2014 Retirement Webinar Series

Transcription

1 2014 Retirement Webinar Series

2 Summer in Washington What it Means for Retirement Plans Hitz Burton, Aon Hewitt Barb Hogg, Aon Hewitt Matt Maloney, Aon Hewitt Steve Shepherd, Hewitt EnnisKnupp, Inc. 1

3 Summer in Washington See how recent news from Washington affects retirement plans: The opportunity to add longevity annuities to your defined contribution plan Building highways with pension smoothing and what that means for DB plan sponsors The changes to life expectancy through new mortality tables Updates on employer stock and brokerage windows as investments in defined contribution plans 2

4 Longevity Annuities 3

5 Background: Retirement Income Solutions Lifetime Income is High Priority for Sponsors especially in the mega market 35% Types of Lifetime Income Options Longevity Insurance Annuity Platform 23% Guarantees Traditional Annuity End of Plan Deferred Fixed Annuity Deferred Guaranteed Income Benefit Deferred Guaranteed Withdrawal Benefit Liquidity $1b or less $1b or more Managed Payout New Fund Source: Aon Hewitt s 2014 Hot Topics in Retirement Managed Payout Existing Funds 4

6 Longevity Annuities Now Possible in DC Plans New regulations allowing Qualifying Longevity Annuity Contracts (QLACs) in DC plans indicates government s interest to have sponsors voluntarily adopt lifetime income features Type of Contracts Amount Death Benefits Guaranteed monthly income for participant and, potentially, survivor Fixed income contracts only no variable contracts or equity-indexed contracts Deferred annuity payments allowed beginning as late as age 85 Premiums of up to 25% of account balance, but not more than $125,000 (indexed) Rules for how this works with multiple purchases Survivor protection Spouse: Up to 100% of participant amount Other: Based on tables Return of premium feature (not required) 5

7 Here s an Example Purchase Deferred to Age 85 QLAC Prior to Retirement (age 65) Account: $400,000 Starting Account: $500,000 + QLAC Premium: $100,000 During Retirement $3,500 $3,000 First 20 years $3,431 At age 85 $3,467 (if no death benefit) $2,500 $2,000 $1,500 $2,098 Drawdown assumptions: 2.5% inflation increases and 5% interest QLAC amounts provided by MetLife as illustrative examples $1,951 (if pre-commencement death benefit)

8 Participant Considerations for QLAC Participant s fear of loss makes return of contribution attractive, but outcomes depend on personal situation Type of QLAC QLAC Amount Age at Death Cost of QLAC Payments Received Gain/ (Loss) No Return of Contribution $3, $100,000 $0 ($100,000) 95 $100,000 $416,040 $316,040 Precommencement 75 $100,000 $100,000 $0 $1,951 * (death benefit) 95 $100,000 $234,120 $134,120 Based on illustrative examples of QLAC payments provided by MetLife. Assumes premium of $100,000 deferred to 85 policy, purchased at age 65. * Benefit with a return of contribution before and after commencement yields a benefit of $1,895 at age 85. 7

9 Expectations for the QLAC The new QLAC regulations are an important move to address a critical need helping participants manage personal retirement risks What to expect in the shortterm What to expect in the longterm Product market under development Out-of-plan options may develop faster than in-plan Opportunistic in-plan implementations Market expansion and innovation Gradual adoption as QLAC becomes more commonplace Considerations for Plan Sponsors A part of plan design, not a product offer Fiduciary implications (e.g., insurer selection) Communication Administrative feasibility 8

10 Pension Plan Developments Pension Smoothing Mortality Tables 9

11 Pension Smoothing What it Means Allows sponsors to measure plan liabilities using nonmarket interest rates - Sponsors seeking relief from artificially low rates - Return to a long-term view of interest rates July 2012 MAP-21 Moving Ahead for Progress in the 21 st Century Act Introduced a 25-year average interest rate corridor to pay for U.S. highway system August 2014 HATFA Highway and Transportation Funding Act of 2014 Extended the MAP-21 interest rate corridor for five years Higher Interest Rates Lower Plan Liabilities Lower Contributions Higher Tax Revenues 10

12 Impact on Plan Sponsors Significant opportunity to use higher rates for purposes of funding Example: 2014 Rates 9% 8% Pre-MAP % MAP % HATFA 6.42% 7% 6% 5% 4% 6.95% 6.95% 6.62% 6.27% 5.40% 4.85% 6.42% 6.24% 6.0% 5.74% 5.9% 5.4% 5.24% 4.9% 4.7% 4.6% 4.5% 4.5% 4.4% 4.3% 4.27% 4.30% 4.3% 4.2% 4.2% 4.2% 4.2% 4.2% 3% HATFA range around 25-year average of corporate bond yields MAP-21 range around 25-year average of corporate bond yields MAP-21 rates (rates confined to MAP-21 range) HATFA rates (rates confined to HATFA range) Pre-MAP-21 rates (no constraints) 25-year average of corporate bond yields Source: Internal Revenue Code, Aon Hewitt 11

13 But a Conflicting Budget Policy Creates Strain Congress has simultaneously increased the penalties for carrying a pension deficit Flat rate, per participant premiums Variable rate premiums, as percent of unfunded liability Flat-Rate per Participant Premiums Variable-Rate Premium, as a Percentage of Unfunded Liability 0.9% 0.9% 0.9% 0.9% 3.0% 3.1% 2.4% 1.9% 2.0% 2.0% 1.4% 0.9% 0.9% 0.9% 0.9% Plan Years Beginning in Pre MAP-21 Pre-BBA Post-BBA Projections assume 3% annual increases in future National Average Wages Source: ERISA, Aon Hewitt 12

14 Pension Plan Mortality Basics Base Rates: level of mortality observed in study Improvement Rates: rates at which base rates are expected to decline The last time both were updated was in 1994 In 2000, base rates were updated (RP-2000) In 2012, an interim improvement table was published (Scale BB) In February, Society of Actuaries revised both (RP-2014 and MP-2014) Typical plans may experience 5-10% increase in their liabilities Timeline for Adoption SOA Exposure Drafts Released SOA Final Reports Expected Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Companies adopt for 2016 Minimum Funding 2017 financial reporting Minimum Lump Sums PBGC Premiums 13

15 New Tables, Old News New Society of Actuaries tables are consistent with expectations of improvements in life expectancy Life Expectancy Increases Accelerated years/decade, years/decade, Males Females +1.3 years, years, Source: Table 18; Health, United States, 2012; National Center for Health Statistics. Life Expectancy at age 65. Insurance companies have used comparable mortality for years Projection scales based on Social Security Administration data Projection tables published two years ago provide similar outlook Even without using new base rates, new projection rates would have similar impact (5-6%) 14

16 Plan Sponsor Goals/Actions Recent plan sponsor goals affirmed by these changes Reduce Headcount Reduce Risks Reduce Deficits Reduce the number of participants in the plan Reduce the overall level of risk financial, demographic, regulatory Achieve full funding 4 Reduce PBGC Premiums Minimize payments made to the PBGC 15

17 Key Actions Available to Sponsors Reduce Headcount Reduce Risks Reduce Deficit Reduce PBGC Premiums Settle Liabilities (via lump sums) Fund the Deficit -- Adjust Investment Policy Restructure the Plan -- Lump sums may avoid mortality table update (consider gender/collar) Funding may be all at once or accelerated schedule (sources vary) Funding and mortality changes may incent greater investment risk MAP-21 added per-participant cap on PBGC variable-rate premium 16

18 DC Plan Investments Facing Additional Scrutiny Employer Stock Brokerage Windows 17

19 Employer Stock Funds: A Change for Fiduciaries The Supreme Court s Dudenhoeffer decision eliminates the presumption of prudence when offering employer stock as a plan investment option Background Investment prudence requires plan investments to be diversified Exception: ESOPs (including ESOP subaccounts in a 401(k) plan) and employer stock funds Pre-Dudenhoeffer The judicial construct (Moench, 1995) was a presumption of prudence in offering employer stock This concept was adopted by five Federal Courts of Appeals Post-Dudenhoeffer Dudenhoeffer states that all plan investments, including investments in employer stock, must be appropriate long-term investments designed to provide participants with retirement benefits 18

20 New Meaning for Stock-Drop Claims The elimination of the presumption of prudence when offering company stock requires companies to respond differently to stock-drop claims Public Companies All Companies (public and private) Efficient market theory means additional disclosure by fiduciaries not necessary Federal securities law should not be violated by ERISA fiduciaries Greater burden on litigants to provide specificity that clearly demonstrates a legal claim exists 19

21 Other Employer Stock Happenings Recent court ruling: Tatum v. RJR 4 th Circuit August 4, 2014 Procedural Prudence Fiduciary Liability Could Have v. Would Have Poor processes leave plan sponsor and fiduciaries vulnerable Sponsors/fiduciaries may be liable when stock declines or appreciates Need to demonstrate how a reasonable fiduciary would have acted similarly (rather than could have) Tatum decision is binding in the 4 th Circuit Court which covers Maryland, North Carolina, South Carolina and Virginia. 20

22 Employer Stock? Steps to Consider... Review/establish procedures for evaluation of employer stock Consider investment committee composition Evaluate special circumstances, (e.g., conflicts of interest) Fiduciary Training Initial investment and ongoing, periodic review/analysis Access to material, nonpublic information Ownership limitations and/or caps for committee members Did committee members sell employer stock while ESOP stock purchases/allocations continued? Evaluate need for one-time or ongoing fiduciary training 21

23 Another Development: Brokerage Windows On August 21, the Department of Labor (DOL) issued a Request for Information (RFI) on brokerage windows in participant-directed individual account plans Objective Concerns Determine whether and what guidance is needed to protect plan participants retirement savings Whether participants receiving sufficient information to understand properly evaluate costs Are brokerage windows used to circumvent the need for plan-specified designated investments alternatives Background: Questions on participant fee disclosure rules led to FABs and R where the DOL said brokerage accounts were not designated investment alternatives 22

24 Questions & Answers 23

25 Contact Us Hitz Burton, JD Partner Aon Hewitt Barb Hogg, FSA Partner Aon Hewitt Matt Maloney, FSA, EA Partner Aon Hewitt Steve Shepherd Partner Hewitt EnnisKnupp, Inc

26 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. 25