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In this article we briefly cover three items: (1) the effect of the Supreme Court’s DOMA ruling on retirement plans; (2) DOL’s field assistance bulletin allowing a delay in delivery of the 2013 fee/performance ‘comparative chart;’ and (3) IRS’s release of new mortality tables for 2014 and 2015 and possible changes to future tables that may affect DB plan cost.
In June 2013, in United States v. Windsor, the Supreme Court struck down section 3 of the federal Defense of Marriage Act (DOMA). Section 3 of DOMA provided that:
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.
After Windsor there is, in effect, no longer one federal definition of marriage. The ruling raises a number of issues for retirement plans – DB and DC. For instance (and most obviously), where a participant in a plan marries a same-sex partner in a state that recognizes that marriage and then moves to state where it is not recognized, for purposes of the plan is the participant married or not? This question obviously presents issues under the plan’s joint and survivor rules or, for a 401(k) plan, under the plan’s survivor/beneficiary rules. There are a host of other issues, including the taxation of distributions, rollover rights, whether the ruling in Windsor should be given retroactive effect, and the effect on qualified domestic relations orders.
The Department of the Treasury, the Department of Labor and the Internal Revenue Service have been asked to provide guidance on these issues, but it appears that that will take time. Until guidance is forthcoming, sponsors will want to consult with counsel.
Under [the final fee disclosure regulation], calendar year plans were required to provide participants an investment alternatives ‘comparative chart’ no later than August 30, 2012 and “at least annually thereafter.” For calendar year plans this puts disclosure of the chart on an awkward basis. August 30 is not a particularly intuitive date for providing this information. And even though the regulation allows administrators to combine the chart with other disclosures, there is no other disclosure that normally goes out on August 30.
In July 2013, DOL released Field Assistance Bulletin 2013-02, which in effect gives administrators an extra 6 months to ‘re-set’ the ‘chart delivery date.’ Thus, the 2013 chart that would under the regulation have to be provided no later than August 30, 2013 may be delayed to as late as February 25, 2014, and then provided annually thereafter. For sponsors who have already provided the 2013 chart or have already taken substantial steps towards doing so, delivery of the 2014 chart may be delayed for 6 months, e.g., where the 2013 chart is delivered on August 30, 2013, the 2014 chart may be delayed to as late as February 25, 2015.
This is ‘will not enforce’ guidance – that is, DOL will not take enforcement action against administrators who take advantage of it. As such, “it does not address the rights or obligations of other parties.”
To get the relief under FAB 2013-02, administrators must determine that the delay will benefit participants and beneficiaries. The relief does not apply to anything but the timing of the delivery of the chart. So, for example, a change to plan investment instruction procedures or investment options must still be timely disclosed as required by the regulation.
DOL also said that it is considering a rule that, rather than requiring delivery by a fixed date, would “provide reasonable flexibility to plan administrators on a permanent basis. Specifically, [DOL] is considering whether to allow a 30-day or 45-day window during which a subsequent annual comparative chart would have to be furnished, rather than fixing the 12-month ‘at least annually’ period to end on one specific day.”
On July 10, 2013 IRS published Notice 2013-49, providing static mortality tables for years 2014 and 2015, updated for mortality improvements. The notice includes both unisex tables for, e.g., calculating lump sums and sex-distinct tables used to determine the plan’s ‘funding target’. The update in the notice is generally in line with expectations.
As noted in the notice, the Society of Actuaries is currently studying mortality and mortality improvements. Current funding rules use the RP-2000 Mortality Tables “adjusted for mortality improvement using Projection Scale AA.” In a report issued in September 2012, the Society found “a noticeable degree of mismatch between the Scale AA rates and actual mortality experience for ages under 50, and [that] the Scale AA rates were lower than the actual mortality improvement rates for most ages over 55.”
The Society has developed a new Scale BB “based on more recent data and newly developed techniques” that the Society believes more clearly reflects recent mortality improvement experience. The Society asked actuarial firms to ‘test’ this new scale to determine its effect on actuarial valuations (and, implicitly, cost). It found that:
For defined benefit (DB) pension plans whose primary forms of benefit payment are non-increasing annuities, moving from Scale AA to Scale BB generally increased Standard Unit Credit accrued liability (calculated using a 6% discount rate) by 2% – 4%.
Current rules generally do not permit sponsors to use Scale BB, but IRS and Treasury are aware of the Society’s study and requested comments “as to whether other studies of actual mortality experience of pension plans and projected trends of that experience are available that should be considered for use in developing mortality tables for future use ….”
“In developing updated regulations,” IRS also requested comment on whether current software could accommodate the use of ‘fully generational’ mortality tables. Whereas static tables use the same rates for all participants at the same age, generational mortality tables provide a unique table for each ‘year of birth cohort.’ Static tables require annual updating – thus the need for guidance such as Notice 2013-49. Generational tables, on the other hand, assume that a 65-year old this year has a higher mortality rate than a 65-year old next year, and so on. So long as the projection scale tracks observed patterns of mortality improvement, such a table would never need updating.
Bottom line: there is clearly (at IRS and at the Society of Actuaries) concern that the current practice (RP-2000 Mortality Tables adjusted for mortality improvement using Projection Scale AA) does not adequately reflect mortality improvements. There (apparently) will be no change in 2014 or 2015, but IRS appears to be contemplating ‘updating regulations,’ and that update may result in an increased funding requirement and, generally, increased cost. In that regard, we note that in addition to increased funding costs, for traditional DB plans paying lump sums, generally ‘longer’ life expectancies = higher costs, including higher costs for, e.g., term-vested cash-outs (aka de-risking).