Compliance March 8, 2019

PBGC Gets Administration Support

Among a host of other services, Serco Inc. will operate the Pension Benefit Guaranty Corporation's (PBGC)’s contact center and help find pension plan participants.

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The Pension Benefit Guaranty Corporation (PBGC) has contracted with Serco Inc. for field office support services.

The service arrangement has a one-year base period and four option years, with a ceiling value of $200.5 million. Serco will provide services in the areas of benefit administration, document management, records management, administrative support, document intake, database building support, data analytics and process automation. Serco will also operate PBGC’s contact center and help find pension plan participants.

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Over the last few years, Congress, the Governmental Accountability Office (GAO) and all three federal agencies that regulate retirement plans have been focusing on missing participants. All Employee Retirement Income Security Act (ERISA) plans and tax-qualified plans including 401(a) and 403(b) plans need to worry about locating missing participants. Most DB plans say that benefits for terminated participants will typically begin at the normal retirement age, although the plan could be written to meet required minimum distribution rules (RMD) after age 70.5. If a DB plan participant is missing at retirement age, there may be a failure to follow the terms of the plan if the benefit isn’t paid out timely. This situation can lead to a qualification problem under the tax code and could be a fiduciary breach under ERISA. 

While PBGC faces different administration and compliance challenges than individual private sector retirement plans, it is notable that the pension insurance organization is also focused on finding missing participants. 

Last July, the ERISA Industry Committee (ERIC) sent a detailed comment letter to Assistant Secretary of Labor Preston Rutledge, encouraging the Department of Labor (DOL) to develop more guidance related to the challenge of employers locating missing retirement plan participants. In a November 2017 memorandum for Employee Plans (EP) examination employees, the Internal Revenue Service (IRS) directed EP examiners not to challenge a qualified plan as failing to satisfy the required minimum distribution (RMD) standards under Internal Revenue Code (IRC) Section 401(a)(9) if they have made a good faith effort to locate missing participants.

Data and Research March 8, 2019

Fewer Households Expected to Face Retirement Savings Shortfall

Just over four in 10 U.S. households are projected to run short of money in retirement, according to an updated analysis from EBRI.

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The EBRI Retirement Security Projection Model (RSPM) found that for 2019, 40.6% of all U.S. households where the head of the household is between 35 and 54 are projected to run short of money in retirement, down slightly from 42.3% in 2014.

In line with this, the aggregate retirement deficit of American households in this age cohort, including Social Security benefits, is estimated to be $3.83 trillion, down 15.9% from $4.44 trillion in 2014. However, when pro rata reductions in Social Security retirement benefits are assumed to begin in 2034, the aggregate retirement deficit increases by 6% to $4.06 trillion.

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On an individual basis, the average retirement savings shortfall for those between the ages of 60 and 64 ranges from $12,640 per individual for widowers and $15,782 for widows. For single males, it is $24,905 and for single females, $62,127.

Defined contribution (DC) plan eligibility has a significant impact. Individuals between the ages of 35 and 39 who have no future years of eligibility in a DC plan have an average retirement deficit of $78,046 per individual. This is more than five-times the $14,638 individual retirement deficit of those who have at least 20 years of future eligibility in a DC plan.

A 23% pro rata reduction in Social Security benefits beginning in 2034 would increase average retirement deficits by 17% for those currently between the ages of 35 and 39.

The results also find longevity risk can play a significant role in increasing retirement savings shortfalls. Those in the longest relative longevity quartile have a retirement deficit that is 10.2-times that for those in the shortest relative longevity quartile.

EBRI’s Retirement Readiness Rating (RRR), on the other hand, measures the percentage of households projected to not run out of money in retirement. In 2019, this rose to 59.4%, up 1.7 percentage points from 57.7% in 2014.

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