Data & Research August 22, 2017

Many Multiemployer Pension Plans Expected to Fail Within 20 Years

Cheiron Inc. says 114 plans covering 1.3 million workers are underfunded by $36.4 billion.
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As many as 114 multiemployer pension plans, covering 1.3 million workers, could fail within 20 years, according to Cheiron Inc. The actuarial consulting firm says the plans are underfunded by $36.4 billion.

“Traditionally, participants in healthy multiemployer plans have been forced to pay for the guaranteed benefits of retirees and their families in failed plans,” says Joshua Davis, a consulting actuary with Cheiron. “If this happens again, it will push other plans into insolvency with terrible consequences for communities across the country. Action must be taken soon to prevent that from happening.”

The failing multiemployer plans informed regulators that they are in critical and declining status, as required by the Multiemployer Pension Reform Act of 2014. These plans have total assets of $43.5 billion and liabilities of $79.9 billion.

The Pension Benefit Guaranty Corporation recently announced it expects its insurance program for multiemployer pension plans will run out of money by the end of 2025.

Cheiron says that a combination of factors have led to worsening conditions for multiemployer pension plans, including the Great Recession of 2008, declining industries creating more retirees than workers, and employers exiting the plans either through bankruptcy or by withdrawing from the plans.

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Products August 22, 2017

A Closer Look at the BICE

A new report, “Everything You Wanted to Know About BICE But Were Afraid to Ask,” offers plan officials key insights on the requirements of the fiduciary rule and the best-interest contract exemption.
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As the Department of Labor’s (DOL) fiduciary rule goes through its phased implementation, some financial institutions and advisers will take on new requirements regarding the delivery of investment advice to retirement plan participants and other stakeholders. Some may choose to stop offering investment advice all together.

Built into the rule, however, is the Best-Interest Contract Exemption (BICE). This part of the expanding fiduciary regulations aims to protect plan participants from receiving costly or conflicting investment advice, while allowing service providers and advisers to keep offering retirement plan investment advice under existing compensation structures, as long as they meet certain fairness standards under the Employee Retirement Income Security Act (ERISA). BICE rules are very important for plan sponsors and advisers to consider when interacting with various vendors. 

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An article titled “Everything You Wanted to Know About BICE But Were Afraid to Ask,” was recently published by Benefits Quarterly, a publication of the International Society of Certified Employee Benefit Specialists.

Attorneys from Jackson Lewis, who authored the report, suggest plan sponsors begin by asking their retirement plan investment advisers to confirm their status as fiduciaries and to provide proper documentation. The report also offers some insight into what is expected of a fiduciary working under the BICE. According to the report, a financial institution must “adhere to impartial standards of fiduciary conduct which include providing advice that is in the best interests of the investor and his or her financial objectives without regard to the financial interests of the adviser.” The fiduciary must also “implement policies and procedures designed to prevent violations of fiduciary standards, and adequately disclose fees, compensation and material conflicts of interest with respect to investment recommendations.” 

In an important sense, the ultimate execution of these requirements remains the responsibility of plan sponsors, which is why the researchers emphasize that plan sponsors now “need to be more aware of who is being paid and how.” Sponsors have to determine whether all fees for providing financial advice are reasonable.

Plan fiduciaries also have to be on the lookout for potential conflicts of interest. According to the report, a “conflict of interest exists (for purpose of BICE) when an adviser has a financial interest that a reasonable person would conclude could affect the exercise of its best judgement as a fiduciary in rendering advice to a retirement investor.” These conflicts of interest need to be disclosed and proper safeguards must be put in place to protect the participant if the adviser intends to use the BICE protection. A person must be identified by name or function who is responsible for addressing conflicts and monitoring adherence to standards of impartial conduct. Those who “avail themselves of the strictures of BICE” will be allowed to accept varying compensation from third-parties including commissions, 12b-1 fees and revenue-sharing payments.

It’s important to note that BICE is one of several exceptions built into a larger regulatory package, all of which are scheduled to complete their phased implementation period in 2018, although additional delays are possible. 

“Everything You Wanted to Know About BICE But Were Afraid to Ask” can be found at ifebp.org.

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