Compliance November 29, 2011

IRS Provides Sample Plan Amendment for Underfunded Pension Plan Limitations

November 29, 2011 (PLANSPONSOR.com) – The Internal Revenue Service (IRS) has issued a notice providing a sample plan amendment that plan sponsors may adopt to satisfy § 436 of the Internal Revenue Code regarding limitations on the accrual and payment of benefits under certain underfunded single employer defined benefit plans.
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The notice also extends both the deadline to amend a plan to satisfy § 436 and the period during which such an amendment is eligible for relief from the anti-cutback requirements of § 411(d)(6).  

Section 436, which was added by Pension Protection Act, sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan (see IRS Issues Guidance on Benefit Limits for Underfunded DB Plans). In general, when a plan’s adjusted funding target attainment percentage (AFTAP) for the plan year is less than 60%, § 436(d)(1) prohibits the payment of prohibited payments (as defined in § 436(d)(5)), including single sum distributions, and § 436(e)(1) requires benefit accruals under the plan to cease. Section 436(b)(1) prohibits the payment of an unpredictable contingent event benefit if the plan’s AFTAP for the plan year is less than 60% or would be less than 60% taking into account the occurrence of the event.  

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When a plan’s AFTAP for the plan year is less than 80%, but not less than 60%, § 436(d)(3) generally limits the portion of a benefit that may be paid in a single sum or other prohibited payment. Section 436(c)(1) generally prohibits a plan amendment from taking effect if the amendment increases the liabilities of the plan by increasing benefits and the plan’s AFTAP for the plan year is less than 80% or would be less than 80% taking into account the amendment.   

Section 436(d)(2) generally prohibits the payment of prohibited payments from a plan while the plan’s sponsor is in bankruptcy unless the plan’s AFTAP is certified to be at least 100%.  

The limitations under § 436 (other than the limitations on prohibited payments under § 436(d)) do not apply to a plan for the first five plan years of the plan, taking into account any predecessor plan.  

The requirement to apply a limitation under § 436(b), (c), or (e) to a plan ceases if the plan sponsor makes a contribution, in the amount specified in the relevant subsection, that is not counted toward satisfaction of the minimum contribution requirement under § 430. Section 436(f) sets forth rules relating to those contributions and other methods that a plan sponsor may use to avoid the limitations under § 436.  

Notice 2011-96 is available at http://www.irs.gov/pub/irs-drop/n-11-96.pdf. 

Products November 29, 2011

Towers Watson Provides Stable Value Strategies for Plan Sponsors

November 29, 2011 (PLANSPONSOR.com) – Towers Watson has released a white paper that asserts that stable value investors should be aware of a few notable changes brought on by a combination of an underlying structural change and recent economic stress.  

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The paper, titled Assessing Stable-Value Strategies: What Plan Sponsors Should Consider, notes investors should pay attention to limited wrap capacity; tighter investment guidelines; higher fees and the potential for an increasing interest rate scenario.

According to the research, stable value has long been a popular investment option in defined contribution (DC) plans, as plan participants have appreciated the principal preservation, benefit responsiveness, liquidity and consistently higher returns compared with money market options, with a similar risk profile.

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However, Towers Watson notes that plan sponsors should be aware of the type of events that may trigger a violation of the wrap agreements and cause a potential market-value adjustment, such as a workforce reduction or the addition of a competing fund option (money market or self-directed brokerage option) within the DC plan.

Such risks include counterparty, term, credit and liquidity (at the plan level) and are exacerbated by:

•  Complexity;
•  Lack of standardization;
•  Less-than-ideal transparency;
•  Changing markets prompted by uncertainty over Dodd-Frank, swap legislation, diminishing capacity and evolution of the wrap market; and
•  The reality of higher wrap fees and lower yields.

“While stable value investment strategies have performed relatively well during the past few years compared to money market strategies, we believe the changed environment means investors should revisit these with a view to understanding all the risks now associated with this investment strategy,” said Peter Schmit, research manager in Towers Watson’s investment business and coauthor of the paper. “Regardless of upcoming regulatory decisions, we believe there has been a structural shift in competitive advantage away from plan sponsors and stable-value managers over to insurance providers and the investment strategy now faces distinct market risks and regulatory headwinds.”

Schmit adds, “We have been discussing stable value with our clients for a number of years, specifically with an emphasis on the education and oversight of the complex structured product. As a plan sponsor fiduciary, it is important to understand the wrap issuer market and the developments within the wrap market, as well as the risks associated with stable value. Ultimately, those who are armed with the best information will make the wiser investment choices as they relate to this issue.”

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