Compliance November 3, 2014

A Review of PBGC Reportable Events

There are certain events that defined benefit (DB) plan sponsors are required to report to the Pension Benefit Guaranty Corporation (PBGC) before they happen.
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The PBGC wants to make sure funding for DB plans does not deteriorate and tries to catch problems ahead of time by asking for plans to fill out PBGC Form 10 for reportable events, Kurt Piper, owner and chief actuary of Piper Pension and Profit Sharing, told attendees of the 2014 Association of Pension Professionals and Actuaries (ASPPA) Annual Conference. Piper said the agency wants advanced notice of certain events, including sponsor bankruptcy and liquidation.

Piper warned attendees that there is no exception for the requirement to report these events by terminating plans unless the plan is already paid out or transferred to the PBGC. He also said a reportable event notice must be filed within 30 days of knowledge of the event, or the plan sponsor could be subject to a penalty of up to $1,100 per day for each day the notice is late.

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Reportable events include:

  • Active participant reduction – A reportable event occurs when the number of active participants in the plan is reduced to less than 80% of the number of active participants at the beginning of the plan year or 75% of the number of active participants at the beginning of the previous plan year.
  • Failure to make required contributions – When a required funding payment is not made by the due date for the payment. 
  • Inability to pay benefits when due – When a plan is unable, or projected to be unable, to pay benefits.
  • Distribution to a substantial owner – When there is a distribution to a substantial owner of a contributing sponsor; the total of all distributions to the substantial owner within the one-year period ending with the date of the distribution exceeds $10,000; the distribution is for reason other than the substantial owner’s death; and immediately after the distribution, the plan has unfunded nonforfeitable benefits.
  • Transfer of benefit liabilities – When a plan maintained by any member of a plan’s controlled group makes a transfer of benefit liabilities to an entity or plans maintained by an entity that is not a member of the transferred plan’s controlled group, and the amount of liabilities transferred, in conjunction with the other benefit liabilities transferred during the 12-month period ending on the date of transfer, is 3% or more of the plan’s total benefit liabilities.
  • Change in contributing sponsor or controlled group – When there is a transaction that results, or will result, in one or more entities ceasing to be members of the plan’s controlled group.

Other reportable events include: 

  • Liquidation – When a member of the plan’s controlled group is involved in any transaction to implement its complete liquidation, institutes or has instituted against it a proceeding to be dissolved or is dissolved, and liquidates in a case under the Bankruptcy Code or any similar law.
  • Extraordinary dividend or stock redemption (1) – When a cash distribution, combined with any other cash distributions to shareholders previously made during the fiscal year, exceeds the adjusted net income of the entity making the distribution for the preceding fiscal year, or when the cash distributions made during the fiscal year or the three prior fiscal years exceeds the adjusted net income of the entity making the distribution for the four preceding fiscal years.
  • Extraordinary dividend or stock redemption (2) – When a non-cash distribution’s net value, combined with the net value of other non-cash distributions made to shareholders during the fiscal year, exceeds 10% of the total net assets of the entity making the distribution; or when both cash and non-cash distributions to shareholders are made during the fiscal year, and the sum of the cash-distribution percentage and non-cash distribution percentage exceeds 100%.  
  • Application for minimum funding waiver – When a plan applies for a minimum funding waiver.
  • Loan default – When a loan agreement by a member of the plan’s controlled group of an outstanding balance of $10 million or more is defaulted because the debtor fails to make a required payment when due, or if the lender accelerates the loan or the lender defaults the loan due to the debtor's failure to maintain certain financial requirements. 
  • Bankruptcy or similar settlement – When any member of the plan’s controlled group commences bankruptcy proceedings or any other type of insolvency proceeding, or executes a settlement with creditors.

Piper noted that changes to plan funding and premium rules made by the Pension Protection Act of 2006 require changes to reportable events rules. The PBGC issued proposed rules in April 2013 and held its first-ever public hearing on proposed rulemaking; however, there’s no indication of when the rules will be finalized. In the meantime, the Form 10 instructions include a list of PBGC Technical Updates to which filers of reportable events should refer until the final rules are issued.

There may be an addition to reportable events in 2015 related to pension risk transfer events. The PBGC has asked the Office of Management and Budget to approve required reporting of certain undertakings to cash out or annuitize benefits for a specified group of former employees.

Data & Research November 3, 2014

Finding ROI in Participant Communication Programs

Improving the retirement plan participant experience is an important step in addressing the nation's retirement savings shortfall, according to Broadridge Research.
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Broadridge released a new white paper examining the impact of targeted participant communications programs on the retirement readiness of three generations in the work force—Baby Boomers, Generation X and Millennials. The research finds that effective communications can offer a competitive edge for retirement providers and plan sponsors, but the costs run high if communications programs aren’t implemented efficiently.

According to the whitepaper, retirement plans integrating digital components into print and in-person strategies can save between 10% and 20% in annual plan-related communication costs. Digitally-enabled approaches can also generate double-digit improvement in participants’ adoption of important retirement plan features, along with significant participation rate increases, Broadridge says.

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“Generational differences, varying plan features, and increased compliance requirements have created complexities in retirement communications,” says Diana Awed, vice president, mutual fund and retirement solutions, Broadridge. “Retirement providers need to develop a framework for designing new solutions that will improve the participant experience, drive participation and reduce costs.”

Different generations currently in the workforce require a personalized and streamlined communications plan to improve engagement and help the industry address the nation’s retirement challenge, Awed says. Broadridge finds four important trends are emerging as providers rise to meet the challenge of delivering more personalized, contextual and interactive communications to plan participants. These include:

  • Segmentation – Life-stage communication programs targeted by age segments will increase in importance as Baby Boomers retire and Gen Xers and Millennials become the backbone of retirement plans.
  • Channel optimization – Retirement providers must deploy highly efficient techniques for communications delivery, including per-participant personalization, an “opt-out” approach, and much more extensive and integrated use of digital and social media.
  • Data integration and management – Sourcing, storing, managing, analyzing and using accurate participant and plan data remains a key challenge in delivering the types of personalized and targeted communications that will drive better participant outcomes.
  • Metrics – Retirement providers and regulators increasingly focus on retirement outcomes as the primary metric of plan success. However, an equally important focus should be on delivering these positive outcomes at a cost that is reasonable, sustainable and competitive.

For retirement plan providers, offering advanced communications capabilities continues to be a double-edged sword, the white paper notes. While effective communications can offer a competitive edge for a provider in a commoditized industry, delivering these communications adds costs in a thin-margin business under increasing fee pressure.

Meanwhile, automated plan design, new plan features and new technologies have created still more opportunities and complexities that must be considered when building a communications program.

Overall the report shares a somewhat gloomy picture of the U.S. retirement system—suggesting early Baby Boomers may be the last generation to achieve true financial security in retirement. While many in this age group have enough savings and wealth to replace nearly 70% to 80% of their pre-retirement income, late Baby Boomers are on track to replace only 60%, Broadridge finds. Generation X, at the median, are projected to replace only half their income, and the majority of Millennials are much more concerned with paying off debt and meeting current expenses than with retirement savings.

Providers are striving to overcome participant inertia by delivering more personalized, contextual and interactive communications, the report finds. To do so, they will be required not only to leverage data more effectively, but also to persuade plan sponsors to approve automatic, multi-channel programs for participant communications.

The paper finds some firms have already begun to create concrete strategies to address these opportunities, but many are still formulating their retirement communications plans. Many service providers and plan sponsors are focused on the more immediate tactical issues at hand, Broadridge observes.

However, all can agree that the need to find real solutions has never been greater, the paper says. Broadridge also presents a framework in the paper for designing new solutions for the next-generation participation experience.

More data and an executive summary of the paper are at www.broadridge.com/DCComms.

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