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Insight on Plan Design & Investment Strategy
Updated: 5 hours 36 min ago

10 Action Steps for DB Sponsors in 2020

Fri, 2019-12-06 10:22

Whether defined benefit (DB) plan sponsors are ready or not, the pension plan landscape is quickly changing, and to adjust, they need to take steps to shore up their investments, Willis Towers Watson says in a new report, “10 Investment Actions for Defined Benefit Plans in 2020.”

First, Willis Towers Watson says, the funding relief that sponsors have enjoyed is nearing an end. Many will need to increase their contributions to their DB plans, and to do so, they will need to revisit their budgets. “Know what you might owe, budget and identify potential sources for cash to help avoid surprises,” Willis Towers Watson says.

Second, due to numerous rate cuts by the Federal Reserve, interest rates are nearly at all-time lows. DB sponsors can respond by putting hedging strategies into place. “Each situation requires coordinated short- and long-term planning around investments, funding and liabilities,” Willis Towers Watson says.

Third, frozen DB plans may be nearing the end of their de-risking journey, and these plans need to come up with a solid exit strategy. “It’s time to decide whether your objective is termination, hibernation or somewhere in between,” Willis Towers Watson says. “In each case, you will likely need to look to enhance cash-flow matching and credit spread exposure. For termination-ready sponsors, you should prepare for upcoming liquidity needs, monitor transaction costs of potential trades and consider asset-in-kind transfer opportunities to streamline the final transfer to an insurance company.”

Fourth, many DB plans are embracing environmental, social and governance (ESG) investing. Willis Towers Watson says this is admirable, but DB sponsors still need to base their decisions on finances and their long-term goals.

Fifth, DB sponsors might want to consider outsourced chief investment officer (OCIO) resources. “Be realistic about the time, resources, money and expertise you can devote to investment actions and evaluate whether owning the big picture but outsourcing the details is right for you,” Willis Towers Watson suggests.

The consultancy’s next five points center around diversifying the DB portfolio. It believes that returns will be lower in the coming years, while volatility will spike. It says that equity and investment-grade bond valuations are inflated; there is the risk of recessions occurring, particularly in Europe and Japan; and that central banks are running low on policy tools to offset shocks.

The sixth thing Willis Towers Watson suggests that DB sponsors do is to add non-corporate credit to their portfolios. “Even though aggregate bonds, long credit bonds, high-yield bonds and bank loans may seem fairly different, they’re all tied to U.S. corporate borrowers and can be more correlated with equity returns than one might hope,” Willis Towers Watson says. “To better diversify your credit investments, we suggest considering other types of borrowers, such as consumers (e.g., securitized debt like credit cards, mortgages and student loans) and sovereigns (e.g., non U.S. government and corporate debt).”

The seventh move the consultancy suggests is to consider investing in real assets such as real estate and infrastructure, or more niche investments if “your tolerance for complexity allows for it.”

The eight suggestion is to take a different approach to current investments by employing strategies “such as merger arbitrage, volatility and momentum.”

Ninth is to study how much liquidity there should be in the portfolio and make sure that a plan isn’t overestimating how much it will need.

Finally, take a hard look at active investments and work with managers to include only their very best ideas, Willis Towers Watson says.

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Categories: Industry News

FRIDAY FILES – December 6, 2019

Thu, 2019-12-05 14:11

Donald Duck scares away a telemarketer, stampede to work, pig video bombs newscast, and more.

In Oakwood, Georgia, a man called out of work at a fast food restaurant because he was “intoxicated.” However, he did show up later. The Gainesville Times reports that he demanded money while holding a co-worker at gunpoint.

On a flight from Paris to Boston, a Delta Air Lines jet had a “wardrobe malfunction.” According to the Boston Herald, an uninflated evacuation slide fell from the jetliner into the yard of a suburban Boston home. The resident of the home told The Patriot Ledger he was doing yard work when the slide took out several branches of his Japanese maple. No one was hurt.

In Chattanooga, Tennessee, the Tennessee Aquarium is using an innovative way to light up a special Christmas tree. A special system connected to an electric eel named Miguel’s tank enables his shocks to power strands of lights on a nearby tree, the Associate Press reports. Miguel releases low-voltage blips of electricity when he is trying to find food, aquarist Kimberly Hurt said. That translates to a rapid, dim blinking of the Christmas lights. When he is eating or excited he emits higher voltage shocks which cause bigger flashes.

Here’s one way to get rid of a telemarketer. If you can’t view the below video, try https://youtu.be/BnzzvqTPTeY.


I’ve never seen people so anxious to go to work before. If you can’t view the below video, try https://youtu.be/1AytQEpwQUo.


A pig in Greece had his moment of fame. If you can’t view the below video, try https://youtu.be/0-xuoNq7a9o.

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Categories: Industry News

2019 Required Amendments List Published by IRS

Thu, 2019-12-05 12:55

The IRS has published Notice 2019-64, which details the 2019 required amendments list for qualified retirement plans.

As the IRS notes, beginning with the 2019 required amendments list, all required amendments lists will apply to both individually designed plans qualified under Section 401(a) and individually designed plans that satisfy the requirements of Section 403(b).

Part A of the Notice details “changes in requirements that generally would require an amendment to most plans or to most plans of the type affected by the change.”

First, the Notice states that final regulations relating to hardship distributions must be addressed.

“Plans (including § 403(b) individually designed plans) that (1) provide for a suspension of an employee’s elective deferrals or employee contributions as a condition for obtaining a hardship distribution of elective deferrals or (2) do not require a representation from an employee who requests a hardship distribution that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need, must be amended as necessary to eliminate the suspension and provide for the representation, for hardship distributions made on or after January 1, 2020,” the Notice states.

The IRS notes that the prohibition on a qualified plan’s or 403(b) plan’s suspension of elective deferrals and employee contributions as a condition for obtaining a hardship distribution of elective deferrals applies not only to the plan making the hardship distribution but also to all of the employer’s other qualified plans, Section 403(b) plans, and, if the employer is an eligible employer described in Section 457(e)(1)(A), eligible deferred compensation plans, as described in Section 457(b).

The second required change is detailed by the IRS as follows: “Collectively bargained cash balance/hybrid defined benefit plans maintained pursuant to one or more collective bargaining agreements ratified on or before November 13, 2015, and which constitute collectively bargained plans under Section 1.436-1(a)(5)(ii)(B), must be amended to the extent necessary to comply with those portions of the regulations regarding market rate of return and other requirements that first became applicable to the plan for the plan year beginning on or after the later of (1) January 1, 2017, and (2) the earlier of (a) January 1, 2019, and (b) the date on which the last of those collective bargaining agreements terminates.”

The IRS notes that the relief from the anti-cutback requirements of Section 411(d)(6) provided in Section 1.411(b)(5)-1(e)(3)(vi) applies only to plan amendments that are adopted before the effective date of those regulations.

Part B of the IRS Notice details “other changes in requirements that may require an amendment,” of which this year there are actually none.

Generally, December 31, 2021, is the last day of the remedial amendment period with respect to a disqualifying provision arising as a result of a change in qualification requirements that appears on the 2019 required amendment list and a form defect arising as a result of a change in Section 403(b) requirements that appears on the 2019 required amendment list. In addition, under section 8.01 of Revenue Procedure 2016-37 and section 6.01 of Revenue Procedure 2019-39, December 31, 2021, generally is also the plan amendment deadline for a disqualifying provision arising as a result of a change in qualification requirements that appears on the list and for a form defect arising as a result of a change in Section 403(b) requirements that appears on the 2019 list. Later dates may apply to a governmental plan.

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Categories: Industry News

Keys to Future Investing Success for Institutional Investors

Thu, 2019-12-05 12:50

There is no shortage of examples of how investment management and products have changed over the years to adjust to market factors and investor demographics.

Looking forward, NEPC, a research-driven independent investment consultant and private wealth adviser, has identified what it sees as the three new future fundamentals of investing and the largest drivers of investment success: sustainability, diversity & inclusion and innovation. Co-Head of NEPC’s Impact Investing Committee, Krissy Pelletier, based in Boston, says the fundamentals came to NEPC at it was looking at trends, with the goal of staying ahead of the curve, and determining what will help clients achieve the best results for portfolios and align with their goals.

Sustainability

According to NEPC, once a niche strategy, impact investing is quickly becoming the norm. Plan sponsors and investment committees are held accountable for delivering both monetary and social returns. To meet this dual mandate, investors need a clearly defined roadmap.

According to Pelletier, impact investing has four key pillars: negative screening, environmental, social and governance (ESG) integration, thematic investing or proactive capital. “Investors should have clear ideas about what they want to do with their dollars. They may want to support renewable energy or health care innovation. Maybe they want to align their investment with their organization’s mission or they just view impact investing as a compelling investment opportunity,” she says.

Pelletier says NEPC’s view is that ESG integration factors are part of an investment process. “We do not believe ESG is a product or asset class. ESG information can be integrated into any investment process, and it is up to asset managers to include it in what they are creating,” she adds.

According to Pelletier, there are studies that show ESG integration will create better outcomes—better return and risk mitigation. “We’re seeing investors taking a state-of-the-state of existing portfolios, turning a critical eye to the levels of ESG integration used by asset managers. And, asset managers have been working on this. Many have products with strong ESG integration efforts,” she says.

Sheri Hawkins, head of strategic product development at Northern Trust Asset Management (NTAM) in Chicago, tells PLANSPONSOR she used to work with equity portfolios, so she is always thinking of investment philosophy. “Investors should be paid to take risk,” she says.

Hawkins says ESG factors are really business issues. If they are managed well, it can set a company up for success and the price of its securities reflects that success. “At NTAM, we evaluate investment strategies on qualitative, quantitative and index factors; we evaluate ESG across that spectrum,” she says.

Diversity & Inclusion

Hawkins says it is quite important to include diversity & inclusion (D&I) in asset managers. The whole ecosystem around investment management should pull from more diverse talent, as this more closely represents the investor base.

NEPC says investment programs benefit from the different perspectives and ideas that come from a diverse and inclusive workforce.

Sam Austin, partner and co-chair of NEPC’s Diverse Managers Committee, says, “Women- and minority-owned funds are still significantly underrepresented in the portfolios of institutional and high-net-worth investors, despite research that points to positive and, in many cases, superior investment performance of those funds.”

Hawkins says, “It’s important to realize that the most important financial goals of individuals inform or are directly tied to their life goals, including retirement funding. Looked at through this lens makes us better realize how important diversity within the industry is, as diversity brings a wider array of talent and therefore a higher likelihood for the best ideas to surface.”

As for investing in companies that have a strong D&I culture, Hawkins says, “Data shows a clear relationship between companies that excel on diversity and those that are among the top performers in their respective industries. This is logical, given that diversity strengthens culture, increases creativity, and builds greater trust/connectivity among employees.”

She cites a McKinsey & Co study which found firms in the top quartile of gender diversity are 21 percent more likely to produce above average profitability and firms in the top quartile for ethnic diversity are 33 percent more likely to experience above average profitability.

NTAM recently selected eleven minority-owned broker-dealers for its Minority Broker Program. Started in 2007, the program consists of firms owned by minorities, women, and disabled veterans. Each firm was selected for one or more asset classes, based on quantitative and qualitative selection criteria including execution capabilities, technology platforms and performance.

“We know that companies that excel on cultural, ethnic and gender diversity are among the top performers in their respective industries,” Northern Trust Asset Management President Shundrawn Thomas said in a company announcement. “This quality leads to higher levels of engagement, increased innovation and greater profitability. It further promotes better business outcomes for all stakeholders, including clients.”

But, NTAM goes even further. It uses third-party managers that run asset classes for which it doesn’t necessarily have expertise. A few years ago it decided it was important to understand and assess those managers and their own D&I practices. It even launched a fund around this concept—the Northern Engage360 Fund, a global equity fund that leverages broader swath of managers, a couple of minority-owned in addition to managers that have strong D&I practices in investment teams and management strategy.

Hawkins adds that public plan sponsors are very involved in in the Engage360 fund. “A feed investor was a university endowment committed to emerging managers for number of years. In a conversation with the client, we co-developed it.”

She says over time, NTAM has had a number of public and corporate plan sponsors come to it with a minority-owned target for their investments. “They come to us for separate accounts to direct commissions to minority brokers, and they are excited to see we were intentionally and thoughtfully directing investments through pooled funds, such as collective investment trusts [CITs].”

Innovation

NEPC says, “The quest for alpha drives innovation in the financial markets as investors deploy new technologies, data and investment models to access an ever-changing investment landscape. Forward-looking investors require new data analytics, investment structures and risk management models to provide access to new markets and asset classes with a proper balance between risk and long-term returns.”

According to Pelletier, institutional investors, including retirement plan sponsors, want to take in information about what is happening in the marketplace and in their portfolios more quickly. Innovation is about asset managers offering the tools and platforms to help asset owners have better understanding, and also about asset managers finding and uncovering trends in the marketplace and portfolios.

Hawkins contends that historically the asset management industry has been behind the curve when it comes to tech innovation. “The threat is coming fast and furiously. Asset managers who are oriented around innovation are likely to thrive. There are a number of studies that say those who invest in tech will thrive in the future not only from a client interest perspective but in margins,” she says.
“Part of idea about future fundamentals is what worked in the past may not work in the future. So, asset managers need to be flexible and open-minded and looking for the next best and brightest idea to bring better outcomes to investors, whether looking at their teams and firms or new products,” Pelletier concludes. “It’s about being good partners [with investors] and having conversations about what should be developed along the way.”

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Categories: Industry News

Investment Product and Service Launches

Thu, 2019-12-05 12:47

Art by Jackson Epstein

Aegon Asset Management Announces Global Integration

Aegon Asset Management announced that it will integrate its European and U.S. businesses.

The creation of a globally integrated structure follows the merger of its senior European management team in 2018, which carries responsibility for Aegon Asset Management, Kames Capital and TKP Investments.

This final step to establish a globally integrated structure will see the simplification of the firm’s current operating model that features regional executive committees to create a global operating management board headed by Aegon Asset Management global chief executive Bas NieuweWeme.

Distribution and operations teams will similarly be managed on a coordinated, global basis.

The investment teams will be organized across four investment platforms for which the firm has uniquely differentiated capabilities and believes it can be globally competitive: Fixed Income, Real Assets, Equities and Multi-Asset & Solutions. There will not be any changes to the investment process nor to the people managing client portfolios.

Each investment platform will be led globally by a chief investment officer who will have a seat on the management board. The existing investment teams will remain in place and continue to manage the portfolios currently entrusted to them, albeit with greater global perspective and deeper research inputs. To maximize the impact of its highly respected ESG capabilities, the firm will transition its Responsible Investing team from the CEO to the CIO domain, in order to be even closer to the investment process and ESG product development.

The new structure will also see the Kames Capital and TKP Investments brands retired in 2020 as the firm moves to the Aegon Asset Management brand. The business says it will remain committed to its fiduciary and multi-manager services, by rebranding to AAM Fiduciary Services & Investment Solutions and AAM Multi-Management, respectively.

“The changes allow us to be more responsive to the changing markets and the evolving needs of our investors, while avoiding duplication of effort,” says NieuweWeme. “The efficiencies we realize can be invested in our client proposition and service, with competitive pricing and investment in our systems and processes so that they remain best-in-class for our clients.”

Avantis Investors Launches Additional Mutual Funds

Avantis Investors by American Century Investments has launched five low-cost mutual funds that share the same strategies with the Avantis exchange traded funds (ETFs) it rolled out in late September.  

Expense ratios for the five funds are identical to their corresponding ETFs: Avantis International Small Cap Value (AVDVX) charges 0.36%; Avantis International Equity (AVDEX) charges 0.23%; Avantis Emerging Markets Equity (AVEEX) charges 0.33%; Avantis U.S. Equity (AVUSX) charges 0.15%; and Avantis U.S. Small Cap Value (AVUVX) charges 0.25%.

“Our goal is to deliver low-cost, broadly diversified solutions in a variety of formats, including mutual funds and ETFs,” says Avantis Investors Chief Investment Officer Eduardo Repetto. “We want advisers and their clients to be able to choose the optimal vehicle to fit their circumstances.”

Information about the five funds, which all seek long-term capital appreciation, follows:

Avantis International Small Cap Value primarily invests in a broad group of non-U.S. small cap value companies believed to have higher expected returns across developed market countries, sectors and industries. The portfolio is designed to help investors achieve higher expected returns by investing in non-U.S. developed small cap companies believed to be trading at low valuations and with higher profitability ratios, seeking broad diversification across companies, industrial sectors and countries in order to mitigate concentration risk.

Avantis International Equity primarily invests in a diverse group of companies of all market capitalizations, across non-U.S. developed market countries, sectors and industries, emphasizing investment in companies believed to have higher expected returns. The portfolio is designed to help investors achieve higher expected returns and broad diversification by investing in a broad set of large, mid and small capitalization companies across non-U.S. developed countries. Aiming to increase expected returns, the strategy deviates from market capitalization weights by overweighting securities believed to be trading at lower valuations and with higher profitability ratios.

Avantis Emerging Markets Equity invests in a diverse group of companies of all market capitalizations, across emerging market countries, sectors and industries, emphasizing investment in companies believed to have higher expected returns. The portfolio is designed to help investors achieve higher expected returns and broad diversification by investing in a broad set of large, mid and small capitalization companies across emerging market countries. Aiming to increase expected returns, the strategy deviates from market capitalization weights by overweighting securities believed to be trading at lower valuations and with higher profitability ratios.

Avantis U.S. Equity invests in a diverse group of U.S. companies of all market capitalizations, across sectors and industries, emphasizing investment in companies believed to have higher expected returns. The portfolio is designed to help investors achieve higher expected returns and broad diversification by investing in a broad set of U.S. large, mid and small capitalization companies. Aiming to increase expected returns, the strategy deviates from market capitalization weights by overweighting securities believed to be trading at lower valuations and with higher profitability ratios.

Avantis U.S. Small Cap Value invests in a broad group of U.S. small cap value companies believed to have higher expected returns across sectors and industries. The portfolio is designed to help investors achieve higher expected returns by investing in U.S. small cap companies believed to be trading at low valuations and with higher profitability ratios, seeking broad diversification across companies and industrial sectors in order to mitigate concentration risk.

Vanguard Launches International Bond Index Fund

Vanguard has announced plans to launch a new, broad market international bond index fund, Vanguard Total International Bond II. The fund will serve as the international fixed income component for the firm’s Vanguard Target Retirement series and LifeStrategy Funds.  

The Vanguard Total International Bond II Index Fund will mirror the investment strategy of Vanguard Total International Bond Index Fund and will seek to track the same benchmark index, the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). 

“As our Target Retirement series and LifeStrategy Funds have grown, they have become increasingly large shareholders of their underlying index funds,” says Vanguard Chief Investment Officer Greg Davis. “We believe it is in the best interest of shareholders to segregate the transaction costs produced by these funds of funds from the costs generated by other investors in the Total International Bond Index Fund.”

Upon launch in early 2020, Vanguard Total International Bond II Index Fund will receive new cash flows from the Vanguard Target Retirement series and LifeStrategy Funds. The fund of funds’ current holdings in Vanguard Total International Bond Index Fund will be transitioned to the new fund in a prudent and tax-sensitive manner over time. The investment strategies, asset allocations, glide path, and expense ratios of the funds of funds will not change. 

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Categories: Industry News

Most 401(k)s Embrace New Hardship Rules

Thu, 2019-12-05 09:58

Nearly two-thirds, 64.6%, of 401(k) plan sponsors have embraced the new hardship withdrawal rules established by the Bipartisan Budget Act of 2018, according to the Plan Sponsor Council of America (PSCA).

The Act directed the Secretary of the Treasury to modify the rules. In September of this year, the Treasury Department and the IRS issued final regulations. They broadened the definition of hardship withdrawals, reduced the penalties for taking one and eliminated the six-month prohibition on contributions following a hardship distribution. The final regulations went into effect in September.

While Fidelity has found that the number of hardship withdrawals taken out spiked by 40% in the first half of this year, while the number of loans decreased by 7%, PSCA found that 72.6% of employers have not seen any meaningful change in the number of hardship withdrawals taken since the new provisions were implemented. Some 17.8% saw an uptick in hardship withdrawals, according to PSCA.

According to PSCA’s research, 60% of sponsors thought the elimination of the six-month moratorium on contributions is a wonderful idea. About half said they were “OK” with the provisions to allow for hardship withdrawals for casualty losses associated with federal disasters. Nearly 30% said the requirement that participants take loans before accessing a hardship withdrawal is a bad idea. The new rules make it easier for people to take out a hardship withdrawal without first taking out a loan.

“Pre-retirement distributions of retirement savings continues to be a matter of concern,” says Hattie Greenan, director of research at the Plan Sponsor Council of America. “Congress’ action to liberalize the requirements for hardship withdrawals is a welcome change for those who use 401(k) monies to stave off financial ruin, or cope with emergencies. However, because of the potential long-term impact of expanded hardship withdrawals, it is critical to keep a close eye on how these changes might affect retirement security.”

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Categories: Industry News

Stable Value’s Role in a Diversified DC Plan Menu

Wed, 2019-12-04 21:01

Earlier this week, John Hancock Retirement Plan Services revealed its newest stable value product, the Stable Value Guaranteed Income Fund.

While discussing the launch of the new fund, Patrick Murphy, CEO of John Hancock Retirement, also spoke generally about the importance of the stable value asset class—and not just for retirees and near-retirees.

Stable value is a valuable option for the conservative portion of anyone’s portfolio, Murphy says. For retirees and near retirees, its guarantee of principal and interest provides principal preservation and a predictable income stream that they can rely on during their retirement years. For individuals who are uncomfortable with market volatility and those seeking to diversify their investments across a range of asset classes, stable value’s protection of principal and interest provides steady and stable returns, protecting these assets from loss in the event of a market downturn.

Murphy says it makes some sense why stable value investments are discussed less often by retirement plan fiduciaries than, say, target-date funds or managed accounts—despite the fact that stable value remains the largest conservative defined contribution (DC) plan asset class.

“Unlike TDFs, stable value funds generally do not qualify as a qualified default investment alternative [QDIA] as defined by the Employee Retirement Income Security Act [ERISA],” Murphy says, noting that there are limited exceptions for stable value assets that were invested prior to the Pension Protection Act. “Automatic investment into a plan’s QDIA selection is an important fiduciary decision and target-date funds, with age-based diversified portfolios designed to meet the retirement needs of participants who are at very different distances from retirement, are naturally the subject of much analysis.”

Still, as Murphy explains, stable value funds can and do play an important role as an asset class along with target-date funds, and they should also be the subject of sufficient deliberation. This is a sentiment echoed by Robert Lawton, president, Lawton Retirement Plan Consultants.

“Almost all 401(k) plans do a good job of covering the nine basic U.S. equity style boxes of value, blend and growth in the standard capitalization sizes of large, mid and small,” Lawton says. “However, does your plan offer an international bond fund? How about a real estate or commodities fund? In many plans, the real estate fund has been the best performing option recently and may be again this year. As the current economic cycle progresses, possibly into recession, and the bull market in U.S. equities comes to an end, do you have the right investment options available to allow your participants to continue to be successful investors?”

Lawton says a 401(k) investment fund lineup should offer “a high quality, extremely low risk option for those participants who are close to retirement, scared of volatile markets or conservative investors.” Stable value funds have been the highest yielding, lowest risk options available lately, he adds.

“If the Fed continues to cut interest rates, they will likely prove to be superior in comparison with money market funds,” Lawton says. “Be aware that employers have faced litigation for offering money market funds instead of stable value funds. Many advisers feel that the safe option is the most important investment option in 401(k) plans. Make sure your plan offers the best safe option possible.”

Murphy adds that stable value funds, with their guarantee of principal and guaranteed payment of predictable income, can be a valuable part of a plan’s “retirement tier” and a participant’s decumulation strategy. 

“As more plan sponsors focus on keeping terminated and retired participants in plan, offering investment options that meet retirees’ spending needs and principal preservation objectives has become increasingly important,” Murphy says.

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Categories: Industry News

Stable Value Guaranteed Income Fund Launched by John Hancock

Wed, 2019-12-04 09:16

John Hancock Retirement and John Hancock Investment Management, companies of Manulife Investment Management, have launched the John Hancock Stable Value Guaranteed Income Fund.

While previewing the new product, Patrick Murphy, CEO of John Hancock Retirement, said the fund represents a new principal stable value option within the firm’s lineup of retirement investments.

According to John Hancock, the fund seeks to provide plan participants with steady and stable returns, guaranteed principal and interest, and daily liquidity. It does so by investing in John Hancock’s General Account, which Murphy describes as a well-diversified portfolio of investment-grade fixed income investments.

Technically, the new fund is offered through a group annuity contract, with underlying assets issued and guaranteed by the John Hancock Life Insurance Company. John Hancock Life Insurance Company has been a stable value asset manager since 2006, with total stable value assets under management greater than $2.7 billion.

“The fund is a valuable option for the conservative portion of anyone’s portfolio,” Murphy says. “For retirees and near retirees, its guarantee of principal and interest provides principal preservation and a predictable income stream that they can rely on during their retirement years. For individuals who are uncomfortable with market volatility and those seeking to diversify their investments across a range of asset classes, Stable Value Guaranteed Income Fund’s guarantee of principal and interest provides steady and stable returns protecting these assets from loss in the event of a market downturn.”

According to Murphy, the new fund generally will offer a rate higher than similar type investments, i.e., money market funds, without increased risk.

Effective immediately, the fund is available on the John Hancock Retirement open architecture platform. The fund will also be launched on John Hancock’s Signature Platform next year. The fund is available for 401(k), 401(a), governmental 457(b) and Taft-Hartley plans. It is fully portable and benefit responsive upon plan termination and has no initial investment minimums.

Asked how this new products announcement fits into the broader retirement plan industry conversation about “decumulation” of defined contribution (DC) plan assets, Murphy says that stable value funds, with their guarantee of principal and guaranteed payment of predictable income, can be a valuable part of a plan’s investment lineup and a participant’s decumulation strategy.

“As more plan sponsors focus on keeping terminated and retired participants in plan, including investment options that meet retirees’ spending needs and principal preservation objectives has become increasingly important,” he says.

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Categories: Industry News

Legislation Would Allow Retirement Plan Withdrawals to Pay Student Loan Debt

Wed, 2019-12-04 09:10

Senator Rand Paul, R-Kentucky, introduced S. 2962, the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act, aimed at helping Americans more quickly and easily pay off their student loan debt and save more money for retirement.

HELPER Act would allow Americans to annually take up to $5,250 from a 401(k), 403(b), 457 plan or IRA—tax and penalty free—to pay for college or pay back student loans. These funds could also be used to pay tuition and expenses for a spouse or dependent.  

The plan would enable two parents and a child, for example, to put over $15,000 in pre-tax funds in one year toward tuition or loan repayment if each set aside the maximum. “Currently, Americans can only pay for their student loans with after-tax money, placing an unnecessary constraint on their budget,” according to a news release from Paul’s office.

The bill would also allow employer-sponsored student loan and tuition payment plans to be tax free up to $5,250, and it would repeal the cap (and the phasing out) on deducting student loan interest, as student loans do not disappear when someone earns more money throughout their career.

While this seems counterintuitive to the effort to discourage leakage from retirement accounts, a summary of the bill states, “Because of student loan debt/repayment, workers are often not fully contributing to their [retirement plans] in the first place. The Paul bill changes the incentive to invest, since that money can be used to pay down burdensome debt. And the quicker student loan debt is paid down, the sooner workers can focus on retirement savings.”

To help give Americans the opportunity to save as much as possible for retirement, the legislation would also offer workers the choice to have an employer contribution to a retirement plan count as a Roth contribution. “While current law defers the taxes on employer contributions, forcing Americans to pay taxes on the funds and its gains in retirement, this change would allow workers to pay the taxes right away, freeing their savings to grow tax free and giving them greater financial security after they retire,” the news release explains.

Previously, Senators Ron Wyden, D-Oregon, and Ben Cardin, D-Maryland, introduced The Retirement Parity for Student Loans Act, which would permit 401(k), 403(b), and SIMPLE retirement plans to make matching contributions to workers as if their student loan payments were salary reduction contributions.

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Categories: Industry News

PIMCO to Reimburse Investors for Fee Miscalculation

Wed, 2019-12-04 08:32

PIMCO announced that between April 2011 and November 17, it had an advisory fee waiver in place on the PIMCO All Asset All Authority Fund to limit the fees PIMCO earned on underlying funds managed by PIMCO. However, according to a post on the fund’s website, due to an error in the calculation methodology, the waiver was less than it should have been.

PIMCO discovered the error when reviewing its fee waiver calculation process. Following the discovery, the firm instructed the fund’s accounting agent to correct the methodology, and the correction was made. PIMCO said it is now independently calculating any applicable fee waiver to ensure the amounts match the bank’s records.

PIMCO is now in the process of reimbursing investors affected by the miscalculation, both from the additional fees and the incremental amount of the estimated foregone performance the fees caused, plus interest. An independent forensic accounting firm verified PIMCO’s calculations. The reimbursement period is expected to end on March 13, 2020.

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Categories: Industry News

Barry’s Pickings: Extend HATFA Now

Wed, 2019-12-04 08:20

Art by Joe Ciardiello

Medium- and long-term interest rates have declined 75-100 basis points since the beginning of the year. For a typical pension plan, that decline will increase liabilities by close to 20%. That increase may, for funding purposes, be partly or wholly offset by asset gains for many plans (stocks have also gained 20% so far this year).

There are reports that some policymakers are considering an extension of the interest rate “stabilization” rules under the Highway and Transportation Funding Act (HATFA). Currently, under HATFA, liability valuation interest rates are determined using 90% of a trailing 25-year average of rates. As a result, Employee Retirement Income Security Act (ERISA) minimum funding valuation rates are nearly 200 basis points higher than (current) market rates.

During the period from 2021 to 2024, HATFA rates will (per the statute) be reduced to 85% of the 25-year average (in 2021), 80% (in 2022), 75% (in 2023), and finally 70% (in 2024), in effect jacking up liability valuations and minimum funding requirements over that period.

When interest rate stabilization was first adopted by Congress (as part of another highway bill, the 2012 Moving Ahead for Progress in the 21st Century Act (MAP-21)), many argued that interest rates were unusually low, as a result of (among other things) Fed monetary policy, and that interest rate “stabilization” would, in effect, tide DB sponsors over this period of outlier-low interest rates.

Whatever I thought at the time, thinking about these issues over the last seven years I’ve concluded that none of that is true. Low rates are here-to-stay for the foreseeable future, largely because of demographics.

But, my support for HATFA, and its further extension, has, if anything, grown stronger. Because it works, much better than the funding regime originally propounded under the 2006 Pension Protection Act (PPA).

Here’s why.

Why PPA minimum funding requirements failed

Perhaps the most important provision of ERISA, when it was originally adopted in 1974, was Title IV – ERISA’s Plan Termination Insurance system. Over time, some policymakers became concerned, however, that this system might become insolvent without stronger funding incentives.

As many policymakers recognized at the time, there were two ways of solving this problem. The one they chose was, in the PPA, to impose a solvency regime—a complicated and rigid set of minimum funding requirements—on the private defined benefit (DB) plan system.

The problems this solution created were made vivid—and to some extent intolerable—by the global financial crisis that hit just as PPA’s new funding regime took effect in 2008.

It turned out that—in the view of a pretty broad consensus—the cash demands that the new system put on DB plan sponsors were not good for a now-struggling economy.

It also forced plans into a design straitjacket, where if, purely because of an interest rate driven drop in funded status, plan funding fell below 80%–design changes, like a lump-sum window, were prohibited.

And (a correlated problem), in time of severe economic stress, with unemployment at nearly 10% in 2010, it was also really bad for Congressional budget math. All the additional required contributions were going to reduce the taxes DB sponsors paid.

The (better) alternative solution to the PBGC/minimum funding policy challenge

And so Congress turned to what had always been the available alternative. Instead of imposing a strict funding regime on plans that—in many cases presented no risk to the Pension Benefit Guaranty Corporation (PBGC) insurance system—it simply increased the cost of insuring unfunded benefits, by increasing the PBGC variable-rate premium from 0.9% of unfunded vested benefits (UVBs) in 2008 to 4.5% in 2020.

This approach allowed sponsors to make their own decisions about the trade-offs between funding or using available cash for more pressing purposes—an option that was unavailable under the original PPA mandatory funding regime—while (I would argue) doing a better job of maintaining the soundness of the PBGC single-employer insurance system.

Here’s proof

The proof is in the actual experience. Here is a table showing PBGC’s single employer program surplus (deficit) from 2008, when PPA’s mandatory funding rules were effective, through 2019.

Table: PBGC’s Single Employer System Deficit

Variable-Rate Premium ($ in billions)

 

 Deficit

VRP (as a % of UVBs)

2008

 $ (10.68)

0.9%

2009

 $ (21.08)

0.9%

2010

 $ (21.59)

0.9%  

2011

 $ (23.27)

0.9%  

2012

 $ (29.10)

0.9%  

2013

 $ (27.40)

0.9%

2014

 $ (19.30)

1.4%

2015

 $ (24.10)

2.4%

2016

 $ (20.60)

3.0%

2017

 $ (10.90)

3.4%

2018

 $ 2.48

3.8%

2019

 $ 8.78

4.3%

Variable-rate premiums (VRPs) go up, the PBGC single-employer system deficit goes down and, in the last two years and for the foreseeable future, is in surplus.

Extend HATFA now

In the current situation—with the dramatic decline in interest rates in 2019 making it likely that in 2020 and after U.S. DB plan sponsors are going to face increasing and unnecessary cash stress because the return of PPA’s funding straitjacket—the first thing that is needed is an extension of HATFA relief, indeed, if possible, an expansion of that relief.

Improvements needed

None of that is to say that the current system is perfect. There is widespread concern that high (and increasing) variable-rate and per capita premiums—the latter going from $33 in 2008 to $83 in 2020—are driving well-funded plans out of the system, both through risk transfer and lump sum de-risking transactions and through plan terminations.

I offer the following reforms as a place to start:

Reduce the PBGC per capita premium by half, say to $40. These (the plans for whom the per capita premium is an issue) are the plans we want to keep in the system.

Replace the VRP cap, which in effect encourages plans with high per capita liability to reduce PBGC headcount, with a special extended funding schedule, and with premium relief, for plans with large legacy liabilities.

Stop the “indexing” of the VRP—there never has been any rationale for this provision—its advocates don’t seem to understand how percentages work.

Substantially reduce the VRP rate. At current levels, and even in a context of dramatically declining interest rates and ballooning valuations, it is producing a significant surplus. That is a bad thing—money is being sucked out of the economy to pad PBGC’s books. How about starting with 3% of UVBs? Based on prior experience (see the table above), at that rate VRPs would continue to improve PGBC’s financial position.

 

Michael Barry is president of O3 Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/  about retirement plan and policy issues.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

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Categories: Industry News

Institutional Investors Feel Braced for Whatever the Market Throws Them

Wed, 2019-12-04 03:00

In the year ahead, institutional investors surveyed by Natixis Investment Managers rank volatility as their top portfolio risk (53%), with 77% saying they expect greater volatility specifically in the stock market and 67% expecting greater volatility in the bond market.

Almost half (48%) believe that equities are due for a correction in 2020. With the U.S. in the midst of its single longest economic expansion on record, and other markets continuing to shine, still institutions have some concerns that prices are inflated and stocks are overvalued.

Yet institutional investors aren’t making big changes to their portfolios, and instead, are waiting out the current cycle until they’re comfortable enough with market conditions to make any portfolio moves. “Institutional investors have been steadily fortifying their portfolios in anticipation of inevitable changes in the market cycle that could make 2020 a bumpy ride for unprepared investors,” says David Giunta, CEO for the U.S. at Natixis Investment Managers. “Despite a substantial amount of uncertainty next year, institutional investors remain focused on their long-term objectives and continue to see actively managed, diversified portfolios as a prudent path to outperformance.”

Institutional investors show a belief that active management will guide them through more volatile markets. Nearly three-quarters (74%) say the market environment in 2020 is likely to be favorable for active portfolio management. They continue to increase their allocations to active strategies while their use of passive strategies continues to decline. Current allocations are split 71% active and 29% passive, up from 64% allocated to active management and 36% to passive when surveyed in 2015.

Institutional investors’ projected allocations heading into 2020 remain relatively unchanged. Natixis found most have turned to the private markets, primarily for diversification (62%) and more attractive returns (61%) than they expect from traditional stocks and bonds. Most institutions now use private equity (79%) and private debt strategies (77%), and two-thirds (68%) see private assets playing a more prominent role in their long-term portfolio strategy, despite associated liquidity risks. Seven in ten (71%) institutional investors feel the return potential of private assets is worth the liquidity tradeoff.

Next year, 37% of institutional investors plan to increase their allocations to private debt as well as private equity (28%), real estate (29%) and infrastructure (32%). However, 86% of institutional investors are concerned about too much money chasing too few deals in the year ahead, and three-fourths wonder if public markets are now overvalued.

Preparing for the presidential election

In 2020, institutional investors will be watching the U.S. presidential election carefully. Overall, 64% project that the election cycle will result in market volatility. More immediately, 54% believe impeachment proceedings will have a destabilizing effect on the markets.

In terms of who wins, institutions are split on the performance outcome. Just over half (52%) think the market will respond favorably to a new president, while 54% see an unfavorable reaction should the Democrats win both houses of Congress. Elections may present some short-term performance concerns, but policy may have a longer-lasting impact, as 73% believe trade disputes will have a negative impact on performance.

Either way, institutions are deploying three key strategies to prepare portfolios for political risk. Most frequently they are looking to scenario analysis (48%) and establishing capital buffers and reserves (47%) to manage the risks. Nearly one-third simply say they will need to be nimble and agile in their approach in 2020.

Natixis surveyed 500 institutional investors that collectively manage more than $15 trillion in assets for pensions, insurers, sovereign wealth funds, foundations and endowments around the world.

The full survey report is available for download at https://im.natixis.com/us/research/institutional-investor-survey-2020-outlook.

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Categories: Industry News

Even Big Tech Employees Don’t Trust Big Tech With Finances

Tue, 2019-12-03 13:12

Jo Ann Barefoot, a former deputy U.S. Comptroller of the Currency and founder of the nonprofit Alliance for Innovative Regulation, has said, “The future of the financial system is going to be a mix of banks and non-banks. So the integration of banks and tech companies seems inevitable.”

It’s true that several big tech companies have moved to get into the financial or banking business. Apple Card, Facebook Pay and Google checking are some examples.

But, a survey finds big tech companies don’t have the trust that traditional banks do. Among 4,032 professionals surveyed by Blind Workplace Insights, 62% think that traditional banks are more trustworthy with their financial data than big tech. Even more interesting, nearly six in 10 tech employees (57%) trust traditional banks over tech companies.

Asked which tech giant—Google, Amazon, Uber, Apple or Facebook—they would be most willing to share their financial data with, 44% of respondents overall chose Apple, 34% chose Google and 17% selected Amazon. Only 2% each chose Facebook and Uber.

Blind was able to find out the trust employees of these big tech companies have in their own employers, too. The result followed the trend of the overall survey respondents. Ninety-one percent of Apple employees said Apple is the tech giant with which they are most willing to share financial data, and 78% of Google employees chose Google.

Less than half (47%) of Amazon employees said Amazon is the tech giant with which they are most willing to share financial data, while only 22% of Facebook employees and 17% of Uber employees selected their own employers.

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Categories: Industry News

Improving Readability of Participant Fee Disclosures

Tue, 2019-12-03 05:00

“I work in HR at an Employee Retirement Income Security Act (ERISA) 403(b) plan sponsor. I realize that we have to provide an annual fee disclosure to participants, but in reading it, it is so boring! As a HR communications specialist, it is just not the type of communication I think our participants will actually read! Isn’t there anything we can do to ‘spice it up’ a bit and improve its readability?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:


Actually the Department of Labor’s Model Chart for participant fee disclosure is not bad as far as required disclosures go—it is much more readable than, say, a Summary Annual Report—but its length, which can exceed 10 pages depending on the number of investment options offered, is indeed likely to discourage many participants from reading it.

However, there is nothing in the final rule for participant fee disclosures that would prevent a plan sponsor from augmenting the communication by including, for example, a simple explanation of the plan fees (e.g., dollar amount of recordkeeping and other administrative fees, dollar amount of investment fees, etc.) in the mailing that perhaps, might grab the attention of plan participants, especially if it is limited to a single page and is written in language designed to engage the participant.

Furthermore, once the proposed regulations regarding electronic disclosures are finalized, there could be an opportunity for plan sponsors to provide an even greater degree of customized fee disclosure to participants, as they will not need to worry about additional mailing costs associated with enhancing the required participant fee disclosures. Plan sponsors might even be able to take advantage of current technology to provide participants with a state-of-the-art, personalized fee disclosure experience!

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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TRIVIAL PURSUITS: What Is the Best-Selling Christmas Song?

Mon, 2019-12-02 13:14

What is the best-selling Christmas song?

According to the Guinness Book of World Records, “White Christmas” by Bing Crosby is not only the best-selling Christmas/holiday single in the United States, but also the best-selling single of all time, with estimated sales in excess of 50 million copies worldwide.

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Categories: Industry News

Help Needed to Curtail Gen X’s Anxiety About Retirement

Mon, 2019-12-02 12:41

Generation X investors are less confident about their financial future than Millennials or Baby Boomers, according to E*TRADE’s quarterly StreetWise survey.

Not having enough saved for retirement tops the list of worries for Gen X (ages 35 to 54), with nearly one-third (32%) choosing it. For Baby Boomers (ages 55 and older) and Millennials (ages 25 to 34) the top worry is the loss of a loved one, while not having enough saved for retirement ranks second for Millennials and third for Baby Boomers.

The survey also found four in 10 Gen X investors (37%) said they have taken an early retirement withdrawal, an increase of 10 percentage points in the past five years.

Mike Loewengart, vice president of Investment Strategy at E*TRADE Financial, stressed the importance of automatic savings for helping Generation X save more for retirement and feel more financially secure. In addition, he noted that employees should be encouraged to contribute at least enough to employer-sponsored retirement plans to get the full employer matching contribution.

However, with their competing financial priorities, Gen X investors are prime candidates for the help of a financial adviser. According to E*TRADE, Gen X investors are less likely than other generations to seek the help of an investment professional when it comes to managing their finances. Gen X investors tend to have more complex financial challenges, managing both their own wealth and that of their dependents. Offered access to an adviser, they can create a comprehensive financial plan—with a financial adviser acting as a coach to help prioritize, budget and allocate appropriately for the future.

Members of the sandwich generation, those between the ages of 36 and 60, are hard pressed to save for retirement or emergencies, primarily due to the strain of supporting other family members, according to a survey by PNC Financial Services Group. Thirty-eight percent do not have an emergency savings fund, 31% have an emergency fund that would last less than six months, 32% have less than $25,000 saved for retirement and more than half have $100,000 or less saved for retirement.

“While the financial challenges Millennials face are often in the spotlight, like student loans and health care costs, Gen X not only faces these, but also the compounding challenges of mortgages, financing education for their kids, and even managing their children’s and parents’ finances. Yet despite this perfect storm of financial challenges, they still have time on their side,” Loewengart says.

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Categories: Industry News

Wolters Kluwer Launches Suite of Benefits Insight and Tools

Mon, 2019-12-02 12:01

Wolters Kluwer Legal & Regulatory U.S. launched the Pension & Employee Benefits Suite on Cheetah. Cheetah is Wolters Kluwer’s research platform.

The suite integrates Wolters Kluwer’s content with a range of practice tools to deliver expert insights and a more seamless workflow to attorneys, corporate counsel, and Employee Retirement Income Security Act (ERISA) professionals.

The Pension & Employee Benefits Suite on Cheetah delivers access to time-saving practice tools, current awareness resources, expert analysis, and professional references on a single platform. The digital suite allows users to customize dashboards and treatise libraries for easy retrieval of resources through a single search, streamlining the research process and delivering greater work efficiencies and time savings. Users can choose from dozens of titles authored by acclaimed, trusted authorities, gaining hands-on knowledge to efficiently create and manage retirement and welfare benefits plans.

Key features of the Pension & Employee Benefits Suite on Cheetah include:

  • 60 explanatory guides and answer books;
  • 18 practical tools;
  • 19 journals and newsletters;
  • 7,506 interactive forms;
  • 58,000 ERISA cases;
  • 105,000 tax law cases; and
  • 205,000 agency materials.
Cheetah organizes information and tools topically, putting content in context so professionals can quickly locate the information and guidance needed. More information is at https://lrus.wolterskluwer.com/store/cheetah/pension-employee-benefits/.

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Categories: Industry News

DOL Enforcement Efforts Are Wide-Ranging

Mon, 2019-12-02 10:51

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) released its program results for Fiscal Year 2019, which show its enforcement and Benefit Advisor programs recovered more than $2.5 billion in payments to benefit plans, participants and beneficiaries.

In FY 2019, EBSA closed 1,146 civil investigations, with 770 of those cases (67%) resulting in monetary results for plans or other corrective action. Recoveries on behalf of terminated, vested participants played a large role in these results. Under its Terminated Vested Participant Project, EBSA helped participants collect nearly $1.5 billion in retirement benefits owed to them in the form of lump-sum payments, present value of lifetime annuity payments and interest.

At the 2019 PLANSPONSOR National Conference, James Robison, managing director, Strategic Retirement Partners, said one of the most common steps that leads to a Department of Labor (DOL) audit is an employee complaint. In its program results, the EBSA said in FY 2019, EBSA’s Benefits Advisors closed more than 166,000 inquiries and recovered $510 million in benefits on behalf of workers and their families through informal resolution of individual complaints.

According to Robison, misunderstandings about how the plan operates could lead to complaints, and “regularly scheduled participant education can help dissipate that.”

Robison and Jania Stout, practice leader, co-founder, Fiduciary Plan Advisors, also noted that information on the Form 5500 could raise a red flag for the DOL. To avoid this, plan sponsors should “review the completed form against the plan’s trust report, employer census information, plan document and other plan information,” Mark Klein, CEO of PCS, a recordkeeper in Philadelphia, previously told PLANSPONSOR.

Michael Savage, retirement services compliance manager for Paychex in Rochester, New York, said errors that are typically found on Form 5500 “include participant counts, beginning asset balance, employer tax ID numbers, financial reconciliations with prior plan years and missing service providers on Schedule C.”

But, the EBSA is not just looking for errors and bad actors; it wants plan sponsors to be able to comply with laws and regulations and easily correct any mistakes. According to its program results, EBSA conducted 325 compliance assistance outreach events across the country.

It also continued to reach out to plan fiduciaries and others to participate in the Voluntary Fiduciary Correction Program (VFCP), and Delinquent Filer Voluntary Compliance Program to encourage the correction of Employee Retirement Income Security Act (ERISA) violations. These programs provide incentives for fiduciaries and others to self-correct by reducing or eliminating potential penalties and/or avoiding other adverse consequences. In FY 2019, EBSA received more than 20,000 delinquent filings and 1,600 applications for the VFCP. VFCP corrections totaled $14.6 million during FY 2019.

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Categories: Industry News

Court Finds Private Equity Funds Not Liable for Plan Withdrawal Liability

Mon, 2019-12-02 09:46

The 1st U.S. Circuit Court of Appeals has reversed a U.S. District Court ruling that two private equity funds are liable under the Multiemployer Pension Plan Amendments Act (MPPAA) for the pro rata share of unfunded vested benefits owed to a multiemployer pension fund by a bankrupt company, Scott Brass Inc., that is owned by the funds.

The District Court held that there was an implied partnership-in-fact which constituted a control group. The 1st Circuit reversed the decision because it concluded the multi-factored partnership test set forth in the case of Luna v. Commissioner had not been met, and it couldn’t conclude that Congress intended to impose liability in this scenario.

Sun Capital Advisors Inc. (SCAI) is a private equity firm which pools investors’ capital in limited partnerships, assists these limited partnerships in finding and acquiring portfolio companies, and then provides management services to those portfolio companies. SCAI established at least eight funds. Two of them, Sun Fund III and Sun Fund IV, are the investors in Scott Brass Inc. (SBI).

As the lower court noted in its opinion, considered separately, one of the fund’s ownership stakes in Sun Scott Brass LLC is 70% and the other’s ownership stake is 30%, both of which separately fall below the necessary 80% threshold necessary to establish a “controlling interest.” However, the court found a limited partnership or joint venture existed. “The Sun Funds are not passive investors in Sun Scott Brass, LLC brought together by happenstance, or coincidence. Rather, the Funds created Sun Scott Brass, LLC in order to invest in Scott Brass, Inc.,” the opinion stated. “[I]t is clear beyond peradventure that a partnership-in-fact existed sufficient to aggregate the funds’ interests and place them under common control with Scott Brass, Inc.” So, combined, the funds’ ownership stake was 100%.

In its opinion, the 1st Circuit noted that an employer completely withdraws from a multiemployer plan when it permanently ceases to have an obligation to contribute under the plan, or permanently ceases all covered operations under the plan. On withdrawal, an employer must pay its proportionate share of the plan’s “unfunded vested benefits.” To prevent evasion of the payment of withdrawal liability, the MPPAA imposes joint and several withdrawal liability not only on the withdrawing employers but also on all entities (1) under “common control” with the obligated organization (2) that qualify as engaging in “trade or business.”

According to the opinion, the MPPAA regulations adopted in 1996 by the PBGC, include the Treasury Department’s regulations governing “common control.” The regulations state that entities are under common control if they are members of a “parent-subsidiary group of trades or businesses under common control.” The PBGC has not provided the courts or parties with any further formal guidance on how to determine common control specifically in the MPPAA context. Nor has PBGC updated its regulation on common control since that regulation’s adoption.

So, the Circuit Court looked to the partnership factors the Tax Court adopted in Luna. The factors are:

  • “The agreement of the parties and their conduct in executing its terms”;
  • “the contributions, if any, which each party has made to the venture”;
  • “the parties’ control over income and capital and the right of each to make withdrawals”;
  • “whether each party was a principal and co-proprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income”;
  • “whether business was conducted in the joint names of the parties”;
  • “whether the parties filed Federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers”;
  • “whether separate books of account were maintained for the venture”; and
  • “whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise.”

While the 1st Circuit found there are some facts under the Luna factors that tend to support a conclusion that the Sun Funds formed a partnership-in-fact to assert common control over SBI, it said consideration of all of the factors leads to the opposite conclusion.

The Luna factors that counsel against recognizing a partnership-in-fact include the clear record evidence that the Funds did not “intend to join together in the present conduct of the enterprise,” at least beyond their coordination within SSB-LLC. The fact that the Funds expressly disclaimed any sort of partnership between the Funds counts against a partnership finding as to several of the Luna factors—specifically, factors one, five and six. The appellate court noted that most of the 230 entities or persons who were limited partners in Sun Fund IV were not limited partners in Sun Fund III. The Funds also filed separate tax returns, kept separate books, and maintained separate bank accounts—facts which tend to rebut partnership formation, and counting against factors six and seven.

The Sun Funds did not operate in parallel, that is, invest in the same companies at a fixed or even variable ratio, which also shows some independence in activity and structure, the appellate opinion states. The creation of an LLC by the Sun Funds through which to acquire SBI also shows an intent not to form a partnership. The formation of an LLC both prevented the Funds from conducting their business in their “joint names”—Luna factor five—and limited the manner in which they could “exercise mutual control over and assume mutual responsibilities for” managing SBI—Luna factor eight.

Using the Luna factors, the 1st Circuit concluded that most of them point away from common control. Moreover, the Circuit Court said it was reluctant to impose withdrawal liability on these private investors because it lacks a firm indication of Congressional intent to do so and any further formal guidance from the PBGC. “Two of [the Employee Retirement Income Security Act] and the MPPAA’s principal aims—to ensure the viability of existing pension funds and to encourage the private sector to invest in, or assume control of, struggling companies with pension plans—are in considerable tension here,” the court stated in its opinion.

The 1st Circuit reversed the entry of summary judgment for the New England Teamsters & Trucking Pension Fund and remanded the case to the lower court with directions to enter summary judgment for the Sun Funds.

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