IRS Notice 2019-18 Retracts Intention to Amend RMD Regulations to Prohibit Retiree Lump Sum Windows in DB Plans

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IRS Notice 2019-18 Retracts Intention to Amend RMD Regulations to Prohibit Retiree Lump Sum Windows in DB Plans

On March 6, 2019, the Internal Revenue Service (IRS) and U.S. Treasury Department issued Notice 2019-18, retracting their intention to amend the required minimum distribution (RMD) rules under Internal Revenue Code (IRC) § 401(a)(9). Notice 2019-18 supersedes Notice 2015-49, which stated the intention to propose regulations that would have prohibited qualified defined benefit (DB) pension plans from replacing various types of annuity payments that are currently being paid (i.e., joint and survivor, single life, or other annuities) with a lump sum payment or other accelerated form of distribution.

Under the current RMD regulations, a pension plan may offer a lump sum distribution option during a limited window period to participants who are currently receiving monthly pension payments (sometimes referred to as retiree lump sum windows or lump sum risk transferring/de-risking programs).  DB plan sponsors have used these lump sum distributions to lower their pension plan liabilities, since the lump sum distribution transfers longevity risk and investment risk from the pension plan to the retiree.

In Notice 2019-18, the IRS announced they will not assert that a retiree lump sum window program causes a minimum distribution violation, but will evaluate if the plan, as amended, satisfies other requirements (i.e., nondiscrimination, vesting, maximum benefit limits, qualified joint and survivor payment, and funding-based benefit restrictions). In addition, the Notice also states that the IRS will not issue Private Letter Rulings (PLRs) on retiree lump sum windows.  However, if the plan sponsor is eligible to apply for and receive a determination letter, the IRS will no longer include a caveat expressing “no opinion” on the tax consequences of a retiree lump sum window.

Notice 2019-18 is available here.

International Foundation Reports on the Effect of Behavioral Finance to Help Improve Retirement Savings

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International Foundation Reports on the Effect of Behavioral Finance to Help Improve Retirement Savings

On March 15, 2019, the International Foundation of Employee Benefit Plans (IFEBP) issued a white paper, “Ten Ways Behavioral Finance Can Boost Retirement Security.” According to the paper, employers, plan sponsors and plan administrators may utilize the insights of behavioral finance based on emotional, social and cognitive factors to make changes that may affect the decision making and actions of employees and plan participants to help increase their retirement savings.

Through effective retirement plan design and communication, employers can encourage workers to make better decisions. Specifically, the IFEBP offers ten tips based on behavioral finance principles to support employees working to achieve retirement security.  One important factor presented would be to provide access to and encourage the use of a financial advisor.

The paper is accessible here.

EBRI Releases Brief on the Future of the Employment-Based Health Benefits System

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EBRI Releases Brief on the Future of the Employment-Based Health Benefits System

On March 14, 2019, the Employee Benefit Research Institute (EBRI) released its issue brief, What Does the Future Hold for the Employment-Based Health Benefits System?  The study evaluates the potential impact of legislative proposals and regulatory actions that may affect the future of employment health benefits.

According to the EBRI, the current employment-based health benefits system is the most common form of U.S. health care coverage, which covered 167 million people under age 65 in 2017. From 2013 to 2017, there has been an increase in such benefits among workers and dependents likely due to the increase in the percentage of employers offering health benefits.  This may be the result of the strengthening economy, lower unemployment rates, and relatively low premium increases.

Some of the public policies related to the Cadillac tax; Medicare-for-all; proposals that allow health insurance to be purchased in the individual market using employer funding; and other market developments may significantly impact employment health benefits. The report concludes, “Thoughtful consideration of policy proposals to expand the number of people with health insurance coverage should not only evaluate their effectiveness in addressing health care costs, quality, and coverage.  Policy makers should consider the impact on the voluntary, market-driven, employment-based system.”

The report is available here.

NASRA Updates Issue Brief on State and Local Government Spending for Public Pensions

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NASRA Updates Issue Brief on State and Local Government Spending for Public Pensions

On March 2019, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, State and Local Government Spending on Public Employee Retirement Systems.  The brief examines the cost of pension benefits for state and local governments and finds that, based on U.S. Census Bureau data, about 4.7% of all state and local government direct general spending (which includes all government expenditures except intergovernmental transfers) was used to fund pension benefits in 2016.

Moreover, state and local government direct general spending on public pensions has remained relatively stable over the past 30 years, declining from 4.4% in fiscal year (FY) 1988 to about 2.3% in FY 2002 and rising to 4.7% by FY 2016.  In aggregate, state and local governments contributed $145 billion to pension funds in FY 2017, which is projected to be about 4.7% of projected state and local government direct general spending.

The brief also finds that across state and local governments in 2016, spending on pensions varied from 1.86% of total spending to nearly 10.0%.  This variation was mainly due to: 1) differences in benefit levels; 2) differences in the magnitude of unfunded pension liabilities; 3) level of commitment by plan sponsors to make required pension contributions; and 4) portion of the state’s population that lives in an urban area.  As a percentage of total spending, pension costs were about 31% higher for cities than for state governments over the 30-year period from 1987-2016.  This is primarily attributable to a larger portion of local government spending on salaries and related benefits compared to state government spending.

In addition, the brief clarifies that state and local government pension benefits are paid from the plan’s trust funds rather than from general operating revenues.  Public pensions are financed from the combination of employee contributions, employer contributions and investment returns.  Since 1988, investment earnings amounted to about 62% of all public pension plan revenues, with an additional 26% from employer contributions, and 12% from employee contributions.

Public retirement programs remain a relatively small, but growing part of state and local government spending.  The brief concludes, “Pension costs paid by state and local government employers vary widely and reflect multiple factors, including differing levels of public services, benefits, pension funding, and employer effort to pay required contributions, among other things.”

The brief also includes a table showing state and local government pension contributions in 2016 as a percentage of state and local government direct general spending on a state-by-state basis.

The brief is available here.

EBRI Studies Trends in Employee Tenure from 1983-2018

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EBRI Studies Trends in Employee Tenure from 1983-2018

On February 28, 2019, the Employee Benefit Research Institute (EBRI) released its issue brief, Trends in Employee Tenure, 1983–2018. This study examines data on U.S. employee tenure (or the amount of time an individual has been with a current employer). It uses U.S. Census Bureau data from the Current Population Survey (CPS) to examine the tenure with current employers of wage and salary workers from 1983–2018.  When the labor market has been the strongest, the tenure of workers has tended to be shorter, as more individuals start new jobs by being newly employed or by changing jobs during a strong economy.

Key findings include:

  • Since 1983, the median tenure of all wage and salary workers ages 25 or older is about five years.
  • Typically, the distribution of tenure levels among workers ages 20 or older has been trending toward longer tenures, but shorter tenures have increased in recent years.
  • Compared to 2012, median tenure decreased in all groups. Furthermore, the distribution of worker tenure increased in the lowest levels of tenure (two years or less).
  • For career jobs, the highest median tenure level for any age group (15.3 years in 1983 for males ages 55–64) does not cover an entire lifetime career, since the median worker would not have started his or her current job until after age 40. In addition, the percentage of workers in both the 55–59 age group and the 60–64 age group with 25 or more years of tenure has been about 20% when these workers would be ending their working careers. Consequently, about 80% of workers at these ages have tenures less than 25 years, which would be less than a full working career.
  • There is a significant difference between private-sector and public-sector workers’ tenure distributions. Private-sector employers have maintained a relatively constant and modest percentage of long-term employees (25 or more years of tenure). In the public-sector, this group has increased significantly through 2004 before trending down through 2018. Therefore, public-sector employers are facing the retirement of a significant number of their most experienced workers, but this issue has been lessening.

According to EBRI, “Most workers have changed jobs during their working careers, and the evidence suggests that they will continue to do so in the future. This … has several important implications — potentially reduced or no defined benefit plan payments due to vesting schedules, reduced defined contribution plan savings, lump-sum distributions that can occur at job change, and public policy issues both through lower retirement incomes of the elderly population and the loss of experienced, public-sector workers likely to be retiring soon.”

The summary is available here.

NCPERS Publishes Report on Financing Retiree Health Strategies in the Public Sector

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NCPERS Publishes Report on Financing Retiree Health Strategies in the Public Sector

On February 26, 2019, the National Conference of Public Employee Retirement Systems (NCPERS) published its report, Financing Retiree Health Strategies in the Public Sector.  The research paper discusses prefunding retiree health care coverage as well as various funding vehicles available in the public sector.  It also provides an overview of the current retiree health care environment and presents other strategies for offering alternative or enhanced retiree health care financing arrangements.

According to NCPERS, retiree health care costs are increasing at compounding rates due to:   increasing numbers of retirees; increasing longevity; general medical inflation; and prescription drugs.  To manage these escalating costs, the advantages of prefunding retiree health care include:

  • Spreading the cost more evenly from a cash flow perspective;
  • Reducing future liabilities through the realization of investment returns on assets set aside;
  • Maintaining or enhancing financial ratings; and
  • Securing funding and assets through formally designed structures and trust vehicles.

The report concludes, “Retiree health costs continue to be on the minds of elected leaders, governmental management personnel, finance officials, unions, employees, and retirees. Further, public entities are entering an environment where recruiting and retention needs will require creative yet budget-conscious solutions as they compete for talent with the private sector.  Prefunding retiree health care is one strategy that could help some entities address these challenges.”

The report is available here.

National Organizations Issue Report on State and Local Fiscal Facts for 2019

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National Organizations Issue Report on State and Local Fiscal Facts for 2019

In February 2019, the National Governors Association (NGA), National Conference of State Legislatures (NCSL), National Association of State Retirement Administrators (NASRA), Government Finance Officers Association (GFOA) and seven other organizations representing public sector officials and employees published a report titled, State and Local Fiscal Facts: 2019.  The annual report covers the fiscal condition of states and localities, municipal bonds, and public pensions. It is intended to help correct misconceptions by providing detailed information regarding state, county and local finances; municipal bankruptcy; types and level of municipal debt and their security; and the fiscal condition of state and local government retirement systems.

Some of the stated facts include:

  • Over the last several years, state and local fiscal conditions have been stable, but improvements have been irregular.
  • In fiscal year (FY) 2018, 30 states spent less than the pre-recession peak in 2008, in real dollar terms.
  • In FY 2018, 40 states had revenues that exceeded their revenue projections; and 7 states enacted mid-year budget cuts due to a revenue shortfall.
  • Most states continue increasing their rainy day funds.  In FY 2018, 32 states reported balance increases and the median balance grew to 6.4% as a share of general fund spending, up from a low of 1.6% in FY 2010.
  • Since 2007, the average 5-year default rate for municipal bonds was 0.15% compared to 6.92% for corporate bonds. The majority were issued by not-for-profit hospitals or housing project financings, not including debt issued by Puerto Rico.
  • As of September 30, 2018, state and local retirement trusts held $4.4 trillion in assets and, on average, the 2017 funded level was 72%.
  • Since 2009, nearly every state and many local governments addressed their long-term pension concerns by making changes to pension benefit levels, financing, or both.
  • In aggregate, the share of combined state and local government spending that is dedicated to retirement system contributions is just below 5%.
  • As of FY 2015, 31 states held about $41 billion in other post-employment benefits (OPEB) assets, up from $33 billion reported in FY 2013.

The report is available here.

NIRS Releases National Public Opinion Research Report on Economic Retirement Security

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NIRS Releases National Public Opinion Research Report on Economic Retirement Security

On February 26, 2019, the National Institute on Retirement Security (NIRS) released its report, Retirement Insecurity 2019: Americans’ Views of the Retirement Crisis.  The study examines Americans’ opinions regarding their economic security in retirement and possible policy solutions to help improve their outlook.  According to the study, Americans are very concerned about economic security in retirement.

Key findings include:

  • Overall, 75% of Americans agree that the nation faces a retirement crisis;
  • 58% of Americans are concerned about their ability to achieve a secure retirement;
  • Nearly 65% of Americans plan to work longer and spend less in retirement;
  • 77% have a favorable view of pensions and 79% support pensions for all workers;
  • 64% believe that pensions help workers achieve a secure retirement as compared with 401(k) plans;
  • 72% of Millennials are more concerned than other generations about achieving financial security in retirement;
  • 80% believe employers should contribute more to employee retirement plans;
  • 73% do not have the financial skills to manage their money in retirement;
  • 56% support government increasing Social Security contributions from both employers and workers;
  • Only 34% believe that the new tax law is improving their financial prospects;
  • The majority strongly supports pensions for public sector workers with 82% supporting pensions for police officers and firefighters and 74% for teachers; and
  • 83% believe that pensions are a good way to recruit and retain state and local workers.

The report is available here.