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Wednesday, May 23, 2018

Can You Invest Your Way to Plan Termination?

Some interesting dynamics have been developing in the retirement industry with respect to defined benefit pension plans.  Most plan sponsors that have maintained these plan types have either suspended or frozen them.  This has been an effort to reduce/control their liabilities and funding obligations and to better respond to a younger workforce by replacing defined benefit plans with defined contribution plans.

For many sponsors, the strategy was to simply look to positive investment returns to “close the gap,” expecting that assets would grow faster than liabilities, creating a positive scenario that would reduce the cash contribution requirements and lead to eventual plan termination.  Unfortunately, this has not happened.

Just prior to the dramatic economic downturn in 2008, many plans enjoyed a funding ratio in excess of 100%.  Following the downturn, plans’ funding ratios dropped precipitously.   As we all know, the market then proceeded to experience an historic run through 2017.  The following chart of a survey conducted by Milliman of the Top 100 Defined Benefit Plans illustrates that funding ratios have remained stagnant since 2008, at 80% or below, even with the significant market upswing.

So what happened?  

All sponsors of frozen plans knew that liabilities would increase even though benefit accruals were fixed.  This would be due to simple aging of the participant population―generally, very manageable.  Combined with this historic investment performance over the past ten years, there was an expectation the funding deficits would return to pre-2008 levels.  What was not anticipated was the corresponding increase in “carrying costs” and an extremely low interest rate environment.

These carrying costs included:

  • Pension Benefit Guaranty Corporation (PBGC) premiums;
  • benefit payment expenses;
  • life expectancy changes reflected by stronger mortality tables;
  • increased regulatory complexities;
  • historically low interest rates; and
  • investment management fees.

The single biggest cost increase of those listed has been PBGC premiums.  Since 2012, the fixed premium has risen more than 130% while the variable premium has risen nearly 400%!    It is reasonable to expect more increases in the future as PBGC efficiency declines with the number of covered pension plans.

If the end goal is plan termination, none of these expense increases have helped.  Therefore, the changes we are beginning to see in defined benefit funding are not directed toward investment portfolios but rather toward the concept of pension risk transfer (PRT).  Rather than try to simply offset increasing costs and liabilities with improved investment performance, many sponsors have looked to removing liabilities and costs from the plan.

How is this done?  

Transfer the responsibility for the current and future payment of benefits to a third party, a.k.a. a reputable insurance company.  This not only reduces the sponsor’s liability but as importantly, eliminates PBGC premiums and benefit payment expenses.  Again, if the end goal is plan termination, this ultimately will be the way in which all plan obligations will be satisfied.

Not only could you de-risk current retirees, but terminated vested employees could also be included.  PRT is a multi-step process that takes a series of small steps of planned and coordinated actions over a period of time to minimize liabilities so that when the decision is made to formally terminate, the financial impact has been greatly reduced, if not eliminated, i.e., putting sponsors in a much stronger position to actually terminate with the least possible financial impact.

So at the end of the day, “Can You Invest Your Way to Plan Termination?”  Probably not.  This is not an absolute statement, but seems to be a clear trend based on the experience of the top 100 defined benefit plans in the U.S.  If you accept this as a reasonable position, then the answer lies in what can be done directly by plan sponsors to reach the end goal.  We think PRT is a very viable approach.

To learn more about strategies to help organizations reduce and ultimately eliminate the financial burden of defined benefit pension plans, or to begin talking to a retirement plan advisor, please get in touch by email or by calling (855) 882-9177.

Tuesday, May 15, 2018

Taxability of Disability Benefits

Many employers provide disability benefits to their employees as part of a comprehensive employee benefits package. Disability benefits replace a percentage of pre-disability income if an employee is unable to work due to illness or injury for a specified period of time. Employers may offer short-term disability coverage, long-term disability coverage, or integrate both short- and long-term disability coverage.

Group disability benefits can be structured in a number of ways. The taxability of these benefits generally depends on how the premiums for the coverage are paid. For example, if an employer and its employees split the cost of premiums for disability coverage, and the employees’ premiums are paid on a pre-tax basis through a cafeteria plan, the disability benefits are fully taxable to employees.

This Compliance Overview answers common questions regarding the taxability of disability benefits.

Monday, May 7, 2018

Q1 Market Recap: Taxes, Tariffs, and Tech

After nine consecutive quarters of gains, the S&P 500 lost 0.76% in the first quarter of 2018. The 0.76% loss masked a spike in volatility driven by the reduction in corporate tax rates in the Tax Cut and Jobs Act, stiff tariffs on imported steel and aluminum, and the prospect of new government regulation of technology firms.

Read the Q1 Retirement Market Recap to learn more about the 1st quarter market volatility. Also included are tips on managing defined benefit plans in the feature on "Can You Invest Your Way to Plan Termination?"

If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at

Monday, April 30, 2018

The hidden cost of identity theft to employees and employers

Strategic Benefit Services is pleased to partner with CyberScout, a leading identity management and data theft services company. CyberScout delivers valuable prevention education, proactive protection services, and swift and appropriate incident remediation for more than 17.5 million households and more than 770,000 businesses.

The hidden cost of identity theft to employees and employers:

When identity thieves take advantage of employees’ stolen personal information to obtain credit or loans, or to commit various types of fraud, both employees and employers pay a steep price. For example, victims:
  • need 165 hours, on average, to resolve identity theft; 
  • are absent five times more than average; and
  • use twice as much sick time.

Monday, April 2, 2018

The Financial Burden of Defined Benefit Plans

Defined benefit plans were the predominant retirement plan at the time the Employee Retirement Income Security Act (ERISA) was introduced in 1974. Many hospitals and other healthcare provider organizations in New York State had defined benefit pension plans. In a defined benefit plan, the total financial obligation falls strictly on the sponsor. The amount of benefit is stipulated and the funding of that benefit is the responsibility of the sponsor. As time went on, defined benefit plans became more onerous to maintain, more difficult to sponsor, and more expensive.

The Revenue Act of 1978 included a provision under which employees were not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments, thus making 401(k) plans possible. The emergence of defined contribution plans began a transition away from the plan sponsor offering and managing the retirement benefits, to participants having the ability to directly manage their retirement savings.