BCG Pension Insider

February 2020 - Volume 100, Edition 1

Remembering the Basics of Fiduciary Duties

PLANSPONSOR | Reported by Amanda Umpierrez | February 07, 2020

What ERISA retirement plan sponsors should know about their responsibilities as they make plan decisions or even outsource decisions to others.

THE DEPARTMENT OF LABOR (DOL) describes any person involved in operating a retirement plan as a fiduciary.

According to its publication, “Meeting Your Fiduciary Responsibilities,” under the Employee Retirement Income Security Act (ERISA), fiduciaries are responsible for maintaining reasonable plan fees, following the terms under the plan, selecting diversified investment options and, perhaps most importantly, managing the plan with the participants’ best interests in mind. If a fiduciary does not understand specific terms of the retirement plan, such as fees, they can look to financial advisers or service providers for help.

The DOL says, “The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of assets, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Possibly one of the most important responsibilities is considering the best interests of employees when making plan decisions. If a plan sponsor fails to do so, they risk litigation.

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Signing and Retaining Plan Documents Is Essential

PLANSPONSOR | By Rebecca Moore | February 03, 2020

Following a memo warning retirement plan sponsors of potential disqualification, attorneys offer suggestions for plan document execution procedures.

The Office of Chief Counsel of the IRS has issued a memorandum concluding that a retirement plan “is considered adopted only if proof of adoption of the plan is provided.”

The IRS adds: “Upon failure to produce an executed plan, the employer has the burden to prove that it executed a plan document as required.”

The agency was asked whether a plan sponsor must retain a validly executed plan document, in light of a tax court decision in Val Lanes Recreation Center Corp. v. Commissioner. In that case, the tax court originally found Val Lanes’ retirement plan to be disqualified because an unsigned plan document was presented on audit. However, after finding additional testimony credible, the court reversed its decision. The individual who served as president, treasurer and sole director of the company testified that the failure of a roof at his facility resulted in extensive water damage that destroyed documents. His accountant testified that “to the best of his knowledge, the restated plan amendments were signed shortly after receipt of the [favorable determination letter] and that petitioner retained the originals.”

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Don’t Put Your Head in the Sand Because of Cash Balance Liability Complexity

PLANSPONSOR | By Rebecca Moore | February 07, 2020

Cash balance plans may have the most complex liabilities to manage, but creating a clear strategy to manage risks will keep it from getting more complicated.

In its U.S. Pension Market Quarterly Outlook, Insight Investment looks at what it calls generally the most complex pension liabilities of all—cash balance plans—and how they can be managed in practice.

Kevin McLaughlin, head of liability risk management with Insight Investment in New York City, says this matters because most of the firm’s clients are on the path to de-risking their plans, and, as they get farther down the path, managing assets to liabilities gets more important - unhedged liability risks become a bigger component of residual risk. “If they’ve done all the hard work to get their defined benefit plan funded status to 100%, they want to make sure things are locked down to have more certainty of outcomes,” he says. “They may have ignored these risks in the past.”

McLaughlin adds that many plan sponsors, as they’ve reconstructed their benefit plans and frozen their traditional defined benefit (DB) plans in the last couple of decades have, in a number of cases, introduced a cash balance component. “It is quite common to come across a cash balance benefit in DB plans,” he notes.

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UPS Named in Latest ERISA Fiduciary Breach Suit

Planadviser | By John Manganaro | February 06, 2020

UPS is not the first national employer to be accused of using outdated mortality tables and interest rate estimates in order to shortchange certain pension beneficiaries.

A new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the Northern District of Georgia suggests the United Parcel Service of America (UPS) committed multiple fiduciary breaches while calculating the value of certain pension benefits.

The plaintiffs, calling for class action status, say their suit seeks to remedy failures to pay joint and survivor annuity (JSA) benefits in amounts that are “actuarially equivalent” to a single life annuity (SLA) benefit to pension plan participants and their beneficiaries. Such actuarial equivalence is required by ERISA.

Allegations in the lawsuit closely mirror those in numerous cases that have been filed in the past few years, naming such well-known defendants as MetLife, Pepsi and American Airlines. As in this new lawsuit, the plaintiffs in such cases suggest that, by not offering JSAs that are actuarially equivalent to the single life annuities that participants earn, the defendants are causing retirees to lose part of their vested retirement benefits in violation of ERISA.

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Standard Pension Closeout / Terminal Funding Case Rates
(No lump sums, disability or unusual provisions)

Retirees - 1.93%
Term Vesteds - 1.98%
Actives - 2.10%

Annuity Purchase Rates as of February 17, 2020