: survive a motion to dismiss and subject the defendant to a very expensive discovery process. It creates incentive to enter into a large settlement.”

Ross and Netter suggest that, for ERISA litigation defendants, the dismissal stage is very significant, yet it is very unpredictable. This is because courts across the U.S. differ in their willingness to dismiss cases outright. Judges for the most part are also wary of seeing their dismissals appealed and overturned, so they more often allow repleading or even full discovery on claims that, in the opinion of defense attorneys, are wholly meritless.

Netter says judges appear particularly adverse to dismissing ERISA cases that allege not just imprudence by plan fiduciaries but actual disloyalty and/or self-dealing.

Looking away from the defined contribution plan side of the marketplace, Netter adds, there are numerous pension-focused lawsuits as well. “Most companies have frozen their legacy pension plans, but there is still a lot of money in those plans waiting to be distributed,” he explains. “For the most part, the issues raised in these cases have to do with the actuarial assumptions associated with disbursement.”

In simple terms, when an individual in a pension plan approaches retirement, he will have some choices in terms of taking the money. Those might be a lump sum, a single life annuity that will pay monthly for life, or a joint/surviver annuity that will make payments until the last spouse dies. Under ERISA, there are rules for converting amounts among these options, with the goal of ensuring the different payment options are “actuarially equivalent.” The two primary assumptions going into this analysis are, first, the interest rates today and projected into the future, and second, the mortality assumptions in terms of how long the payments are expected to last.

“In the last 50 years, the mortality tables have gotten longer, and so these lawsuits allege that the plan sponsors of pensions are purposefully and improperly using outdated mortality tables that improperly assume the participants will receive fewer annuity payments in the course of doing one of these conversions,” Netter explains. “If the plaintiffs begin to see some success in these sorts of lawsuits, the same sorts of theories can be directed against dozens or hundreds of pension plan sponsors.”

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