Administration June 17, 2016

PSNC 2016: Pension Plan De-Risking

The pension plan de-risking conversation plays out on a spectrum and often takes years—if not decades—to run from start to finish.

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Speakers featured on the Pension Plan De-Risking panel on the second day of the PLANSPONSOR National Conference all stressed there is no one-size-fits-all solution when it comes to de-risking defined benefit (DB) plans.

As explained by Rob Massa, director of retirement at Ascende, an EPIC company, “there are so many different variables to consider that it becomes difficult to give general advice about de-risking. It gets very detailed and complicated pretty much right from the start.”

Marty Menin, director of the retirement division at Pacific Life Insurance Company, agreed wholeheartedly with that assessment, nothing that his firm is one of just about a dozen or so insurers willing to take on pension risk from employers. He suggested that, while general advice is tough to give and there is “a ton of grey in this area,” one thing is absolutely clear.

“When it comes to pension plan de-risking, for example through an annuity buyout, failing to plan adequately is planning to fail,” he explained. “We’ve seen some transactions that have gone very smoothly because the plan sponsors had done the tough work well in advance to clean up their data and really understand the economic drivers that determine the pricing and mechanics of the buyout.”

Other plan sponsors clearly don’t plan as well, and so their de-risking efforts are much more frustrating, slow moving and inefficient. Both Menin and Massa urged plan sponsors thinking about de-risking to leverage the expert advisers and consultants who work on de-risking practically every day. Experts should be consulted early and often so that the plan can get itself into a position to de-risk when it wants to—when economic conditions are most favorable—as opposed to when it has to.

“The adviser will be able to work with you to set optimum lump-sum windows, for example, and to help you understand how offering lump sums in different ways can impact the way insurers view your assets and liabilities,” Menin said. “They’ll also be able to help you make sense of how the different de-risking maneuvers can fit together and work together over time, such as buy-outs, buy-ins, plan hibernation, liability driven investing, and all the points on the de-risking continuum.”

Karin Stouffer, senior vice president and relationship manager in the rollover solutions group at Millennium Trust Company, urged plan sponsors to consider early the role individual retirement account (IRA) custodians will likely plan as a DB plan moves down the de-risking spectrum—ultimately driving towards final plan termination via full annuitization.

“For us, as an IRA custodian, we have insights to offer throughout the process,” she said. “We can help you complete the lump sum window and assess what the terms of the window should be. We can help make sure you are finding and servicing the missing participants. Something else to add is that, through our experience assisting de-risking actions thus far, we know that strong client service from all the providers is one of the main keys to success.”

All three panelists concluded that the earlier a pension plan starts to thin about de-risking, the better.

“Because there are really one a dozen insurers that are actually active in this marketplace, that can cause some real capacity issues, especially when your plan assets and plan data are not in the best shape,” Menin concluded. “You will see that a dozen insurers can very quickly diminish to just two or three. You might even find just one insurer willing to take on your benefit liabilities—which obviously will not be conducive to getting a good deal.”

Compliance June 17, 2016

PSNC 2016: DOL and IRS Audits

The IRS has announced a new strategy for retirement plan compliance efforts. What should plan sponsors do to prepare for their next compliance check questionnaire?

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According to expert panelists at the 2016 PLANSPONSOR National Conference, both the department of Labor (DOL) and the Internal Revenue Service (IRS) have announced plans to increase the number and frequency of audits.

As explained by Tom Schendt, a partner in the employee benefits and executive compensation practice at Alston & Bird LLP formerly employed by the IRS as a technical assistant to the associate chief counsel within the Employee Benefits and Exempt Organizations for the Office of the Chief Counsel, neither DOL nor IRS have the resources to simply rely on random auditing anymore.

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“Instead they have had to become much more focused and selective in how they use their auditing resources,” Schendt explained. “The DOL, for example, has become very focused on Form 5500 audits, due to the emerging realization that there are significant problems in terms of audit quality in this area. Both organizations are increasingly relying on specific red flags to hone in their auditing resources where there are likely to be problems.”

Jeb Gramah, retirement plan consultant and partner with CAPTRUST Financial Advisors, and James Moyna, principal with the auditing firm JMM CPA, agreed with that assessment—warning that the regulators are leveraging new and old sources of data more aggressively to target potentially problematic plans.

“They focus primarily on plans with 2,500 employers or more these days, but small plans also get audited if there appears to be issues,” Schendt added. “They look at ebb and flow of people going in and out of an organization. They look at the numbers of plans you have, and of course they consider any referrals of complaints coming from government agencies.”

Moyna and Schendt both suggested the most audited issue today is 401(k) plan loans.

“IRS and DOL know that loans are difficult to administer and that if they look deep enough into your plan records they can probably find examples of defaulted loans or other timeliness issues,” Schendt said. “Loans can be very difficult to manage. You’re dealing with payroll, the third-party administrator (TPA), and the participant. There’s an ebb and flow of money going back and forth according to very strict terms. This is fertile ground for an audit. It’s easy pickings as far as they are concerned.”

Put simply, the greater the number of loans and the greater the number of defaults, the greater the likelihood of an audit. Panelists explained another likely trigger of an audit on the defined benefit (DB) side of the equation: how many people in the plan are eligible for a benefit but are not getting a benefit?

NEXT: Inside the DOL and IRS mindset

“DOL is focusing on this right now, no question,” Schendt said. “They’re saying there has not been a good enough effort by DBs to find missing people. They believe you’re not following your fiduciary duties if you are accepting that there are people who are over 65 or even 70.5 and who have not started collecting a benefit. They will not necessarily just accept that these folks may be missing. They will want to know exactly what you have done to find these people and to pay them the money they’re owed.”

According to Moyna, DOL feels a need to get even more aggressive than it might have been in the past due in large part to “serious concerns emerging about the audit quality of CPA firms serving plans that are not actually experts in ERISA.”

“A recent study by the DOL found a whopping 39% of independent third-party Form 5500 audits commissioned by larger plan sponsors contained factual errors or other deficiencies,” he explained. “It’s very problematic right now and there is no way this issue is going away any time soon. Plan sponsors must be very aware of who they are hiring. They must ask their auditors tough questions about their expertise in ERISA, and if they lack confidence in what they hear, it’s time to find a new auditor who is actually expert in ERISA.”

He added that the DOL “is looking at ways of changing the definition of a certified public accountant to include more explicit requirements about employee benefits law. We support that wholeheartedly.”

Turning to practical takeaways for plan sponsors, the panelists suggested it’s probably not within their power to avoid all audits. Even though DOL and IRS are being more targeted, it’s still pretty much luck of the draw for a given plan sponsor in a given year—whether they’ll be audited by either DOL, IRS, or even both.

“DOL and IRS have always asked tough questions of plan sponsors,” Schendt concludes. “If you have great processes and documentation and controls in place, they’ll leave very quickly. If not, they could be with you for months.”

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