iLoveBenefits: Industry News Blog

Defined Benefit Pensions Have Disappeared; Now an Attack on 401k Savings

Possible Cutbacks in Retirement Savings – Recently released proposals on retirement policy from policymakers in Washington, DC have a few troubling trends in common: new approaches to contribution limits, mandates for employers, and new complicated sets of rules for retirement savings.


Representative Camp (R-MI), Chairman of the Ways and Means Committee, released a “discussion draft” for a major overhaul of the tax code. New lower limits would be imposed on individuals saving for retirement through 401(k) plans and large companies would be required to offer a Roth 401(k).

April 15, 2014 | Categories: 401(k),Benefits,Pension | Tags: , , | Comments (0)

IRS Announces Changes in Retirement, Health Plan Limits for 2013

Each year, various dollar limits applicable to health and retirement plan contributions and benefits are adjusted for inflation.


On October 18, the Internal Revenue Service (IRS) released Revenue Procedure 2012-41, outlining the 2013 calendar year limits for high-deductible health plans (HDHPs) used in conjunction with Medical Savings Accounts (MSAs), as well as eligible long-term care premiums and transportation fringe benefits.


In News Release 2012-77, the IRS announced a series of retirement plan limits for Tax Year 2013. Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans.


Annual   Limit [Applicable Tax Code Section]



Maximum   elective deferral [401(k) and 403(b)]



Maximum annual pension benefit [415(b)] (The limit applied is actually the lesser of the dollar limit or 100 percent of the participant’s average compensation (generally the high three consecutive years of service))



Defined   contribution maximum deferral [415(c)]



Maximum   catch-up contribution for those age 50 and over [414(v)]



Qualified   plan compensation limit [401(a)(17)]



Highly   compensated threshold [414(q)]



Key employee   definition [416]



Deductible amount for individual making   qualified retirement contributions to an IRA [219(b)(5)(A)]




In related regulatory news, the Social Security Administration has announced that the Social Security wage base – also known as the “contribution and benefit base” – which is the amount of earnings subject to taxation for a given year, based on the average wage index – will increase from $110,100 to $113,700 in 2013.

Retirement security – is it secure any more?

Highlights from the Towers Watson Retirement Attitudes Survey

* Over the last three years, retirement security has acquired a higher value for nearly nine in 10 older workers.
* Health care costs top the list of workers’ retirement security worries.
* Most employees identify their employer’s retirement program as their primary means of saving for retirement, especially younger workers with a defined benefit (DB) plan and mid-career workers with only a defined contribution (DC) plan.
* More than four in five respondents say their employer has curbed their pay and/or benefits over the last three years, and nearly half are worried about future reductions to their retirement benefits. An even greater number fear higher health costs are ahead.
* While 26% of employees believe retirement benefits are crowding out take-home pay, 49% blame higher health costs.
* More than half of responding employees are willing to trade off some portion of pay for more generous retirement benefits, and almost half would do so for more predictable health costs.
* Older workers, women and lower-paid workers are most often willing to trade investment control for stronger guarantees.

Source: Towers Watson,  Retirement Attitudes Survey, February 2012

Half of US employees unhappy, want to leave, or have already checked out: study

The message comes through loud and clear in Mercer’s new What’s Working™ survey, conducted over the past two quarters among nearly 30,000 workers in 17 countries, including 2,400 workers in the US.


Nearly one in three (32%) US workers is seriously considering leaving his or her organization at the present time, up sharply from 23% in 2005. Meanwhile, another 21% are not looking to leave but view their employers unfavorably and have rock-bottom scores on key measures of engagement, a term that describes a combination of an employee’s loyalty, commitment and motivation (see Figure 1).

“The business consequences of this erosion in employee sentiment are significant, and clearly the issue goes far beyond retention,” said Mindy Fox, a Senior Partner at Mercer and the firm’s US Region Leader. “Diminished loyalty and widespread apathy can undermine business performance, particularly as companies increasingly look to their workforces to drive productivity gains and spur innovation.”

Employee concerns about work are pervasive, reflecting an evolving employment deal that they have seen as a series of takeaways, plus further cuts made during economic tough times:

* Only 43% of US employees believe they are doing enough to financially prepare for retirement – down from 47% in 2005, and just 41% believe their employers are doing enough to help them prepare, up slightly from 38%.

* Sixty-eight percent of employees rate their overall benefits program as good or very good, down from 76% in 2005, while 59% say they are satisfied with their health care benefits, down from 66%.

* Base pay is the most important element of the employment deal, by a wide margin, but US workers show lower satisfaction with base pay (53% satisfied, down from 58% in 2005).

* Despite improvements, scores for career development and performance management remain low. Just 42% of employees today agree that promotions go to the most qualified employees in their organization, up from 29% in 2005, and 46% agree that their organization does an adequate job of matching pay to performance, up from 33%.

As a result, overall scores are down consistently across key engagement measures while intention to leave is up across all employee segments, with the youngest workers most likely to be eyeing a departure – 40% of employees age 25–34 and 44% of employees 24 and younger (see Figures 2 and 3).

According to Ms. Fox, an effective employment deal includes both how the deal is defined and how it is delivered. “Employees see a ‘disconnect’ between what employers are promising and what they are delivering,” she said. “Organizations should re-examine their deals – both the traditional and non-traditional elements – then support them with effective administration and consistent, authentic communication that fosters a sense of belonging and helps employees make better rewards choices and career decisions.”

Jason Jeffay, a Senior Partner and Global Leader of Mercer’s talent management consulting, said, “Without question, employers face significant challenges in raising engagement but they can be overcome by making the right trade-offs and investments in the employment deal, while enhancing leadership skills and managerial effectiveness on the front line.”

Mercer’s survey also drives home the importance of knowing what is going on inside employee minds, which changes over time. “Often, a change in mood or sentiment is not spotted until it becomes a full-blown issue,” said Pete Foley, PhD, a Principal at Mercer and employee research consultant. “Employers must periodically take the pulse of their own employees to identify their specific areas of concern and link employee opinion to outcomes such as productivity and retention.”

The findings from Mercer’s What’s Working survey are part of a six-month client outreach campaign entitled, “Inside Employees’ Minds: Navigating the New Rules of Engagement.” The campaign will feature a dedicated website (, videos, podcasts and other intellectual capital, all designed to help employers better understand and create ways to increase employee engagement.


Workers’ Pessimism About Retirement Deepens, Reflecting “the New Normal”

This from Dick Quinn’s post on retirement:

WASHINGTON—In a sign that Americans are recognizing the realities they face about their chances for a comfortable retirement, the 2011 Retirement Confidence Survey (RCS) finds workers are more pessimistic than at any time in the two decades the RCS has been conducted: More than a quarter (27 percent) of workers now say they are “not at all confident” about retirement, up 5 percentage points from the level measured just one year ago.

Read more here:

March 15, 2011 | Categories: 401(k),Cost,Pension,retirement | Tags: , , , | Comments (0)

Inflation vs. Deflation – An Issue for Plan Sponsors to Truly Consider


The U.S. national debt is at historic levels, and the ratio of that debt to Gross Domestic Product is at levels not seen since WWII!   So, with all this debt pouring money into the economy, inflation and higher interest rates are sure to follow soon, right?  Well, not necessarily.  In fact, many economists are worried about deflation.  Unemployment remains high and credit remains tight. These factors dampen demand and lower demand means lower prices – deflation!  Deflation represents a significant risk to pension plan sponsors.  Deflation means lower interest rates which mean higher liabilities for defined benefit sponsors and a challenging investment environment affecting both DB and 401(k) plans. While there is no guarantee of deflation, plan sponsors should consider this risk as they look forward.
Click here for a one page summary of deflation risk.

July 9, 2010 | Categories: Cost,Pension | Tags: , | Comments (0)

Courts Owe Deference to Plan Administrators

Supreme Court backs interpretations by plan administrators

by Sandra Feingerts, Esq. (guest contributor)

The Supreme Court recently affirmed that a court must give deference to an ERISA fiduciary’s second interpretation of ambiguous plan language, even if the first interpretation made by the fiduciary is struck down by the court as unreasonable.

Using a “one strike doesn’t mean you’re out” analysis in Conkright v. Frommert, the Court held that where the plan gives the fiduciary the broad authority to interpret the plan, that authority extends to the fiduciary’s alternative interpretation if the first was a mistake.

The so-called Firestone standard of judicial review, which requires a court to give deference to a plan administrator’s interpretation of a plan provision, was upheld as a principle not susceptible to special exceptions.

The Conkright decision concluded that a court’s duty is to be sure the fiduciary does not abuse its discretion, not to substitute its judgment if the fiduciary gets it wrong the first time because of an “honest mistake.”

The facts

This case involves a dispute over how a pension plan should account for prior lump-sum distributions paid to a group of participants when calculating those participants’ current benefits.

Like many companies, when Xerox experienced an economic downturn, a number of employees retired and took lump-sum distributions from the Xerox pension plan. When business rebounded, many of these same individuals were rehired.

The Xerox pension plan calculated such a rehired retiree’s benefits based on total service, and to avoid “double dipping,” the plan provided that the final retirement benefit would be offset for the previous lump sum distribution. The method for calculating the offset was not set out in the plan, so the administrator was required to interpret the plan and determine an appropriate method.

The lawsuit was brought because the employees who had received lump-sum distributions thought that the plan administrator’s offset method was unreasonable.

Initially, the district court found in favor of the plan and held that the offset formula was appropriate. On appeal, the 2nd U.S. Circuit Court of Appeals reversed the lower court’s ruling on the grounds that the formula was unreasonable and the employees had not been adequately notified of the method that would be used.

The case was sent back to the district court for that court to determine the appropriate method for off-setting benefits. Next, the district court considered other approaches that could be used to reduce the employees’ pensions for the past lump sum distributions.

The plan administrator submitted an alternative approach for calculating the off-set, arguing that the district court must apply a deferential standard of review to the plan administrator’s second formula.

The district court refused to apply that standard and adopted the approach proposed by the employees which was to offset the pension by the lump sum amounts paid years ago with no adjustment for the time value of money.

The 2nd Circuit affirmed the district court’s ruling and held that the district court did not have to apply a deferential standard of review (i.e., is the administrator’s proposition reasonable and if it is, it prevails) to the plan administrator’s second approach.

As an aside, to those of you who don’t spend time thinking about pension plan calculations, the formula adopted by the district court and affirmed by the 2nd Circuit – that the pension plan should not consider how long ago the plan paid the lump sum distributions and how much money the employees could have earned on those distributions – is absurd and runs counter to actuarial principles.

The decision

The Supreme Court reversed the 2nd Circuit, holding that it meant what it said in Firestone and again in Metropolitan Life Ins. Co. v. Glenn involving a plan administrator with a conflict of interest – if the terms of an ERISA plan give a plan administrator discretionary authority to interpret the plan, a court can disturb the administrator’s interpretation only if it finds the interpretation unreasonable.

This deference to the plan administrator applies even if the administrator is making a second interpretation of a provision.

What this means to employers

This decision is an affirmation of a long-upheld standard of review directing courts to judge a plan administrator’s interpretation of an ambiguous ERISA plan provision on the basis of reasonableness.

If such an interpretation is found unreasonable, the plan administrator essentially gets to try again without losing the deferential standard of judicial review. The Supreme Court characterized the administrator’s first judgment as a “single honest mistake.”

There is no substitute for clearly drafted provisions, but ambiguities in plans are common, so when a plan administrator is faced with interpreting a plan provision, the administrator should consider the provision it is interpreting in the context of the plan, make notes of the basis for the interpretation and discuss the reasonableness of the interpretation with knowledgeable legal counsel.

Feingerts can be reached at

Employee Benefit News Legal Alert is a free, weekly e-newsletter featuring articles from the nation’s leading benefits attorneys.

Annuity Products and Inflation Fears

Editor’s note: One additional consideration is the impact and timing of any inflationary cycle. With the a huge deficit and relatively low inflation rate, will the Fed move to raise inflation to attack the debt issue?


April 12, 2010 ( – Back in February, the Department of Labor and the U.S. Treasury turned to the retirement plan community for some input.

Specifically, they issued a request for information (see Feds Call for Lifetime Income Product Public Comment) on how to “enhance retirement security for workers in employer-sponsored retirement plans through lifetime annuities or other arrangements that provide a stream of income after retiring.” 

Now, part of what the DoL is trying to figure out is why the take-up rate on those offerings is so dismal—not just because many see them as a superior way to ensure that “stream of income,” but because some are hoping that, if it can be made more available as a distribution option (perhaps even a default distribution option), more participants will take advantage of it.

Pension Audits Behind the Scenes

Keeping a watchful eye on retirement plan auditors

by Frank Palmieri, Esq.

Most HR/benefits professionals are familiar with the concept of training the trainers. The Department of Labor recently introduced an initiative that practitioners refer to as auditing the auditors.

Gunning for errors

Under this program, DOL is issuing letters to accounting firms who perform audits for qualified retirement plans, requesting copies of work papers and management letters, typically referred to as the SAS 112 Letter, which stands for Statement of Financial Account Standards No. 112, Employer’s Accounting for Postemployment Benefits.

Understanding the audit process and the DOL initiative is imperative to employers in making business decisions regarding qualified retirement plans.

Employers who maintain qualified retirement plans with more than 100 participants as of the beginning of any plan year are required to attach an accountant’s opinion to the annual Form 5500 filing. The audit is not a comprehensive compliance review of a retirement plan.

Rather, it primarily is a financial audit to detect any financial improprieties. Although most auditing firms generally test eligibility, contributions, vesting, distribution and loans as a part of an audit, such actions are performed on a sampling basis.

Accordingly, many accounting firms don’t identify administrative errors, such as use of the incorrect definitions of compensation for contributions or testing, even when they exist in qualified retirement plans. For an additional fee, most accounting firms and/or employee benefit consultants will also perform a more comprehensive compliance audit.

The purpose of these projects is to specifically detect errors in the administration of qualified retirement plans and to correct errors voluntarily or under the Voluntary Compliance Program as established under the Employee Plan Compliance Resolution System Program, as most recently announced in Revenue Procedure 2008-50, or the DOL Voluntary Fiduciary Program.

Audit results

The primary products from a retirement plan audit are the audited financial statements, accountant’s opinion and footnotes. In addition to the audit report, accounting firms also issue a letter to management under SAS 112.

This letter will highlight issues identified on audit. Auditors will categorize comments as control deficiencies, significant deficiencies or a material weakness, which is the most severe operational deficiency. For example, an accounting firm may note that it observed employees being improperly excluded from participation in a plan. This would be a significant deficiency.

On the other hand, an accounting firm may believe that the human resources, finance and legal departments should better communicate changes in plan design. This would simply be a recommendation to improve procedures in the future.

Under the DOL initiative, accounting firms are being subpoenaed to provide copies of all management letters to the DOL where any significant deficiencies or material weaknesses may have occurred.

Therefore, what may have been intended as confidential communications between an accounting firm and an employer will now be turned over the DOL. The DOL is undertaking this initiative based upon its investigative authority under Section 504(a)(i) of ERISA. If an accounting firm refuses to turn over records, the DOL will issue a subpoena to obtain such records.

The important issue for employers is to carefully review the draft letters to management and to negotiate the classification of any deficiency. By explaining the reason certain errors have occurred, and how they have already been corrected, an accounting firm may be willing to downgrade an error from a significant deficiency to a control deficiency.

Paying attention

More importantly, if employers understand that management letters will be disclosed to the DOL, employers will be encouraged to consider the IRS and DOL programs to correct administrative errors.

In general, under the voluntary compliance program, insignificant errors may be fixed at any point in time. Significant errors may be corrected by the end of the second plan year following the year in which the error occurs. Thus, an error made in January 2009 can be corrected by Dec. 31, 2011, for a calendar year plan without any IRS filing.

Significant errors that are more than two years old may be corrected under the voluntary compliance program by filing an application with the IRS and paying the applicable user fee. User fees have dropped significantly from the original amnesty programs introduced by the IRS.

For small employers with between 51 and 100 participants, administrative errors may be fixed for a fee of $2,500. Larger employers with over 10,000 participants may pay a fee of $25,000 to fix errors.

As the audit season begins for the 2009 plan years, employers should carefully consider footnote disclosures in financial statements and management letters received from accounting firms. If necessary, voluntary compliance program applications may be filed with the IRS. For fiduciary breaches, employers may also consider the voluntary fiduciary program as sponsored by the DOL.

Bottom line: Failure to act when errors have already been communicated to the DOL is like playing cards with an open hand. No bluffing will work and all bets are off.

Accounting terms explained

Here is a summary of accounting terms under the Statement of Financial Accounting Standards No. 112, Employer’s Accounting for Postemployment Benefits.

Control deficiency: When the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis.

Significant deficiency: A deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the plan’s financial reporting.

Material weakness: A deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the plan’s financial statements will not be prevented or detected on a timely basis.

Frank Palmieri can be reached at

Employee Benefit News Legal Alert is a free, weekly e-newsletter featuring articles from the nation’s leading benefits attorneys.

April 9, 2010 | Categories: Pension | Tags: , | Comments (0)

What Has Happened to DC Plan Balances?

Defined Contribution Participant Balances

According to findings from Mercer, as of year-end 2009, nearly 70 percent of defined contribution participant balances have returned to levels prior to the stock market declines of 2008 and early 2009.  However, 16 percent of participants below age 30 and 36 percent of those ages 55 and older have yet to return their account balances to 2007 levels. Mercer’s data comes from a survey of the 1.2 million participants for whom it administers defined contribution retirement savings plans.

Percentage of participants with balances below 2007 levels

  12/31/2007 vs 12/31/2008 12/31/2007 vs 12/31/2009
All participants 64% 31%
Under age 30 41% 16%
Age 55 and older 70% 36%


Source: Mercer company release. March 3, 2010.

March 25, 2010 | Categories: 401(k),Benefits,Pension | Tags: , , | Comments (0)
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