Compliance May 30, 2014

How to Avoid Errors in QDROs

May 30, 2014 (PLANSPONSOR.com) – When it comes to qualified domestic relations orders (QDROs), plan sponsors and recordkeepers need to head off potential issues before they become larger problems.
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First, it is important to understand what a QDRO is. Bob Toth, an attorney based in Fort Wayne, Indiana, tells PLANSPONSOR, “A domestic relations order is sometimes merely referred to as a DRO, which is your run-of-the-mill divorce order or child support order.”

A DRO becomes ‘qualified,’ says Toth, once a plan administrator determines:

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  • It was issued by a court of competent jurisdiction in the state (the court clerk’s attestation clause is enough);
  • It is actually a domestic relations order and not merely some civil lawsuit;
  • Has the name and address of the plan participant and each alternate payee;
  • Describes what is payable to the alternate payee, and the number of payments or period to which it applies;
  • Includes the name of the plan to which it applies;
  • Does not require a type or form of benefit not provided under the plan, i.e. a monthly payment when none is available under the terms of the plan; and
  • Does not require payments to an alternate payee of amounts already due to an earlier alternate payee.

John Fellin, vice president of FASCore, the recordkeeping affiliate of Great-West Financial, tells PLANSPONSOR his firm looks at Internal Revenue Code (IRC) Section 414(p), the Employee Retirement Income Security Act (ERISA), and a plan’s requirements to determine if a domestic relations order (DRO) is qualified. The Denver-based Fellin cites The QDRO Answer Book, which describes a QDRO as a DRO that assigns to an alternate payee the right to receive all or a portion of the benefits payable to a participant under a qualified retirement plan and that meets certain other requirements, as per IRC Section 414(p)(1) and ERISA Section 206(d)(3)(B).

As for what QDRO-related errors recordkeepers or plan sponsors should keep an eye out for, Toth lists:

  • Attempting to get the plan to pay attorney fees;
  • Attempting to have taxes related to the alternate payee distribution paid from the participant’s account; and
  • Failing to provide sufficient contact and Social Security information for the alternate payee.

Fellin says recordkeepers and plan sponsors should also pay special attention to:

  • Properly preserving or restricting the alternate payee’s portion when notified of a DRO situation;
  • Any provision that cannot be administered or conflicts with the terms of the plan; and
  • Identifying same-sex couples' DROs for tax reporting purposes.

Fellin adds that recordkeepers and plan sponsors should also keep an eye out for orders that are based on a condition (e.g., dollar or percentage award contingent on the selling of a property) and are not able to be administered, as well as orders that are missing the appropriate court entry/filing stamp and approval.

“These mistakes are avoided by providing a draft to the plan administrator or providing to the attorney either a template or a checklist they would use in drafting the order, if the attorney contacts them first," Toth says. "They should also ask for a draft of the order before submitting it to the court. It’s a mess to try to correct an order, as it often requires reopening a case or an additional hearing. They are corrected by making sure the court has continuing jurisdiction, so that the parties can go into the judge without refiling. Some administrators might accept a stipulation of the parties.”

According to Fellin, “As a recordkeeper, Great-West Financial encourages the parties to submit a proposed order before filing with the court to ensure the plan and recordkeeper can comply once it is approved by the court. In addition, we rarely see mistakes or issues with plans that either require the use of their model order or provide a model order.”

Toth notes, “QDROs can be messy and time consuming, as they are done in often tense circumstances with attorneys who may not be well-versed in retirement law. The recordkeeper needs to keep its own interests in mind, and avoid being overly sympathetic toward one side—though it is often tempting to do so—and should remain even handed.”

More information about QDROs can be found on the Department of Labor's website.

Products May 30, 2014

A More Complete Picture of DB Plan Liabilites

May 30, 2014 (PLANSPONSOR.com) – Measures of defined benefit (DB) plan liabilities currently used by plan sponsors do not tell the whole story, contends a paper from Russell Investments.
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Plan sponsors typically focus on the projected benefit obligation (PBO) liability metric, says Marcus Muetze, senior consultant at Russell Investments. He tells PLANSPONSOR the PBO, which appears on the corporate balance sheet, is used in calculating pension expense, so it’s a very important metric.

Plan sponsors also calculate liabilities used to determine minimum required contributions or Pension Benefit Guaranty Corporation (PBGC) variable rate premiums, but in the paper “Introducing TFBO,” Muetze says these metrics do not tell plan sponsors the whole story about their plan’s long-term economics.

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Investment and funding policy decisions must be made with an eye not just to liabilities that have already accrued, but also to those that will accrue in the future, Muetze contends. In other words, an important metric is the total future benefit obligation (TFBO).

TFBO looks at the present value of all benefits that will ever be earned by current plan participants as well as by future participants (or new entrants). It is an estimate of all benefits that will ultimately need to be paid out of the plan’s assets. Muetze says it is the most effective liability measure to help plan sponsors set funding and investment policies.

“It’s not a better liability metric than any other,” Muetze admits, “but it’s a different metric—an additional tool to help plan sponsors understand the long-term economics of their plan and do it in a more full and complete way.” He describes the measure as a liability metric that gives a plan sponsor the full picture of funding obligations in the long term, so that the true long-term funding and investment challenges are clearer.

Sponsors of DB plans need to know how their liabilities are going to evolve over the long term. How big benefits will ultimately be is an important question. Muetze says the PBO tells only the story of benefits that have accrued until now—not all benefits that will need to be paid out in the future. Even though this cannot be predicted with perfect accuracy, he says, it should still be attempted.

“Actuaries make an estimate beyond PBO on a regular basis,” Muetze points out, and larger actuarial firms do it as part of the standard valuation process. The calculation is called the present value of future benefits (PVFB).

According to Muetze, this is an actuarial attempt to look into the future to see how much benefit will accrue over the entire future working life of the current participants. Actuaries do not always share this figure with a plan sponsor, he says, but if a plan sponsor wants to know, Russell requests the number, which is easy for them to provide, since it was already calculated.

The metric is helpful, Muetze says, because ultimately plan sponsors are not just going to have to pay out the PBO liability number. “Over the long term, they’ll have to pay out the whole liability number,” he says. The metric is a way to understand how a plan’s assets are doing versus this long-term liability. The information can help set a more effective, more informed investing policy immediately.

Using the PBO measure, three plans might have an identical 97% funding status, Muetze says, but looking at them through the lens of the TFBO metric, the picture could be very different because their future liabilities are so different. This naturally would have an impact on investing policy and contributions.

A plan should calculate future benefit accruals, which Muetze says are going to be significant. The plan needs to assess whether assets alone can make up that piece, or the plan sponsor should consider options, such as coming up with contributions and a more realistic funding and investing policy, perhaps one that is more realistic than contributing the minimum each year. If the plan’s policy allows it to fund the minimum requirement, this strategy might require a re-think depending on what future liabilities look like, Muetze says.

“Introducing TFBO: A Tool to Help You Understand the Long-Term Economics of Your Plan” can be downloaded from Russell Investments’ website.

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