Compliance February 26, 2015

Definition of Participant Governs Nonqualified Plan Payments

A group of retirees should not have received a lump-sum payment from a nonqualified plan at a change in control because they were not “participants” as defined by the plan.
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A federal appellate court found three retirees of Bausch & Lomb were not “participants” as defined in its nonqualified plan for executives and, therefore, not subject to the change-in-control provisions of the plan.

The retirees sued Bausch & Lomb because their recurring payments from the plan were stopped and they were paid a lump-sum of their remaining account value, which they contended reduced their overall benefits.

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The 2nd U.S. Circuit Court of Appeals agreed with a lower court that since the plan defines “retired participant” separately from “participant,” and since the change-in-control provision of the plan only applies to “participants,” the retirees should not have received a lump-sum distribution upon a change in control of the company. The plan defined “participant” as “an employee of the company who has been selected to participate in the plan,” while “retired participant” was defined as “a former participant who is receiving benefits under this plan.” The court noted that retired participants are no longer “employee[s] of the company,” as is required to be a participant, and a retired participant, as a matter of logic, cannot be both a “former Participant” and a current participant.

In addition, the court pointed out that the change-in-control section of the plan provides that, for purposes of determining the participant’s accrued benefit, the date of the change of control will act as a stand-in for the date of termination of employment. The retirees already had a date of termination and did not need a stand-in date.

The 2nd Circuit affirmed a lower court’s ruling that Bausch & Lomb misinterpreted the change-in-control provision of the plan.

As a remedy, the lower court allowed for the retirees to keep their lump-sum payments but have monthly payments reinstated at a lower amount in consideration of the lump sum. The 2nd Circuit found that the district court’s remedy does not run afoul of the principle, announced by the U.S. Supreme Court in CIGNA Corp. v. Amara, that a district court has no authority to “reform” an Employee Retirement Income Security Act (ERISA) plan. The court said the only relief ordered by the district court—reinstatement of monthly benefit payments that Bausch & Lomb had unlawfully stopped—was explicitly called for by the plan itself. In addition, the appellate court said the district court’s practical measure of a “credit” in the amount of the lump sum is a traditional application of the remedy of contractual expectation damages—ensuring that plaintiffs are restored to the same financial position they would have been in, but for Bausch & Lomb’s breach.

The decision in Gill v. Bausch & Lomb is here.

Participants February 25, 2015

Five Behaviors That Sabotage Retirement Savings

Years of education, communication strategies and support haven’t done as much to move the needle on retirement plan participant retirement readiness as plan sponsors and advisers hope to see.
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For America Saves Week, Prudential wanted to answer a simple question: Why is long-term savings so hard for participants?

According to Jennifer Putney, vice president of Total Retirement Solutions at Prudential Retirement, the firm turned to the behavioral sciences to formulate an approach that would help them understand the behaviors that help or hinder decision-making.

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The numbers say that 10,000 Baby Boomers retire daily, Putney says, and more than half aren’t prepared to support themselves, a figure she calls startling. “We wanted to understand why this is so hard,” she tells PLANSPONSOR. “The industry has done a wonderful job educating participants and delivering information about the importance of retiring with the kind of income that will be sustainable.

After talking with experts in the academic world who specialize in human behavior, Putney says the answer is fairly simple. “We’re not bad planners, and we do have some self control,” she observes, “but our brains are hard wired to take care of immediate needs.”

The firm’s research uncovered five innate human behaviors that cut across all economic groups, behaviors that may have dire consequences for participants’ secure retirement:

  • Underestimation: “I don’t know how long I will live.” They are hesitant to plan for a retirement that may last 20 years or longer, Putney says.
  • Procrastination: “I’ll do it later.”
  • Optimism bias: “It won’t happen to me.” 
  • Peer pressure: “I just can’t resist (that vacation or a new car).” Putney notes that peer pressure can also spur someone to make short-term decisions based on market volatility.
  • Immediate gratification: “I want it now.”

One tactic for plan sponsors to use is defaults, which Putney explains as a principal approach used by behaviorists to help overcome these innate human tendencies. “Plan sponsors can create plan design to help everyone get into the plan,” she says. Auto features—automatic enrollment to start, combined with automatic deferral increases to raise the savings rates every year—help participants overcome the urge to spend instead of save.

Well-diversified fund options and asset-allocation models are useful to help participants avoid short-term decisions made in the face of market fluctuations.

Peer pressure can often sway people in their savings habits, Putney says. It is the herd mentality, when people feel everyone else is doing something. Overreacting to a situation is another sub-optimal behavior. “If the market tanks 800 points in one day, people may panic and feel they have to do something,” she explains. “But these overreactions often lead to poor decisions.”

Steady, long-term investments that don’t require an individual to make changes in their fund lineup will help to overcome those biases.

Next, Putney says, behavioral financial experts suggest frequent messaging and helpful hints to remind participants about the importance of saving for retirement. “Help them understand how close they are, what their surplus or gap may be,” she says. “Keep those messages in front of participants all the time. They constantly need the messages to help them overcome the hardwired human behavior.”

Frequent messaging helps get people on the right path, Putney says. “Once the saving is going in the right direction, they begin to gain confidence about the decisions they’ve made,” she says. “They can see the value it’s bringing, and that is what can help them overcome these innate human behaviors.”

Plan sponsors need to message participants consistently and frequently. This helps to reinforce the importance of staying on plan and remind them where they are. A robust, sustainable communication program maximizes opportunities to participate in the plan. Tracking the success of the plan is another key part, Putney says, and results can be shared with participants, especially if the plan sponsor has accepted the challenge of making sure that all employees are on track for a successful retirement. “If they take ownership of that as a goal, I think sharing how well the plan is doing can be very powerful,” Putney notes.

Putney suggests that plan sponsors hold an event that gets everyone focused. Using sticker boards, she says, they ask people to identify the oldest person they know. “When a number of employees respond and you create a visual, the evidence becomes clear,” she says. “People are living longer: to their 80s, 90s, even 100s, and this is the kind of longevity all of us can expect.”

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