The Year in Regulation and Guidance

Several regulations and pieces of guidance issued in 2014 will have a lasting impact on retirement plans.

PBGC premium due dates and calculations: A final rule from the Pension Benefit Guaranty Corporation (PBGC) implemented changes to premium due dates and calculations. The PBGC proposed rules in 2013 to simplify due dates and give small plans more time to value benefits, among other changes. In January 2014, the agency issued a final rule moving the flat-rate premium due date for large plans to later in the premium payment year (see “PBGC Moves Premium Date for Large Plans”). The current rule finalizes all other items in the proposal.

Some big plans will feel the impact, according to Serena Simons, national retirement practice leader at the Segal Group in Washington, D.C., in the form of a reduced number of filings. Simons says this is a positive outcome for administrators. Plan sponsors used to have to file an estimated premium early in the plan year, Simons says, and then do a final premium “true-up” in the fall. Now plan sponsors just need to make one payment—the actual one.

“That has already affected some plans in 2014,” she says, and will continue to have an impact on off-calendar plans going through 2015. Simons says plan sponsors welcomed the change, because it meant having to determine the premium amount—an operation that generally means some complex consulting with actuaries—has to be done only once. This will translate to savings of administrative time and energy.

Some alterations by the PBGC in the premium regulations for multiemployer plans eliminated the need for plan sponsors to deliver certain notices at certain times. While the overall impact is smaller, Simons says, it’s in a similar vein. “The agency is looking at the administrative burden it has imposed and is trying to make it easier for plan sponsors to comply,” she says. The attempt to minimize that burden is indicative of the agency’s effort to streamline its regulatory requirements when possible, Simons observes.

Hybrid retirement plans: Also welcome to plan sponsors, the Internal Revenue Service (IRS) issued final regulations for hybrid retirement plans. Mainly affected, according to Simons, are cash balance plans. This hybrid plan is the most common and the one most affected by the rule, Simons says. “At heart, the cash balance plan is a defined benefit plan, so the standard benefit that has to be offered remains an annuity,” she explains. “The benefit is actually expressed to the participant as an amount in a hypothetical account, and it grows in two ways.”

A contribution credit, which is a percentage of pay, can be quarterly, monthly or annually. An interest credit is credited at pre-specified times. Simons notes that cash balance plans for a time were considered controversial, because they were deemed to be age discriminatory: younger participants could get a bigger benefit, while older ones, since they were not going to be there as long a time, could get less. The issue was solved by legislation in the Pension Protection Act of 2006.

But how to decide the market rate of return remained an issue until this year. A rate of return that’s too high could not be changed because doing so would be forbidden by the anti-cutback rule, Simons explains. “When you get a contribution credit, the interest credit at the interest rate in place is part of that accrual of benefits,” she says. “That interest rate could not be changed retroactively because that would be a cutback.”

The regulation fixes this dilemma for plan sponsors, Simons says, and it is a big step forward. “What can the interest rate be, and what can plan sponsors do if they pick one that is too high?” she says. “It seems to have been well received by plan sponsors. The regulation took care of a lot of questions on what rates are appropriate.”

ESOPs and Presumption of Prudence: The Supreme Court in June handed down the decision that fiduciaries of employee stock ownership plans (ESOPs) are not entitled to any special presumption of prudence under the Employee Retirement Income Security Act (ERISA).

In its unanimous opinion in Fifth Third Bancorp v. Dudenhoeffer, the high court said they are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.

“(The decision) changed tremendously what we all assumed you could do with a plan document,” says David Weiner, principal at David Weiner Legal in Northbrook, Illinois. He is uncertain if the decision opens the gate to more lawsuits, but says in his opinion it may have demonstrated a certain lack of understanding on the court’s part about the implications of what it was doing. “It may have created an obstacle to cases,” Weiner says, “or it may have created a new presumption of prudence.”

The Supreme Court tried to give some guidance to the lower courts in evaluating motions to dismiss, Weiner feels. He does not think the decision can be used to demonstrate that a specific stock should not be held as a plan investment. “Anything that’s wrong with a company is already in the stock price,” he says. A possible interpretation of the decision might be: “It’s never going to be imprudent to continue to hold onto stock absent special circumstances,” he says. Continuing to hold onto a stock is fine. It has a specific value, and it’s worth what the market has already determined to be its value, whether it’s one dollar or a hundred dollars.

The decision underscored the need for plan sponsors to do what they should already be doing. “You have to have an independent fiduciary,” he says. “Anyone with a stock fund that is handling it internally is putting themselves into the parts of Fifth Third that were not decided.” Plan sponsors must keep evaluating what the stock is doing on a regular basis and make decisions based on the knowledge, and watching procedural prudence is absolutely critical.

He feels it might continue to stoke the movement away from companies having stock funds. “There is so much uncertainty,” Weiner says. “I think it will push companies away.”