Compliance April 21, 2010

U.S. Supreme Court Orders More Respect Shown for Plan Admins

April 21, 2010 (PLANSPONSOR.com) – The U.S. Supreme Court has ruled that pension plan administrators deserve a bit more respect for their plan document interpretations than they have been getting in some courts.
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The high court’s decision came in Sally L. Conkright et al. vs. Paul J. Frommert et al., a case involving a participant challenge to a Xerox Corp. pension plan and how it calculated current benefits after workers left the company, took distributions, but were later rehired.

In a 5 to 3 vote with Justice Sonia Sotomayor not participating, the court overturned a ruling by the 2nd U.S. Circuit Court of Appeals, which held in 2008 that a trial court judge is not required to defer to a plan administrator’s reasonable interpretation of the plan’s terms if the administrator arrived at the conclusion outside the context of an administrative claim for benefits. Justices ruled that the District Court judge should have reviewed the case by applying more deference to the administrator’s interpretation after the case had earlier gone to the appellate court and had been sent back to the lower court judge (High Court Accepts Xerox ERISA Case for Review).

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“We held in Firestone Tire & Rubber Co. vs. Bruch…that an ERISA plan administrator with discretionary authority to interpret a plan is entitled to deference in exercising that discretion,” Chief Justice John Roberts wrote for the majority. “The question here is whether a single honest mistake in plan interpretation justifies stripping the administrator of that deference for subsequent related interpretations of the plan. We hold that it does not.”

The Supreme Court opinion is at http://www.supremecourt.gov/opinions/09pdf/08-810.pdf.

Administration April 21, 2010

DC Consultants Say Custom Target-date Funds Keep Growing

April 21, 2010 (PLANSPONSOR.com) – A new PIMCO survey of defined contribution consultants finds the trend of clients requesting custom target-date funds continues to grow.
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A PIMCO news release about its “4th Annual Defined Contribution Consulting Support and Trends Survey” said 90% of the consultants polled are offering such custom target-date products, and 82% are offering to act as a fiduciary for their custom services such as managing a plan’s asset-allocation (i.e., glide-path).  Consultants also identify over 20 recordkeeping firms that support custom strategies.

“Custom target strategies provide plan sponsors ultimate control of their DC plan, including best-in-class investment management, glide-path design flexibility, institutional pricing, as well as optimal fiduciary oversight and transparency,” said Stacy Schaus, senior vice president and leader of PIMCO’s Defined Contribution Practice, in the news release. “It’s not surprising to know that consultants and recordkeepers are supporting more of their clients with custom strategies.” 

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Consultants said that many plans are still using “off-the-shelf” target-date funds instead of a custom product tailored to their employee demographics. Nearly half of consultants surveyed believe existing glide paths are too aggressive, especially in light of how these strategies performed during the recent market crisis.

To mitigate risk, consultants suggest that plan sponsors add diversifying assets beginning with treasury-inflation protected securities (TIPS), which they also note as the most effective hedge against inflation. The majority of consultants identified tactical asset allocation as a somewhat important to critical component of glide-path management, PIMCO said.

Other findings from the survey include:

  • 75% of consulting firms report that their clients prefer retaining retiree assets. Yet most consultants report that most sponsors do not actively encourage retirees to keep their assets in the plan.  However, a fifth of the consultants noted clients are somewhat likely to add a “deemed IRA” to their DC plan to allow retirees and their spouses to consolidate assets within the DC plan.
  • 80% of consulting firms believe their clients will add a retirement income option within the next two years. Fixed annuities, living benefit, and longevity insurance are the top three products of interest.
This year’s survey captures data, trends, and opinions from 30 consulting firms across the U.S., which serve nearly 2,000 plan sponsors with aggregate DC assets of $1.7 trillion. For more information, call (888) 845-5012 or email pimcodcpractice@pimco.com.

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