Opinions July 20, 2012

Fee Disclosure Rules Increase Complexity in Multi-Provider Environment

July 20, 2012 (PLANSPONSOR.com) - The litany of challenges related to having multiple retirement plan service providers is well documented.
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It creates an environment in which coordinating administrative tasks such as loans, distributions, contribution limits and hardship requests become much more complex and time consuming. And with the new 408(b)(2) and 404(a)(5) fee disclosure regulations, it’s not going to get any easier.  

When you take into consideration some of the requirements associated with the new fee disclosure regulations—like the fact that communication to participants on the subject needs to go out as one document—it’s clear that the data aggregation that needs to occur will be cumbersome to say the least.  

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The question that plan sponsors are going to need to ask themselves is: How do I make this work? Of course, simply answering that question in and of itself may not be enough. Why? Because even if they develop a creative solution, they may not have the necessary resources at their disposal to make the solution palatable.  

Over the long-term, the simple solution is to move to a single-provider environment, as that seems to be the direction the 403(b) market is destined toward when other regulations that have been recently established are taken into consideration.   

And while it may be a tough solution to swallow initially, as participant perceptions may view a move to a single-provider environment as a take away, it ultimately may be the best choice for the continued health of the plan, as greater efficiencies, less administrative maintenance and potential economies of scale are gained through this approach.  

 

David S. Hinderstein, founder of Strategic Retirement Group, Inc.  

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.  

Administration July 19, 2012

Governments Significantly Underpaid Pension Contributions

July 19, 2012 (PLANSPONSOR.com) - Three states with approximately one-fifth (19%) of the U.S. population have underpaid pension contributions by more than $25 billion, a study found.
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The State Budget Task Force said California, Illinois and New Jersey accounted for more than half of the contribution shortfall of U.S. state and local governments, which the group estimates to exceed $50 billion. Six states studied need to increase contributions to eliminate existing unfunded liabilities, the report said.

For example, contributions to the California State Teachers Retirement System (CalSTRS) would need to increase by more than $3 billion annually to amortize unfunded liabilities, assuming that the system earns 7.5% on its investments. If a 5% earnings assumption were used, CalSTRS would need to increase by a further $7 billion.

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“If systems do not achieve currently assumed returns or contribution levels, the next generation may bear the cost, in the form of higher future contributions, of deferred compensation promised to workers whose services benefited this generation,” the report said. “Failure to achieve these returns or contribution levels also may be borne by workers and retirees, who could suffer cuts in the pensions that were promised to them.”

The National Conference on Public Employee Retirement Systems (NCPERS) mostly agreed with the report, saying in a statement: “The Report of the State Budget Crisis Task Force verdict on the role public pensions are playing in state and local government fiscal woes – which recommends stronger local funding policies and greater disclosure – is a balanced one. The Task Force members correctly identified state and local governments’ failure to keep up with required contributions in recent years as a primary cause of the current dilemma.” 

However, Hank Kim, Esq., the organization’s executive director and counsel, also noted the NCPERS’ 2012 Fund Membership Study demonstrates the vast majority of public pension plans are solidly funded and are experiencing a robust recovery from the Great Recession (see “Public Pensions Are Solidly Funded”). He went on to say that long-term investment returns, which is more indicative of a fund’s health than short-term fluctuations, are rising, and confidence among plan administrators is running high.

The task force’s full report is here, and a summarized report is here.

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