The Retirement Report, Fall 2018
VOL 1 | NO 3
Plenary session speakers at the Academy’s Annual Meeting and Public Policy Forum in early November covered various aspects of U.S. pension and retirement systems.
As comptroller general, Dodaro helps oversee the development and production of hundreds of reports and testimony each year before various committees and individual members of Congress. GAO reviews all aspects of the federal government’s operations, including many on pensions, retirement, 401(k) plans, and related issues, Dodaro said, noting that its 2017 report cautioned a potential “huge, looming retirement security crisis in the United States.” He said fundamental pillars of government- and employer-based retirement systems, along with individuals’ plans, “all were experiencing shifts and challenges,” and noted that the Pension Benefit Guaranty Corporation’s multiemployer pension program has a more than 90 percent chance of becoming insolvent by 2025.
By 2034, the Social Security system will only have 77 cents on the dollar to make payments for its programs, while a third of people over age 65 rely solely on Social Security for more than 90 percent of their income. “If Bob Myers was here, he’d be concerned about that,” Dodaro said, referencing Robert J. Myers—who helped structure and fund Social Security during his tenure as the chief actuary of the Social Security Administration from 1947 to 1970, and for whom the Academy’s annual public service award is named.
With a relatively low national savings rate of about 5 percent, “many people don’t have any retirement savings at all, or very small amounts,” Dodaro said. Coupled with greater longevity, “if people will have enough retirement savings to last until the end of their life is a big question,” he said.
One of GAO’s goals is to try to identify challenges ahead of time in order to alert Congress to act, Dodaro said. “Our major recommendation was that [Congress] needed to create a commission to look comprehensively at this [retirement] system,” he said, adding that the situation is happening against a backdrop of a large federal debt and deficit, with the cumulative national debt topping $21 trillion at the end of fiscal year 2018.
The Congressional Budget Office estimates the U.S. deficit will be over $1 trillion each year between 2020 and 2028, with growing interest that could account for the largest component in the federal budget, Dodaro told attendees. Other deficit drivers include health care spending, which continues to grow faster than the economy in part because of the demographic factor of 10,000 Baby Boomers set to turn 65 every day through 2029. GAO will be issuing its next report on the fiscal health of the federal government in 2019.
Rutledge outlined a series of federal health- and retirement-related rules that are in development—with some open to public comment, including a “pooled employer plan,” which is accepting comments through Dec. 24.
EBSA’s agenda includes regulatory, compliance, and enforcement aspects. Its recent activities—driven by the President’s executive order of October 2017—were driven by three areas of health care: association health plans (AHPs), short-term limited duration (STLD) insurance plans, and health reimbursement arrangements (HRAs). State insurance commissioners have the same regulatory authority they did before the rule was published, he said. The applicability dates of the rule were Sept. 1, with upcoming dates of Jan. 1 and April 1 of 2019 for some self-funded plans.
STLD plans, like AHPs, can typically last for up to 12 months. A 2017 rule reduced that down to three months, but the president directed EBSA to restore the 12-month window, with some possibilities of renewal for up to 36 months. EBSA published a final rule in August that took effect in October, though states have the option to delay the effective date, Rutledge said.
For health reimbursement arrangements, EBSA proposed a rule in late October that will be open for public comment through Dec. 28. It would allow employees of large businesses to use funds from HRAs to pay for individual health insurance plans, which is prohibited under existing regulations; allow employers that offer traditional group coverage to provide HRAs of up to $1,800 annually; and include safeguards requiring employers to offer the same type of coverage (either an HRA or a traditional group plan) to all workers within the same class (such as seasonal or part-time workers), as well as a disclosure provision intended to ensure that employees understand the benefits they are receiving.
DOL is also seeking comments on a similar proposed rule in the pension area—“association retirement plans and other multiple-employer plans,” Rutledge said. That proposed rule, published Oct. 23, has a goal of “level[ing] the playing field between small- and midsized businesses,” Rutledge said. If smaller employers band together, through associations or a professional employer organization, that could lower the fees their plans charge, he said. Further, the idea with this proposal is employees for smaller firms would have the ability to accumulate assets in a similar way as someone in a large firm.
“We very much look forward to receiving comments on this rule, and particularly from groups like yours who understand the retirement landscape better than most anybody,” Rutledge said. The comment period ends Dec. 24.
Another aspect of the executive order was retirement plan disclosures—to make things like benefit statements, summary plan descriptions, and annual reports more usable, more understandable and more effective—and less expensive, by potentially utilizing electronic options, Rutledge said. That proposal will likely be out next year. “Be thinking about it, tee it up, have it ready,” he said, regarding future comments to that impending rule. “We take the public comment process very seriously.”
EBSA’s long-term regulatory agenda—which it publishes once a year and is not part of the executive order—includes regulatory ideas in the area of providing lifetime income. “We’re going to consider what steps we might take in the area of lifetime income options that would address the issue of mitigating longevity risk in a defined-contribution world,” he said. That could include qualified default investment alternatives (QDIAs) and lifetime income disclosures that might leave participants with an overestimation of their financial security if they haven’t converted that to a lifetime income stream, and could potentially reduce their future savings plans.
“Any kind of evidence, in the literature or elsewhere, that would convince you, and you could convince us, that these lifetime income illustrations actually affect behavior—do they actually encourage people to save more?…—would be extremely helpful. We have to be able to show an effect,” he said, noting that the Office of Management and Budget has the final say.
The most anticipated pension session of the week was “Tasked with Saving a System in Crisis – The Joint Select Committee on Solvency of Multiemployer Plans.” The Joint Select Committee was given a Nov. 30 deadline to come up with a solution to the looming multiemployer crisis, and the speakers in this session highlighted the urgency of the situation, discussing multiemployer plans from an employer, legislative, and plan trustee and participant perspective.
The session was moderated by Eli Greenblum, former Academy vice president, pension. He was joined by Kendra Kosko Isaacson, Democratic staff member with the Senate Committee on Health, Education, Labor and Pensions; Pamela Nissen, attorney at Leonard, O’Brien, Spenser, Gale & Sayre.; and Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce.
Greenblum highlighted the different zone statuses by industry, with manufacturing and transportation seeing the highest rate of declining plans. Wong and Nissen shifted to the employer and plan participant and trustee perspective, underscoring why it was so critical for the Joint Select Committee to come up with a solution by the Nov. 30 deadline.
They discussed the difficulties associated with the MPRA application process, withdrawal liability concerns, and plan terminations. Greenblum then ended with a discussion of the options for system-wide reforms, and the role of Pension Benefit Guaranty Corporation (PBGC) and potential sources of funding.
The session was moderated by Tim Geddes, chairperson of the Academy’s Pension Accounting Resource Group, and the panel included Zvi Bodie, professor emeritus at Boston University; Deva Kyle, tax counsel for the Democratic staff on the Committee on Ways and Means; Aharon Friedman, senior tax counsel for the Republican staff on the same committee; and Monique Morrissey with the Economic Policy Center.
After Geddes delivered his introductory remarks, Bodie began the discussion by highlighting the role that Social Security, employer pensions, and self-directed DC plans and IRAs played in an individual’s retirement; he then discussed the changes that could be made to bolster each prong. During this discussion, Bodie highlighted Ibonds and suggested that these were a useful investment tool that were underutilized.
The panel had a discussion regarding whether there is a retirement crisis—with varying views—and Morrissey closed the session by discussing the challenges in the retirement sphere, the problems with the defined contribution system, and challenges with shielding participants from investment risks.
“The Other Side of the Coin—How Employers View the Retirement Programs They Sponsor” focused on employer sponsored retirement programs and how they view such programs. The session was moderated by Bruce Cadenhead, chairperson of the Academy’s Pension Committee. He was joined by Lynn Dudley from the American Benefits Council; Scott Henderson, former vice president of Pension Investment & Strategy at Kroger Co.; and Rob Wylie, executive director of the South Dakota Retirement System.
The session opened with Dudley discussing what could happen with certain retirement bills after the midterm elections. Of particular focus were the Retirement Enhancement and Savings Act (RESA) and the Family Savings Act. Dudley discussed defined benefit pension plan premiums and noted that a study of the PBGC single-employer premiums was dropped from the final version of the Family Savings Act.
The discussion then moved from legislative possibilities to employer realities. Henderson provided an analysis of how Kroger was able to rescue its pensions while other plans failed. He stated that, in his opinion, withdrawal liability was a major impediment to action. He also shared several personal opinions of how other organizations could follow suit. Wylie then closed with an analysis of the South Dakota Retirement System and how it managed its plan with fixed contributions, provided appropriate and adequate benefits, and remained fully funded.
The Pension Committee released a public policy practice note covering topics related to the implementation of the spot rate approach to determining benefit obligations, service cost, and interest cost under accounting standards and other granular approaches.
The practice note covers the following topics:
The Pension Committee released a practice note exposure draft, Valuing Benefits Payable as a Lump Sum. The purpose of the practice note is to provide information to actuaries on current and emerging practices in the development of liabilities and cost estimates for pension plans, with benefits paid as a lump sum.
Many pension plans offer benefits in the form of a single, lump-sum payment. In recent years, as plan sponsors have looked to manage risk, lump-sum payments have become more common. The practice note discusses the valuation of lump-sum benefits for financial accounting purposes, and utilizes a number of concepts related to interest theory.
The Joint Board for the Enrollment of Actuaries (JBEA) is seeking applications for the next term of the Advisory Committee on Actuarial Examinations, which begins on March 1, 2019, and ends on Feb. 28, 2021.
The JBEA asked the Academy to make this opportunity known to our members. The Advisory Committee plays an integral role in assisting the Joint Board to offer examinations that test the knowledge necessary to qualify for enrollment. Its duties include recommending topics for inclusion on the Joint Board examinations, reviewing and drafting examination questions, and recommending passing scores. Information on how to apply is available via the IRS website.
Applications are being accepted through Dec. 7, 2018.
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