Administration June 20, 2018

PSNC 2018: Pension Risk Transfer Options

DB plan sponsors want to keep control of their plans as they de-risk.

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The transferring of risk, or de-risking, from defined benefit (DB) plans has become a focus of pension plan providers over the past few years.

Risk transfer or de-risking transactions addressing pension plan risks can include several options: the purchase of annuities from an insurance company that transfers liabilities for some or all plan participants (removing the risks cited above with respect to that liability from the plan sponsor); the payment of lump sums to pension plan participants that satisfy the liability of the plan for those participants (either through a one-time offer or a permanent plan feature); and the restructuring of plan investments to reduce risk to the plan sponsor.

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At the 2018 PLANSPONSOR National Conference, David Hinderstein, president, Strategic Retirement Group, Inc., in White Plains, New York said, “Many pension plans are frozen and these plan sponsors have been waiting for something to happen. They are hoping and hope has become expensive.”

Maintaining a frozen pension plan is expensive, according to Hinderstein, and it means contributing fees to the Pension Benefit Guaranty Corporation (PBGC). The flat-rate-per-participant premium for single employer plan increased 130% since 2013. The variable rate is a percentage of a plans unfunded status. 

Hinderstein said, “Plan sponsors have begun to take action to deal with liabilities but there are a few service providers that can help plan sponsors keep their frozen plans which slows down the process. Why derisk? To help fund the plan they are derisking.”

An example of a partial risk transfer is how FedEx recently entered into an agreement to purchase a group annuity contract with Metropolitan Life Insurance Co. to transfer about $6 billion in pension plan obligations. By taking on a portion of the payment obligations of the FedEx DB plan, it will help the company secure its pension obligations and provide its retirees with financial security. Companies are chunking out their liabilities so that those funds do not grow.

In addition, many plan sponsors are offering terminated employees lump sums payments. Hinderstein said there is on average a 65% take rate.

Mike Devlin, principal, BCG Pension Risk Consultants, which specializes in assisting plan sponsors with managing their pension risk, stressed the importance of a plan sponsor keeping control of its plan as it derisks.  He said, “Restructuring the plan through an IRS determination letter can be complex and interest rates are unpredictable. Instead transact under your own conditions and you can predetermine the timing with the market as to what you do. Plus, never move all your retirees at one time. Figure out how much you will save over X amount time and do what makes sense economically.”

Michael Kozemchak, managing director at Institutional Investment Consulting interjected, “It’s going to cost more to keep the liabilities than to move them to an insurance company. It makes more sense to move it right now. Figure out what the annuity price needs to be for it to make sense financially for your plan.”

The fourth quarter of the year is very busy for these insurance companies according to Marty Menin, director of retirement solutions division at Pacific Life, specializing in pension risk transfer and other group annuity contract solutions. “[Insurance providers have many] other companies to look at that time and plan sponsors are back to losing control of their transaction. When insurance companies get busy they won’t be as competitive and you want the best price for the annuitization.”


Benefits June 20, 2018

PSNC 2018: Health Meets Wealth

One important purpose of offering more holistic benefits and education that link health and wealth concerns for employees is that it “prevents the 401(k) plan from being treated like a checkbook.”

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According to Nathan Voris, managing director for business strategy at Schwab Retirement Plan Services, and Michael Kane, managing director of Plan Sponsor Consultants, there is an increased recognition among employers that employees’ stress about debt and finances can be just as detrimental to physical health and job performance as a serious illness.

The pair shared their outlook during a panel discussion on the final day of the 2018 PLANSPONSOR National Conference, held last week in Washington, D.C. As Voris and Kane explained, the vast majority of retirement plan officials they speak with feel financial stress is significantly impacting participants’ daily lives, diminishing their ability to plan effectively for retirement and resulting in a lack of productivity.

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To combat the challenge, employers are looking for new ways to help employees with monthly budgeting, planning for college savings or medical costs, and reducing debt.

“All of these are crucial and interrelated financial decisions, and they should have an impact on what health care plan employees select,” Voris observed. “It really doesn’t make sense from the participant perspective to bifurcate these issues, health and wealth. And from the employer’s human resources perspective, these two subjects must be linked for effective service.”

Kane agreed, observing that one important purpose of offering more holistic benefits and education that links health and wealth concerns for employees is that it “prevents the 401(k) plan from being treated like a checkbook.”

“There a numerous academic studies out there demonstrating the various ways financial stress impacts productivity and absenteeism, leading to delayed retirements,” Kane said. “Just take the prevalence of 401(k) plan loans for people with less than $60,000 per year in income—it’s something like 60% or more. The statistics show the wellness need is huge.”

Voris and Kane noted that retirement plan recordkeepers and advisers each can help plan sponsors build a plan for better linking health and wealth topics.

“A big part of this effort will be building out a marketing plan,” Kane suggested. “We have seen plan sponsors have success getting participants to go through education modules or take specific actions by using gift card giveaways, for example. What is the most impactful thing you can do? Have your CEO write a letter directly to employees and explain why this is important and that employees’ physical and financial health are valued. If this is tied to a digital rollout it can be incredibly powerful.”

Voris added that “picking goals and metrics for measuring the performance of any new programming will be very important.”

“When it comes to setting goals and designing a strategy, I always recommend starting with the data and bringing together the stakeholders,” Voris noted. “This will include the recordkeeper, the health care provider, and maybe even your insurance providers as well. The goals, strategy and time frame are different for everyone, so getting the objectives set and mapping out the required data is key.”

Kane concluded that “the use of an adviser or coach is huge here.”

“In our experience, the adviser will be critical in getting these programs created and actually rolled out,” he said. “You may also consider integrating the efforts of customer relationship managers from the recordkeeper for the financial wellness topic.”

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