As more companies look to cut their pension plan obligations by offering employees lump-sum payments or annuities, the U.S. Department of Labor is considering regulations that have groups representing employers and participants squabbling.
The department’s ERISA Advisory Council earlier this month recommended that guidelines be created to ensure plans disclose to employees how derisking strategies are calculated and implemented, as well as making sure participants know their possible impact. The most contentious proposal might be one that would declare derisking a fiduciary decision.
Derisking has become increasingly popular. Derisking strategies can vary from reducing exposure to risky equities in pension portfolios to offering lump sum buyouts to retirees and former workers. In some cases, plan sponsors have transferred pension obligations to private insurance companies by purchasing huge group annuities to pay out benefits.
Given the huge sums involved, it's no surprise there's plenty of controversy around derisking.
“To call giving participants additional opportunity (to take a lump sum) a fiduciary decision … a lot of plans sponsors are not going to like that,” said Mike Archer, senior consulting actuary for Towers Watson.
Archer said that adding disclosure requirements would also be burdensome to employers.
“Requiring all of this data about how lump sums are calculated will be difficult for employers,” he said.
Stanley Baum, a New York ERISA attorney with Carey Kane, said the DOL is headed down the wrong path.
“I don’t think this is really where we should be spending our time,” he said. “I think you have to give a good summary of the alternatives (offered a plan participant). But what’s the point of telling someone how a lump sum is calculated. It’s very technical.
“They ought to be moving the other way. Simplify this,” he said.
Not everyone agrees, of course.
David Certner, the legislative policy director for government affairs for AARP, said the organization supports the DOL's proposals and, in fact, he had hoped the advisory council would have gone further.
“Clearly they supported a number of things we had supported regarding fiduciaries and providing more information to participants,” said Certner, who testified before the council’s derisking panel. “But allowing companies to go back to participants who turned down a lump-sum payment shouldn’t be allowed.”
That’s because, in Certner's opinion, the best way to make derisking work for corporations is by enticing participants to make the wrong fiscal choice, which for most would be choosing a lump sum over an annuity.
Indeed, the Employee Benefits Research Institute found that between 2005 and 2010, 73 percent of employees chose the lump-sum option when asked. New rules approved in 2008 allowed companies to use lower interest rates when calculating lump-sum payments. The result was substantially lower costs for employers.
Just how popular derisking pension plans has become was borne out by a Towers Watson survey published this month.
The survey, which canvassed executives from 180 companies, found that 75 percent of firms either have a derisking road map, are planning one or seriously considering implementing one by 2015. Half of all executives said moving defined benefits plans off the company balance sheet is a priority.
Companies with larger plans – more than $5 billion in assets – were more likely (50 percent) to say they wanted to derisk their DB plans. Executives who dealt with smaller plans were less likely (31 percent) to be following that strategy.
Despite some worry about the burden of new regulations, the momentum is on the side of derisking.
“This survey shows employers are interested in lump sum distributions and buying annuities,” said Archer. “That activity is likely to continue.”
Companies that have offered lump sum payouts in the last two years include GM, Ford and Kimberly-Clark.
For the ERISA Advisory Council’s part, striking a balance between the concerns of plan sponsors and participants was a priority as it listened to testimony from those on both sides of the issue, including consultants, employee representatives and regulators.
“Taking all of that testimony into account really focused us on five recommendations,” said Richard Turner, chairman of the derisking panel and vice president and deputy general counsel for Variable Annuity Life Insurance Co. of Houston.
The five recommendations were presented to Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration. For now they sit in limbo while Borzi consider whether to publish them as regulations. The proposals are:
1. Make clear the rules for selecting annuities under Interpretive Bulletin 95-1 applies to any purchase of an annuity from an insurer as a distribution of benefits under a defined benefit plan.
2. Defined pension plans offering participants a lump sum payment should provide disclosure similar to that given when a plan is terminated.
3. Consider providing guidance under ERISA § 502(a)(9) clarifying the consequences of a breach of fiduciary duty in the selection of an annuity contract for distribution out of the plan, and other terms, including “appropriate relief” and when “posting of security” may be necessary
4. Provide education and outreach concerning derisking to plan sponsors on:
- The range of options available;
- the distinction between settlor and fiduciary functions;
- the distinctions among disclosure, education, and advice to participants in connection with; distributions, options, and elections.
5. Consider collecting relevant information regarding plan derisking transactions.
Whether these proposals become regulations is up in the air. There’s even a debate among those representing companies and those watching out for pension plan participants about how much public debate is required before they would be approved.
The ERISA Advisory Council originally approved language calling for a public comment period before the Department of Labor decides whether to give them the OK. The council then changed that to a call for public debate. To some, that seemed a call to rush the proposals into use.
“I think you ought to have a public dialogue,” said Lynn Dudley, senior vice president of retirement and international benefits policy for the American Benefits Council, a lobbying group for corporate benefit plans. Dudley, who testified before the derisking panel, called the changes “significant” and said proposals to provide more information to participants would be costly and the money to pay for them would them would be paid for out of pension funds. That would hurt participants.
To others, the regulations are needed now to protect pension plan participants.
“Rules can be so slow” before they are implemented, said AARP’s Certner, adding that there was a danger companies would rush to derisk pensions while the rules were being vetted.
Turner said it was never the council’s intention to suggest that a full public comment period should be skipped by the Labor Department.