Retirement Plan Sponsors
As an experienced advisor, we stand ready to guide Plan Sponsors through the complexities and everchanging landscape of pension plans. Below find valuable updates from our dedicated Defined Benefit Business Council.
Insights From Your Trusted Team
Cash Balance Plans
Cash balance plans continue to garner interest from Plan Sponsors, including “term restarts”. Cash balance plans, when structured alongside a 401(k) plan, may allow plan participants the ability to defer significantly more dollars into a qualified plan versus a 401(k) plan alone.
A “term restart” involves terminating an original cash balance plan, while concurrently launching a new plan so participants can continue to maximize their tax-deferred savings. Participants’ distributions from the plan which is terminating are commonly rolled over to the participants’ IRA or 401(k) plan accounts, allowing participants to invest in a manner that meets their individual investment objectives.
Updates included within the SECURE Act 2.0 have made it easier for cash balance plans to convert the Interest Crediting Rate from a fixed rate to a market rate. Such a switch may help reduce the volatility of the plan’s funded status while also potentially allowing for more attractive investment returns.
It’s important for Plan Sponsors to review participant balances regularly to evaluate those that may be nearing the 415 limits or below the capital preservation floor.
Traditional Pension Plans
The FTSE Pension Discount Rate increased by 23 basis points (+0.23%) during the quarter, ending June at 5.35%. The rate is up 52 basis points (+0.52%) this year, resulting in overall lower liability valuations.1
Higher interest rates and continued equity market strength has been an overall tailwind for Plan Sponsors.2
JP Morgan recently released a white paper analyzing developments with the 100 largest pension plans in the United States for 2023. Key findings in the report include:2
- Funded status remained essentially unchanged for the year, with many plans having surplus assets
- The pension risk transfer (PRT) market remains robust
- Complications arising from the use of illiquid alternative assets in pension plans
Pension Risk Transfer and Plan Termination
The SECURE Act 2.0 directed the Employee Benefits Security Administration (EBSA) of the Department of Labor to review Interpretive Bulletin (IB) 95-1 which provides guidance for fiduciaries on the selection of the “safest available annuity provider” when undergoing PRT activity. In their report to Congress on June 24, 2024, EBSA concluded that it is not prepared at this time to propose amendments to IB 95-1. However, the report acknowledged the need for additional review noting that “some stakeholders are very concerned about developments in the life insurance industry that may impact insurers’ claims-paying ability and creditworthiness”.3 Fiducient Advisors will continue to provide updates and potential implications for Plan Sponsors
With favorable market conditions driving many plans to fully funded to over-funded territory, the PRT market continues to set records for activity. Per LIMRA, the first quarter set a record for both the number of deals as well as for the aggregate dollar value of liabilities transferred.4
Litigation Update5
In a win for plan fiduciaries, a lawsuit claiming fiduciaries of the New York City Employees’ Retirement System violated their fiduciary duty through their divestment of fossil fuel companies was recently dismissed. The court found that the plaintiffs failed to show that they suffered harm.
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Sources:
1https://www.soa.org/sections/retirement/ftse-pension-discount-curve/
2https://www.msci.com/documents/10199/a71b65b5-d0ea-4b5c-a709-24b1213bc3c5
5https://www.napa-net.org/news-info/daily-news/pension-plans-prevail-esg-divestment-suit
