By now your clients that sponsor retirement plans know that they’re complicated, defined benefit plans in particular. There is a lot of work and expertise that goes into running one successfully. Luckily, your clients are not alone. In addition to you, their financial advisor, they should have a competent actuary that they work with on a regular basis. Here are four things that your clients should consider discussing with their actuary this year that could have a great effect on the cost of their retirement plan, both now and in the future.
Phase Out Of Funding Relief
In 2018, legislation extended funding relief provided through interest rate corridors through 2020. However, in 2021 the 10% corridors will begin to increase. They will increase by 5% every year until they reach a final level of 30% in 2024.
In light of this, your clients should consider adjusting their funding policies and budgeting. Today’s low-minimum required contributions are not going to be around much longer. By contributing more now, they can prepare for the coming increases. Making additional contributions is also a proactive move to lower PBGC variable premiums and help reduce contribution volatility as relief is phased out.
Remind your clients that the real cost of the plan is not the contributions they make right now, but the amount that they will ultimately pay out in benefits. Making the lowest possible required contribution now will only lead to higher contribution requirements in the future. It is important to work with the fund’s actuary and develop a funding policy that will achieve your client’s specific business objectives (current and future) in the most effective way possible.
Escalating Pension Benefit Guaranty Corporation Premiums
Already in 2019, both the flat-rate premium paid for all defined benefit plans and the additional variable-rate premium paid for underfunded plans have increased. The flat-rate premium, which was $74 per plan participant last year, is now $80. The variable-rate premium is now $43 per $1,000 of plan underfunding, up from $38 in 2018. Furthermore, the per-participant cap on variable-rate premiums has gone up from $523 to $541.
These escalating premiums can be costly, especially for an underfunded plan. If you have a client with an underfunded plan, there are several moves you should encourage them to make. First, they could lower or even eliminate the variable-rate premium by simply increasing contributions. They could also transfer risk through annuity purchases or offering lump-sum cashouts to former employees with deferred vested benefits. Another action that can also help lower premiums is merely cleaning up their data so that they do not have “phantom participants” that increase their premium payments. You can help your client review forecasts of future premiums and decide which moves make the most sense in their particular situation.
Mortality Table Changes
As the U.S. faces increasing longevity, the Society of Actuaries (SOA) standard annuitant tables are updated to reflect it. This is important because the Treasury has mandated the use of SOA tables to determine ERISA minimum funding requirements and PBGC premiums. While the Treasury made their announcement a couple of years ago, it is only now effective.
As the mortality tables change to show workers living longer, the cost of defined benefit plans will increase. However, the 2015 Bipartisan Budget Act allows for greater flexibility in setting plan mortality assumptions. As such, standard mortality assumptions can be adjusted to better align with a particular plan’s real-life history. You and your client should discuss with their actuary customizing the mortality assumptions based on their plan’s actual experience for the minimum funding and PBGC premium requirements.
Using alternative assumptions may also be more appropriate for accurate budgeting forecasts as well. And don’t forget to take into consideration how increasing longevity may affect other assumptions, such as anticipated retirement dates, and the implications that would have on the plan.
Required Defined Benefit Plan Restatement
A little over a year ago, the IRS announced new rules and deadlines for pre-approved defined benefit plans. One of the requirements included was that all defined benefit plans using pre-approved plan documents must restate their plan before April 30, 2020.
If you have clients that have used pre-approved plan documents, this is also a good opportunity for them to review and amend their plan. There have been a lot of changes in the past couple of years and it is important for your clients to make sure their plans remain compliant before officially adopting the plan document before next year’s deadline. It is wise to consult with a pension specialist to ensure that everything is in order before restating the plan documents.
How I Can Help
As I said previously, defined benefit plans are complicated and it’s important to have a team of professionals working together for them to run smoothly and effectively. If defined benefit plans are beyond your expertise as a financial advisor, you may want to partner with an experienced pension specialist like me in order to best meet your clients’ needs. Email me today at info@ff401k.com and we can discuss how I can help you help your clients.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.