IRS Proposes Nondiscrimination Relief for Closed DBs

The proposed rule will help closed DB plans continue to satisfy minimum coverage and other testing requirements.

The Internal Revenue Service (IRS) has proposed nondiscrimination relief for closed defined benefit (DB) plans and additional changes to the retirement plan nondiscrimination requirements.

Last year, the IRS extended temporary relief which permitted certain employers that sponsor closed DB plans and also sponsor a defined contribution (DC) plan to demonstrate the aggregated plans comply with the nondiscrimination requirements of Internal Revenue Code Section 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for individual testing on that basis.

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The IRS explained that a significant number of DB plans have been closed to new entrants, and the plan sponsor of a closed DB plan typically provides a DC plan for its new hires. Under these arrangements, in the early years after the DB plan has been closed to new entrants, the plan may be able to satisfy the coverage requirement of § 410(b) without being aggregated with the DC plan. However, the § 410(b) minimum coverage test typically becomes more difficult for the closed DB plan to satisfy over time, as grandfathered employees in the old system typically build seniority and become more highly compensated than younger workers entering the DC plan.

If the closed DB plan cannot satisfy the coverage requirement of § 410(b) on its own, it will need to be aggregated with another plan in order to satisfy that coverage requirement, the IRS continued. If the DB plan is aggregated with a DC plan that covers the employer’s new hires to satisfy the coverage requirement, then it is also required to be aggregated with the DC plan for purposes of satisfying the nondiscrimination requirements of § 401(a)(4). In the typical case, the aggregated plans will fail the requirements of § 401(a)(4) unless they are permitted to demonstrate compliance with the nondiscrimination requirements on the basis of equivalent benefits.

NEXT: Elements of the proposed rule

Under its proposal, the IRS modifies the rules applicable to defined benefit replacement allocations (DBRAs), which allow certain DC plan allocations to be disregarded when determining whether a DC plan has broadly available allocation rates. The rules applicable to DBRAs allow employers to provide, in a nondiscriminatory manner, certain allocations to replace DB plan retirement benefits without having to satisfy the minimum aggregate allocation gateway.

The IRS says the group of employees who receive a DBRA must be a nondiscriminatory group of employees under the minimum coverage requirements of section 410(b) for the first five years after the closure date.

The proposed regulation adds a new exception to the requirement that a DB/DC plan must satisfy the minimum aggregate allocation gateway once the other conditions under §1.401(a)(4)-9 are not met, called the "closed plan rule." This closed plan rule, which applies to a DB/DC plan that includes a closed plan, provides an exception to the minimum aggregate allocation gateway that would otherwise apply, but only if the closed plan was in effect for five years before the closure date and no significant change was made to the closed plan during or since that time (except for certain permitted amendments).

There is also a special testing rule for the nondiscriminatory availability of a benefit, right, or feature provided to a grandfathered group of employees. The special testing rule applies to plan years beginning on or after the fifth anniversary of the closure date and applies on a plan-year by plan-year basis. To be eligible for the special testing rule, the benefit, right or feature must be currently available to a group of employees that satisfies the minimum coverage requirements of section 410(b) for the plan years that begin within five years after the closure date.

The proposal also includes a modification of testing options for DB/DC plans, including DB/DC plans that do not include a closed plan. The proposed regulations expand the ability to use the average of the equivalent allocation rates under the defined benefit plan for purposes of satisfying the minimum aggregate allocation gateway by permitting the averaging of allocation rates for non-highly compensated employees under the defined contribution plan for this purpose.

The proposed rule will be published in the Federal Register January 29, and comments will be received for 90 days. Text of the proposed rule is here.

Investment Product and Service Launches

S&P Dow Jones Indices adds retirement income indexes; Northern Trust Asset Management reveals its next generation of target-date funds; and Beaumont Capital reveals a defensive TDF alternative.

S&P Dow Jones Indices has launched the S&P STRIDE Index series, “aimed at blending the process of wealth creation with the need to mitigate uncertainty of in-retirement income.”

The STRIDE name is short for “Shift to Retirement Income and Decumulation,” the firm explains. The index series is a multi-asset class solution “designed to transition from growth assets to a hedged stream of inflation-adjusted retirement income based on target retirement dates.”

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Dimensional Fund Advisors worked collaboratively with S&P DJI to develop the glide path, inflation hedging, and duration hedging techniques used in these indices. Each S&P STRIDE index consists of an allocation to a group of indices covering global equity, global fixed income and U.S. Treasury Inflation-Protected Securities (TIPS). Allocations are determined by five-year increments of target-date years to cover a full life cycle of accumulation, defined as working years, and decumulation, defined as retirement years.

“As life expectancy increases and plan participants depend more on their retirement plan balances to generate income, the development of benchmarks addressing these trends are key to serve as the basis for investment solutions,” suggests Philip Murphy, vice president of North American equity indices at S&P Dow Jones Indices.

In a research paper released alongside the new index series, the firm argues the goal for many people saving for retirement is essentially to maintain a specific standard of living. For these individuals, one relevant risk to manage is the uncertainty of how much retirement income their balances can afford, the firm explains.

“This uncertainty is driven by changes in interest rates and inflation,” adds David Booth, chairman and co-CEO at Dimensional Fund Advisors. “The S&P STRIDE Index series represent a significant step forward in the design of target date indices, because they manage relevant risks facing participants saving for retirement. I believe these indices provide plan sponsors, consultants, and financial advisers with a better benchmark to understand how well prepared plan participants are to maintain their desired standard of living in retirement.”

To learn more about the S&P STRIDE Index Series, access the research paper here. Additional information is also at www.spdji.com.

NEXT: Northern Trust Reveals Engineered Funds 

Northern Trust Asset Management launched the Life Engineered Funds, described as a new generation of target-date retirement funds.

“The funds help defined contribution (DC) plan sponsors by providing participants with a comprehensive solution that takes the guesswork out of investing and builds a more secure retirement,” according to the firm.

The products build on Northern Trust’s asset allocation framework, funds combining the expertise of Northern Trust’s factor-based Engineered Equity strategies, and PIMCO’s active fixed-income and inflation-sensitive strategies.

“Northern Trust has re-engineered the target-date fund,” suggests Stephen Potter, president of Northern Trust Asset Management. “Life Engineered Funds leverage our unique factor-based investment approach and our demonstrated expertise in asset allocation. This new series reflects our continued commitment to the retirement marketplace by providing an efficient and effective solution for DC participants to build for their life in retirement.”

Rick Fulford, head of retirement at PIMCO, says the firms built the new TDF product line in the belief that the next generation of target-date funds should seek to provide sufficient, reliable income. He explains the Life Engineered Funds are available to DC retirement plan sponsors via 12 collective trust funds, “designed for participants who are retired or are planning to retire between now and 2060.” Each fund includes a combination of three distinct strategies—growth, income and inflation sensitive—according to the firms.

“We have seen considerable adoption of our Engineered Equity factor-based strategies by global institutional investors over the past year, due to an increased focus on managing volatility and taking compensated risks,” says Northern Trust Chief Investment Officer Bob Browne. “Academic studies, including our own, have identified factors in the equity markets that have been proven to outperform over time. Strategically combining exposures to those factors provides portfolios the right volatility at the right time, over a certain time horizon.”

More information about the funds is at www.lifeengineered.com.

NEXT: Beaumont Capital Reveals TDF Alternative 

Beaumont Capital Management, a provider of quantitative ETF-based investment strategies, launched a defensively minded alternative to target-date funds (TDFs) in the form of risk-managed collective trust funds.

Beaumont says the new product approach “addresses the need for a more versatile investment solution that seeks to benefit in growing markets and can react appropriately and decisively in periods of market volatility.” In addition, according to Beaumont, the products are “designed to address the current Department of Labor and industry concerns with other target-date funds.”

The age-based portfolios are designed to meet the varied needs across a workforce from aging Baby Boomers on the verge of retirement to Millennials just starting their first job, the firm says. Each portfolio mirrors the design of a target-date fund, “but the overall strategic allocations are adjusted over longer periods the way most investment advisers would manage a portfolio, rather than small annual adjustments.”

Additionally, Beaumont launched new U.S. Sector Rotation and Decathlon Growth Tactics strategies as collective investment funds, “which can easily be included and accessed in virtually any retirement plan.”

“The premise of our new retirement products is to offer portfolios that are low cost, have active management, are defensively oriented and meet the needs of investors regardless of where they are in their life stage,” explains Dave Haviland, managing partner and portfolio manager of Beaumont Capital Management.

To learn more about Beaumont’s new retirement products, contact Bob Peatman at bpeatman@investbcm.com

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