I am the new general manager of our 501(c)(4) homeowners association, an employer eligible to sponsor an ERISA plan; and have been asked to sign the 5500 for our 401(k) plan for our employees. The association is small and has nowhere near 100 participants, so I’ve been asked to sign the 5500-SF. However, even in signing that form, I am concerned about any responsibilities and liabilities that go along with signing the forms. Can the Experts provide some clarification? Thanks!
Kimberly Boberg, Taylor Costanzo, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
Indeed, we can, and you were wise to check as to what the responsibilities associated with signing the 5500 are. First of all, there are actually two signature lines on the form: one for the plan administrator and second for the employer/plan sponsor. As indicated in our Ask the Experts column on the subject; the plan administrator can be the employer or a third party; you will need to check the plan document to determine who has been designated the plan administrator. If it is a third party, you should NOT sign the 5500 as plan administrator; a representative of the third party should sign instead. If it is the employer/plan sponsor, and you are an authorized representative of the employer, you should indeed sign as plan administrator, recognizing that you may be then responsible for various administrative functions of the plan as stated in our column.
The second signature line, which is for the employer/plan sponsor, is more straightforward to complete. If you are an authorized representative of the employer, you may sign here; if you are not, you may not. If you do sign as an authorized representative of the employer, note that the plan document likely assigns many responsibilities to the employer, so you should be prepared to carry out these responsibilities. Most importantly, the employer is often designated as a fiduciary under the plan, which includes a myriad of responsibilities that go well beyond filling the 5500 form and apply to retirement plans both large and small.
We note that the Form 5500 is filed under penalty of perjury, which means that anyone signing should, at a minimum, review the form at a high level to be sure that nothing in the form is obviously inaccurate.If you have any questions regarding retirement plan responsibilities, be sure to contact outside ERISA counsel with specific expertise in this area.
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.
Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.
Aon’s Pension Risk Trackerin October reached its highest funded status level since its’ inception in 2011, as the aggregate pension funded status of S&P 500 companies increased to 97.2%. from 93.8% in September. Aon reports that pension asset returned 0.8% in October.
The month-end 10-yr Treasury rate increased 27 basis points relative to the September month-end rate. This combination resulted in an increase in the interest rates used to value pension liabilities to 5.26% from 4.97%.
During 2022 to date, the aggregate funded ratio for U.S. pension plans of S&P 500 companies increased to 97.2%from 95.5%, according to the Aon Pension Risk Tracker. The funded status deficit has decreased by $53 billion, which was driven by liability decreases of $574 billion offset with asset decreases of $521 billion year-to-date.
Another firm, using a slightly different gauge, showed things were even better. The Insight Investment pension model showed that funded status improved by 4.8 percentage points, to 105.2% in October from 100.4% in September.
According to Sweta Vaidya, head of solution design North America, at Insight Investment, “equity returns were strong and liability gains were also significant, both of which caused funded status to improve. Year to date, funded status has improved by more than 8%, driven primarily by Fed rate increases (U.S. pension discount rates have now risen by approximately 260 bps since the beginning of the year).”
According toOctober Three’s Pension Finance Updatefor October, pension funds enjoyed their best month of the year in October, driven by higher stock prices and higher interest rates.
Funded status improved by 4.8% to 105.2% from 100.4%, assets increased by 0.3%, and liabilities decreased by 4.3% in October. While the average discount rate rose by 35bp to 5.61% in the month from 5.26% in September.
LGIM America’s Pension Solutions Monitor, which estimates the health of a typical U.S. corporate defined benefit pension plan, estimated that the average funding ratio has increased to 100.7% during October from 95.6% a month earlier. This was primarily due to liabilities decreasing due to rising discount rates and the equity markets having a strong month with global equities and the S&P 500 rising 6.1% and 8.1%, respectively.
By LGIM’s measure, plan discount rates were estimated to have increased roughly 27 basis points over the month with the Treasury component increasing 36 basis points and the credit component tightening 9 basis points. Plan assets with a traditional “60/40” asset allocation increased 3.1% and liabilities fell by 2.1%.
During October,the Milliman 100 PFIfunded ratio rose to 112.8% on October 31, reaching a new high for the year and up from 108.8% on September 30.
The change was driven by a 35-basis-point hike in the monthly discount rate.
The PFI projected benefit obligation decreased to $1.266 trillion as the discount rate rose to 5.71% for October—the highest rate since March 2010 — from 5.36% in September. This increase helped to offset October’s flat investment returns of 0.21%, which lowered the Milliman 100 PFI asset value by $4 billion.
“Although equity markets saw significant growth in October, the Milliman 100 plans are heavily weighted in fixed income, where rising interest rates dragged on performance,” said Zorast Wadia, co-author of the PFI. “Still, October’s discount rate increase helped the plans achieve their largest monthly funded status gain and their highest funded ratio so far this year.”
According to Agilis, in October discount rates continued to increase, with the FTSE pension discount curve finishing the month at 5.51%, a 0.34% increase from the end of September and the highest the curve has been in over a decade.
Current rates are up 2.74 percentage points from the beginning of the year. Meanwhile, credit spreads narrowed, and Treasury rates increased on the longer end of the curve, while rates on the shorter end finished October roughly in-line with rates from the end of September.
According to the,WTW Pension Finance Watch, the end-of-October index level of 105.4 reflected an increase of 8.7% for the month. This is the first time the hypothetical plan represented by the index has achieved full funding since March 2002.
The equity portion of the benchmark portfolio returned 7.9% in October, with domestic equity asset classes incurring the largest growth. Equity returns were partially offset by the fixed income investments of the tracked benchmark portfolio, which had a negative return at -1.1%, with Long Treasury Bonds experiencing the largest losses.
Yields on long high-quality corporate bond indices increased an average of 31 basis points, with the Moody’s Aa index hitting its highest level since March 2010. These were followed by increases in long Treasury rates. Yields on 10- and 30-year Treasury bonds increased 27 and 43 basis points, respectively. The broader Bloomberg Barclays Aggregate index increased 26 basis points this month.
In the NEPC 2022 October Pension Monitor, the firm anticipates market volatility and the potential for market disruption with the Fed continuing to increase short-term rates to battle inflation. They warn plan sponsors should remain diligent about monitoring sources of change in funded status versus expectations as equities and interest rates are likely to remain volatile. This includes closely monitoring hedge ratio ranges to avoid becoming over hedged to interest rates as yields rise.
In the month, equity markets were largely positive, offsetting losses from fixed-income markets. The Treasury yield curve rose, steepened modestly, and remained inverted between the one- and 10-year tenors. Treasury yields increased and inflated discount rates used for valuing pension liabilities.
Overall, corporate pension plans recorded significant gains in funded status in October amid rising discount rates and rallying equities.
The Treasury yield curve rose and remained inverted between the one- and 10-year tenors as investors continued to grapple with the Federal Reserve’s hawkish stance and its impact on economic conditions.
Total-return plans outpaced LDI-oriented plans due to positive equity returns and a lower hedge to rising discount rates as Treasury rates ticked up. NEPC’s hypothetical pension plans witnessed a funded status gain of 10 points for the total-return plan compared to 3.6 points for the LDI-focused plan.
Quarterly Updates
Northern Trust tracks the performance of 373 large U.S. institutional investment plans, with a combined asset value of more than $1.13 trillion, in the most recent quarter markets continued to sell off, and the median return for institutional asset owners included in the Northern Trust All Funds Over $100 million plan universe was minus-4.2% for the quarter ending September 30, 2022.
Investor response to Federal Reserve interest rate increases of 75 basis points in June and again in September contributed to the Northern Trust U.S. equity program universe median return declining 4.4% for the third quarter. The S&P 500 large cap index was down 4.9% during the three-month period.
In its’ ERISA universe, median return was negative 6.4% for the third quarter. U.S. fixed income remains the largest asset class in ERISA plans, with a median allocation of 49.9%, and continued to grow as U.S. fixed income assets outperformed equities. The median allocation for U.S. equities was 20.1%.
The Public Funds universe’s median return was negative 3.8% in the quarter. The Foundation and Endowment universe produced a negative 3.5% median return for the second quarter.
The Foundation & Endowment median U.S. equity allocation grew to 19.5% in Q3 from 19.1%, the median allocation to private equity was 25.4%, and the median allocation to U.S. fixed income remained below 10%.
