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Our Perspective

Retirement proposals in the Administration’s FY2024 budget

On March 9, 2023, the Administration released its Fiscal Year 2024 Budget. The related General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals included a description of “modifications to rules relating to retirement plans” consistent with, for the most part, proposals that were, at one point, part of the Administration’s 2021 “Build Back Better” proposal. In this note, we very briefly review two of the Administration’s proposals: a $10-$20 million cap on account-based accumulations, and the elimination of certain “Roth conversions,” for certain high-income taxpayers.

February 2023 Pension Finance Update

In February, pension finances saw positive growth despite falling stock markets, thanks to higher interest rates. The traditional plan, Plan A, improved by 2%, while Plan B saw a fractional improvement, bringing both up to almost 3% and 1% respectively for the year. While stocks lost ground, bonds saw an increase in interest rates and credit spreads, causing losses of 2%-4%, but remaining up by 1% for the year. Pension liabilities are driven by market interest rates, and while corporate bond yields rose by 0.4% in January, pension liabilities fell by 4%-6%. The overall effect in the first two months of the year has been a modest boost for pension finances. However, the increase in rates has eroded the impact of relief from funding requirements, which were relaxed in March and November 2021 legislation. Effective discount rates are expected to be in the range of 4.9%-5.2%, and the table summarizes rates that plan sponsors are required to use for IRS funding purposes for 2023, along with estimates for 2024.

PBGC variable-rate premium vs. borrow-and-fund

For defined benefit plans that (1) are underfunded (using market interest rates and asset values) and (2) are not at the Pension Benefit Guaranty Corporation variable-rate premium (VRP) headcount cap, the “go to” strategy for reducing VRPs is to make current contributions to increase the plan’s funded status.
After the passage of SECURE 2.0, which froze the VRP rate at 5.2% of unfunded vested benefits (UVBs), determining when it is economically more efficient to borrow-and-fund vs. funding the plan over time (at ERISA minimums) and paying the 5.2% VRP “tax” is, in some respects, relatively straightforward. In this article, we review this calculation. We conclude with some observations about future interest rate risk and how it might affect borrow-and-fund decision-making.

Reasons for sponsors to consider settling liabilities in 2023

Increases in interest rates, the increasing cost of PBGC premiums, and the idiosyncrasies of IRS minimum funding/benefit restriction rules may, for many sponsors, make 2023 a good year for defined benefit plan liability settlement – through the payment of lump sums or the purchase of annuities (AKA pension risk transfer). In this article, we briefly review the issues with respect to 2023 settlements sponsors will want to consider.

December 2022 Pension Finance Update

 2022 was a rough year for stock markets – the S&P 500 lost more than 18%, the index’s worst showing in 14 years and the fourth worst year since 1950 – and yet, pension finances held up pretty well, buoyed by the largest increase in interest rate seen since at least 1980. The two model…Read More

Congress Opens the Door for the Retirement Program of the Future

As happens late every year, Congress has passed a spending bill, this time called the Consolidated Appropriations Act, 2023 (CAA 2023). As anticipated, the bill includes a wealth of retirement provisions often referred to as SECURE 2.0. Most of the provisions in SECURE 2.0 are 401(k)- or 403(b)-related, as expected.

Reducing PBGC premiums in 2023 – the significance of the standard/alternative method election

In the weeks ahead we will be reviewing the economics of de-risking, for this purpose defined as reducing defined benefit plan costs – principally the cost of Pension Benefit Guaranty Corporation premiums – by settling liabilities, by paying a participant’s benefit out as a lump sum or transferring it to an annuity carrier. But this year, for many plans, the amount of PBGC premiums the plan will owe will depend more on whether the plan is able to use the standard (spot-rate) method, rather than the alternative (24-month average) method, to value PBGC “unfunded vested benefit” liabilities. This article discusses that latter issue.

Retirement income, inflation, and retirement finance at 2022 year-end

The year-end 2022 saw a steady rise in the Consumer Price Index (CPI), with prices increasing by 6.5% over the prior 12 months, reducing the buying power of a (nominal) dollar since the beginning of the year. This rise in inflation has significant implications for retirees and those saving for retirement, with retirement income and finance taking a hit. In this article, we discuss the effect of inflation on retirement income and how it affects participants and retirees in both defined benefit (DB) and defined contribution (DC) plans. We highlight the different risks associated with retirement finance, including asset performance, interest rate performance, and inflation, and how they affect each other. Traditional DB plan participants and those with fixed or frozen annuity benefits have lost ground in 2022 due to inflation, whereas DC participants have been more resilient due to gains from increased interest rates. We recommend that sponsors of DC plans consider providing a hedge against inflation losses and offer investment education with respect to inflation risk. Overall, it’s essential to consider the implications of inflation in retirement planning and make informed decisions about retirement finance.

District Court dismisses 401(k) participant suit against Microsoft involving BlackRock TDF

On February 7, 2023, the US District Court for the Western District of Washington, in Beldock v. Microsoft, dismissed plaintiffs’ claim that the inclusion of the BlackRock target date fund “suite” in the Microsoft 401(k) plan violated ERISA’s prudence standard. The court’s decision on the key issue was relatively straightforward: A plaintiff cannot state an ERISA imprudence claim based simply on the comparison of the alleged underperformance a plan’s fund relative to the performance of selected “comparators.” In this article we provide a brief note on the court’s decision on this issue.

Annuity Purchases for Retirees with Small Benefits – Guaranteed Savings

Executive Summary The cost to maintain a defined benefit pension plan has skyrocketed.   The primary reason is the premiums paid to the Pension Benefit Guaranty Corporation (PBGC).  Most plan sponsors have reduced their head counts in recent years to effectively manage these premium overhead costs.  The first wave focused on lump sum windows for terminated…Read More

District Court Vacates DOL’s Fiduciary Rollover Advice Policy

A court in Florida declared that the Department of Labor’s position on rollover advice in their 2020 fiduciary advice Prohibited Transaction Exemption and 2021 FAQs was unlawful and vacated it. The court found that the DOL’s position that advice given to an individual-as-IRA holder could support a “regular basis” finding with respect to earlier advice given to the individual-as-plan participant was arbitrary and capricious. This decision is effective nationwide.

24 States Sue Department Of Labor Over ESG Rule

On January 26, 2023, a group of plaintiffs including 24 states, an energy company, an oil and gas trade association, and a plan participant filed a complaint against the Department of Labor in United States District Court for Northern District of Texas (Amarillo Division), claiming that DOL, in adopting amendments to its ESG (environmental, social,…Read More