NewsDash – August 13, 2014

August 13th, 2014

Second Opinions

Starting in 2014, the Patient Protection and Affordable Care Act (ACA) prohibits group health plans from imposing an out-of-pocket maximum (OOP max) that exceeds statutory limits. Once an individual has met the plan’s OOP max, the plan must pay 100% of covered benefits. This requirement applied for plan years starting on or after January 1, 2014, except with respect to grandfathered plans. The Department of Health and Human Services has issued regulations in the context of Exchange-qualified health plans, but these regulations do not apply directly to other group health plans, such as Employee Retirement Income Security Act (ERISA) plans (although can be viewed as analogous guidance). The agencies have not issued regulations applicable to group health plans, but have issued several Q&As. Experts from Groom Law Group answer several questions group health plans may have that have been addressed in the agency Q&As.

Benefit Briefs

Contribution Rate Inertia a Problem for Participants

Thirty-six percent of Americans currently contributing to an employer-sponsored retirement plan have never increased the percentage of salary they defer into retirement accounts. This is according to a recent survey from TIAA-CREF conducted among a national sample of U.S. retirement plan participants. The survey results show an additional 26% of current plan participants have not increased their defined contribution retirement account deferral in at least a year. Even employees who received a raise showed reluctance to increase salary deferrals.

Members of the “sandwich generation” are feeling a squeeze on their retirement savings. The BMO Sandwich Generation Survey from Canadian investment firm BMO Nesbitt Burns finds 76% of the sandwich generation feel the stress of everyday living—such as working, taking care of family, paying household bills, and helping older relatives—is negatively impacting their ability to meet long-term financial goals. The sandwich generation are individuals ages 45 to 64 who are caring both for their aging parents and for their own children. On average, the 800 Canadians surveyed indicated they need to save $818,000 to have their ideal retirement lifestyle, but they have only saved an average of $258,000.

Employer Contributions Important to Retirement Savings

More than four in 10 (43%) employees surveyed by Fidelity Investments say they would settle for lower pay if it meant they received a higher employer contribution to their retirement plan accounts. The survey focused on various compensation scenarios to determine how much value employees place on a 401(k) employer match when making decisions about new job opportunities. Employees were more likely to accept a position that had an employer match as part of its overall compensation package. Only 13% say they would take a job with no company match, even if it came with a higher pay level.

Changing retirement plan providers (recordkeepers) doesn’t have to be a bad experience. Churn rates, or the percentage of plan sponsor switching recordkeepers, have actually slipped, says Bill Harmon; senior vice president of 401(k) markets at Great-West Financial in Greenwood Village, Colorado. In the smaller market, plans might change every five to seven years, he says. Larger plans have a lower turnover rate, but conversions are simply a fact of plan life. Sooner or later, someone is simply going to want a change. Reasons for a change are simple, Harmon feels. “It comes down to systems and people,” he tells PLANSPONSOR. “It sounds so simple, but most of the time, investments are pretty similar, and with fee disclosure a lot of costs structures have come to the middle.” The plan sponsor that wants to change recordkeepers generally is not having a good systems experience, which can stem from the way the plan was set up initially, or an actual relationship with the account manager or the field relationship manager.

Industry Voices

Industry Voice: Another Look at TDFs

Over the last several years, target-date funds (TDFs) have gained a great deal of popularity, and they are being looked at, poked, inspected, regulated and debated. There are arguments about “to” versus “through” and arguments about fees. Some have suggested that fiduciaries examine whether “proprietary” funds are acceptable or if outside money managers have to be offered. I do not want to reexamine these issues. Rather, I want to ask a new question: Does anybody really think a new plan participant just starting to save in his or her employer’s retirement plan will be in a TDF 30 to 40 years later?

Market Mirror

Tuesday, the Dow slipped 9.44 points (0.06%) to 16,560.54, the NASDAQ decreased 12.08 points (0.27%) to 4,389.25, and the S&P 500 was down 3.17 points (0.16%) at 1,933.75. The Russell 2000 fell 8.90 points (0.78%) to 1,133.03, and the Wilshire 5000 closed 50.96 points (0.25%) lower at 20,476.17. On the NYSE, 3.2 billion shares traded, with 1.4 declining issues for every advancing issue. On the NASDAQ, 2.8 billion shares changed hands, with decliners leading advancers more than 2 to 1. The price of the 10-year Treasury note was down 7/32, bringing its yield up to 2.453%. The price of the 30-year Treasury bond fell 20/32, increasing its yield to 3.277%.

Rules & Regulators

Court Finds Executive Compensation Plan Is ERISA Plan

A federal court has found a wealth accumulation plan (WAP) offered to executives of RBC Capital Markets Corporation is a “pension plan” under the Employee Retirement Income Security Act (ERISA). The 5th U.S. Circuit Court of Appeals noted that a “pension plan” as defined by ERISA is “any plan, fund, or program . . . maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan…” The appellate court disagreed with RBC’s argument that the two conditions must be taken together and said they are two separate conditions for determining whether a plan is a “pension plan” under ERISA.

Financial Sense

Institutional plan sponsors gained almost 4% in the second quarter at the median, nearly doubling gains achieved during the first quarter, according to data from Northern Trust Universe. Institutional plans continued to benefit from gains in the domestic and international equity sectors, in addition to smaller gains in fixed income. During second quarter 2014, corporate ERISA plans (i.e., plans governed by the Employee Retirement Income Security Act) performed best among all plans with a return of 4.1%, compared with 2.8% during first quarter 2014.

The World at Large

Larger UK employers will hire independent financial advisers (IFAs) to explain retirement options to staff, rather than rely on the government’s ‘guidance guarantee,’ according to research from employee benefits consultancy Mercer.