Administration April 4, 2017

DB Plan Sponsors Overpaying PBGC Premiums

A change in the recording and timing of contributions could save DB plan sponsors thousands or more in PBGC premiums, a report contends.
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Defined benefit (DB) plan sponsors paid $145 million in Pension Benefit Guaranty Corporation (PBGC) premiums in 2015 alone that could have been avoided, according to a paper from October Three.

The report contends that not optimizing their contribution recording and timing caused plan sponsors to overpay PBGC premiums.

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“Minimizing PBGC premiums depends on plans’ maximizing the use of ‘grace period’ contributions—amounts contributed to a plan after the end of the plan year but still attributable to that plan year,” the report says. “Failure to adopt best practices around quarterly contribution requirements and applying funding balance has caused plan sponsors to overpay PBGC premiums due to not getting full credit for grace period contributions. In many cases, all or part of contributions made to satisfy quarterly contribution requirements could have been characterized as grace period contributions but weren’t. So, plans often report lower asset values than they could have and, as a result, pay higher premiums than they need to.”

Over the six years analyzed by October Three, DB plan sponsors have missed out on more than $700 million in savings. As an example, October Three’s review uncovered a plan ($330 million in assets, 8,300 participants) that owed a variable premium of $2.9 million during 2015, but could have reduced this premium by $685,000 simply by recording grace period contributions differently. “That is, an action that would only take the plan’s actuary minutes to complete, cost this sponsor almost $700,000!” the paper says. October Three notes that the plan paid actuarial fees from the trust during 2015 of $160,000.

October three calls these missed opportunities “recording errors”—plans could have reduced premiums without changing anything they did except for paying attention to quarterly contribution and funding balance rules at the time.

NEXT: Accelerating contributions

In addition, October Three contends many DB plan sponsors could have substantially reduced PBGC premiums by modestly accelerating some budgeted contributions (by one to five months) and, again, paying attention to quarterly contribution and funding balance rules. “These ‘push back strategies’ require a modest change in approach from plan sponsors. Over a period of years, differences in contribution amounts due to modest acceleration are insignificant, but PBGC premium savings are not,” the report explains.

The report says potential premium reductions based on push back strategies are more widespread and more significant in terms of total dollars. October Three observed one plan ($4.1 billion in assets, 78,600 participants) that paid a 2015 variable premium of $31.4 million, but could have reduced this premium by almost $1.2 million just by applying best practices to contribution recording and timing.

While October Three says there is some evidence that DB plan sponsors are increasingly adopting best practices in recent years now that PBGC premiums have increased, still its analysis indicates that sponsors continue to overpay premiums by more than $100 million annually, with more than half of eligible plan sponsors overpaying in some fashion.

October Three notes that DB plan sponsors rely on the plan actuary to use best practices, and in these situations knowledge and ability to advise rests with the actuary. “Hence, any sponsor experiencing recording errors is likely not being told the opportunity exists by their actuary and, in turn, is missing an opportunity to reduce their PBGC premium,” the report states.

The report, “The PBGC Premium Burden,” may be downloaded from here.
Benefits April 4, 2017

Benefits Customization Key to Employee Retention

A majority of employees, especially Millennials, value customizable benefits packages and they say these perks increase their loyalty to their companies.
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With the appeal of the gig economy posing a real threat to employers, a new study by MetLife finds that effective and customizable benefits programs remain essential to employee retention. This perk is especially important to Millennials, which currently make up the largest segment of the American workforce.

According to the study, more than three-fourths (76%) of Millennials say benefits customization is important for increasing their loyalty to their employers, compared with two-thirds (67%) of Boomers.

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“Today, our lives reflect our preferences,” says Todd Katz, executive vice president, Group Benefits, at MetLife. “We choose how our coffee is made, create personalized playlists and decide which apps we have on our phones. In all aspects of our lives, we can make choices to meet our unique needs. The same should apply when it comes to benefits. This is particularly important for driving engagement and loyalty among Millennials, who comprise the largest generation in the workplace today. Customization for them is inherent, and they want to know that their employers understand and are willing to address their specific needs.”

Moreover, 59% of employees say that health and wellness benefits are important for increasing loyalty to their employer and 53% say the same about financial planning programs. However, the study concluded that few employers are offering these perks. According to the survey, only 33% of employers reported they are very likely to offer wellness benefits and just 18% currently offer financial planning programs. At the same time, more and more employees are finding the perks of the gig economy or freelance and contract work appealing.

Fifty-one percent of employees say they are interested in contract or freelance work for more flexible hours, the ability to work from home and project variety, as opposed to a full-time salaried job, which may not offer these perks. The allure of freelance work is strongest among Millennials with nearly two-thirds (64%) of the generation interested, followed by Generation X (52%) and Boomers (41%). In the midst of rising prospects in the freelance space, employers agree that the gig economy is affecting the workplace. More than half (59%) say the increase of temporary jobs will impact the workplace in the next three to five years.

“In the past, there was a clear delineation between work and life,” says Katz. “That line is now blurred with work and life overlapping more than ever before. As this happens, employees are looking to their employers to help them with their overall wellness needs, whether it’s through gym memberships to stay healthy or financial education programs to plan for their futures. As employees have more non-traditional workplace options available to them, it will become increasingly important that employers prioritize holistic wellness to drive employee engagement and loyalty in this new era.”

This provides employers with an opportunity to enhance their benefits packages to achieve their goals of maximum retention, especially among Millennials.

“Not only is the gig economy disrupting the traditional workplace, but the workforce itself is transforming,” explains Katz. “There are four generations working side by side. Employees’ definitions of family are changing, and certain demographics, like single women, are on the rise. Employees have very distinct wants and needs and expect their employers to meet them. To attract and retain top talent in this new era, especially during a time of decreasing unemployment rates, employers have an opportunity to adapt their workplaces to address the unique needs of their employees. This is especially critical when it comes to benefits.”

According to the survey, 74% of employees say that having benefits customized to meet their needs is important when considering taking a new job and 72% say that having the ability to customize their benefits would increase their loyalty to their current employer. 

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