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Cypen & Cypen
NEWSLETTER
for
February 21, 2019

Stephen H. Cypen, Esq., Editor

1. SAVE THE DATE! 40TH ANNUAL POLICE OFFICER’S AND FIREFIGHTERS’ PENSION TRUSTEES’ SCHOOL APRIL 30 – MAY 2, 2019, TALLAHASSEE, FL:
TO:                     Board of Trustee Members and Other Interested Parties
FROM:               Florida Division of Retirement
                           Municipal Police Officer's and Firefighters' Pension Office
SUBJECT:         SAVE THE DATE!
                           40th Annual Police Officers' & Firefighters' Pension Trustees' School
                           April 30 through May 2, 2019, Tallahassee, FL  
 
You are cordially invited to attend the 40th Annual Police Officers' & Firefighters' Pension Trustees' School scheduled for April 30 through May 2, 2019, sponsored by the Department of Management Services' Division of Retirement (Division), in conjunction with The Florida State University's Center for Academic & Professional Development. This program is uniquely designed for pension plans established under Chapters 175 & 185, Florida Statutes. Tuesday's program, on April 30, is designed specifically for new trustees, for those interested in becoming trustees, and for those who want a basic understanding of the operation of police and fire pension plans. The program will offer a no-nonsense explanation of how the plans work. An attorney, an actuary, and the Division will provide presentations on the trustees' responsibilities. We encourage participants to ask questions and participate in group discussions focusing on the fundamentals of pension fund management. If you are a new trustee, we encourage you to participate in this special program. The registration fee for the one-day program is $120. Wednesday and Thursday's programs, on May 1 and 2, are designed for both the new and seasoned trustee and will feature presentations on legal, investment, administrative, and ethics issues, as well as an update on the Police and Fire annual report submission. Speakers will range from State of Florida agency representatives to experts in the field of pension plans. There will be an opportunity for questions and answers after each speaker, to provide you a chance to address concerns specific to your plan. We are always open to new ideas and topics. If there is a topic you would like discussed, please let our office know. The registration fee for the two-day program is $210. If you wish to attend all three days, the registration fee is $300. Each day's registration fee covers the cost of materials, refreshment breaks and lunch. Cancellations must be received in writing by April 19, 2019, or you may be liable for the full registration fee. Any cancellations received after April 19, 2019, must be accompanied by notarized documentation from a supervisor indicating that you have been called to duty. Please remember, we are only able to continue providing these low cost conferences for our plans based on satisfactory attendance. We know that plan participants and board members fulfill a vital role in our communities, and although you may not be able to attend every program, Florida Statutes require that the plan investment policy provide for continuing education of board members. This program will help to satisfy that requirement and educate the attendees on how the plans may be most effectively administered to ensure their continued health. Please consider our program when making your training plans so that we can continue to offer them to you.  The program will be held at the Augustus B. Turnbull, III Florida State Conference Center, home of the Center for Academic & Professional Development. The Conference Center is located at 555 West Pensacola Street, Tallahassee, FL, across from the Tallahassee-Leon County Civic Center. You may register with Florida State University (FSU) for the program at the following link:
 
Trustees' School registration link
 
Please note, prior to registering, make sure you have the correct billing information, and attendee information. If you are registering on behalf of another individual, please use that individual's contact information and email address as the contact email and select the third party payment option, if the individual is not paying the registration personally. If you are registering more than one individual, you must log off entirely and start over at the entry page. Do not change the account information for the previous registration or use the same email address or you will delete the first registration. Florida State University has asked that all returning guests please make sure to select the option for previous registrations on the online log-in page. If someone else is registering for you, that individual should have your email address and the password used the last time you registered online. If you forgot the password, there is an option to create a new one. Florida State University will award a Certificate of Completion at the closing of the school. The Florida Public Pension Trustee Association will make Continuing Education Credits available for each participant. Attendance confirmation will be provided for accountants and attorneys wishing to apply for CPE and CLE credits.  Hotel accommodations may be made at the Residence Inn Tallahassee Universities at the Capitol, located directly next door to the conference center. The room rate is $199.00 per night and includes free parking, high speed internet, breakfast and fitness center. When reserving the room, please note that the website states $15 for parking. We received confirmation that this fee will be waived, but the hotel was unable to remove that statement from their website. To make a reservation, please contact the hotel at 1.800.331.3131 or 850.329.9080 before April 2, 2019. You must identify yourself as part of the Police Officers and Firefighters Pension Trustees' School to receive the room rate. You may also register online using the following link:
 
Trustees School hotel registration link .
 
All police officer and firefighter plan participants, board of trustee members, plan sponsors, administrators, accountants, actuaries, investment advisors, legal counselors, other advisors, and anyone interested in the administration and operation of the Chapters 175 and 185 Pension Plans, should take advantage of this unique, insightful and informative program Further information will be posted soon to our website. I look forward to meeting with you in Tallahassee in April.
 
Sincerely,
Municipal Police and Fire Pension Office
 
Florida Division of Retirement, February 13, 2019.
 
2. THE 2018 FLORIDA LOCAL GOVERNMENT RETIREMENT SYSTEMS ANNUAL REPORT:
Paragraph 112.665(1)(d), Florida Statutes, provides that the Department of Management Services (DMS or department) shall:
 
"Annually issue, by January 1, a report to the President of the Senate and the Speaker of the House of Representatives, which details division activities, findings, and recommendations concerning all governmental retirement systems. The report may include legislation proposed to carry out such recommendations;"

Within DMS, the Division of Retirement’s Bureau of Local Retirement Systems (bureau) issues this annual report. This is the 38th annual report published since the local government retirement system review function was established in 1981, pursuant to section 112.63, Florida Statutes, to ensure that local government retirement plans are funded on an actuarially sound basis. The number of defined benefit local government retirement plans has increased from 355 in 1981 to 485 in 2018. Recent years have seen a decline in the number of plans after a peak of 520 in 2005. The bureau currently monitors and oversees 485 municipal and special district retirement plans and school boards’ early retirement programs for actuarially sound funding (102 of which are closed to new members or have frozen benefit accruals). In aggregate, these plans provide retirement, death, and/or disability benefits to 94,655 retirees, beneficiaries, Deferred Retirement Option Plan (DROP) participants and vested terminated participants. Active plan membership for only the municipalities and special districts retirement plans is 95,126 while school board early retirement program active plan membership is 392. Total plan assets were valued at approximately $39.77 billion for the municipalities and special districts and $64.80 million for the school boards’ early retirement programs, as of Sept. 30, 2018. The bureau’s responsibilities, in addition to publishing this annual report, include the following:

  • Reviewing and commenting on actuarial valuations, impact statements and reports submitted by local governments, special districts and school boards, in accordance with part VII of Chapter 112, Florida Statutes;
  • Determining if actuarial reports are timely, complete, accurate and based on reasonable assumptions;
  • Gathering and cataloging data to maintain a computerized data information system on all local retirement systems;
  • Receiving additional actuarial disclosures required by subsection 112.664(1), Florida Statutes;
  • Cooperating with local retirement systems on matters of mutual concern by providing technical assistance when requested;
  • Providing a fact sheet for each local government defined benefit pension plan summarizing the plan’s actuarial status, to be posted on the department’s website;
  • Issuing a report to the Department of Economic Opportunity (Special District Information Program) regarding special district pension plans and their compliance with the local government and state-administered retirement provisions as required by paragraph 112.665(1)(f), Florida Statutes; and,
  • Adopting reasonable rules to administer the provisions of Chapter 112, Part VII, Florida Statutes.

The following link leads to the complete 2018 Local Government Annual Report . Florida Department of Management Services, 2018.
 
3. LET’S BE HONEST ABOUT THE TEACHERS’ PAY RAISE:
It was crystal clear that #362, which garnered 71% of the vote this past November, was a pay raise for Miami Dade Public School Teachers and increased security measures. It was made clear that this only applied to those teachers and support staff that work directly for Miami Dade Public Schools and not individuals who work at private, parochial or charter industry schools. Anyone suggesting otherwise is being disingenuous. As School Board member Rojas pointed out last week, “Even if we wanted to (which the Board did not) the School Board can’t share this money because we have no oversight over charter schools.” In other words the school board would have no idea where the money would go. The School Board would be unable to find out if taxpayer dollars were being spent on teacher pay increases or simply adding to the profit margins of the for profit management companies that operate the majority of our charter schools. The referendum for Miami Dade County Public School Teachers pay raise was crafted out in the open, discussed at numerous televised School Board Meetings, nuances debated vigorously and work shopped at public forums with citizen input over the course of one year. At certain points in the year long different ideas were floated by Superintendent Carvalho, such as funding pilot programs, debated and ultimately rejected. It was discussed publicly if these taxpayer funds would be shared with charter schools and that notion was also shot down. The County Commissioners who reviewed and approved the ballot language, were also clear on where these taxpayer dollars were to be spent if the referendum was passed. The very powerful Charter School business industry did not begin grumbling about sharing #362 taxpayer funds until it became evident that the referendum would be successful. While Miami Dade Public school teachers and United Teachers of Dade, their union, campaigned for months to ensure the passage of #362, the largest for profit charter school management company in Florida attempted to dampen voter support among parent in an email they distributed on November 2nd just before election day. Voters in Miami Dade have shown a willingness to support increased taxes to support Jackson Memorial Hospital, School Building Bonds, to combat sea level rise and now Public School Teacher Pay Raises. What infuriates voters and undermines public trust in local government is when voters realize they have been part of a “bait and switch” scheme. County voters are still upset that increased taxes collected with the promise of expanded Metrorail and mass transit efforts were instead used for operational costs and debt service. A decade later and no new rail lines to the south, north or west are even being planned. The for profit charter school entities that are now stirring the pot chose not to be involved in this public discussion during the public debate period, planning or campaign to pass this referendum. They went so far as to tell parents of their students in writing that #362 did not include their schools. Any efforts to siphon off these funds after they have already been allocated would be a dis-service to county voters and like the public transit funds, another sad “bait and switch” scheme by politicians. The school board Chair must ensure that the board stays the course. Grant Miller, Publisher, Miami’s Community Newspapers, February 12, 2019.
 
4. WHY YOU SHOULDN’T TAKE A 401K LOAN:
It’s awfully tempting. You see that money in your 401k plan account just sitting there. And you think of all the possible uses for it. Why not take a loan? You will pay it back -- with interest! Generally, that is a really bad idea to take 401k loans. Here are the reasons why.
 
You will likely forfeit some company matching contributions
Many individuals who take 401k loans end up stopping or lowering their contributions while they are paying back their loans. This often results in the loss of 401k matching contributions when their contribution rates fall below the maximum matched percentage. There is no better investment you can make than receiving free money in the form of company matching contributions. It is the safest, easiest way to earn 25%, 50% or 100% -- depending upon your company’s matching percentage.
 
Job changes can force defaults of 401k loans
Most individuals considering a job change don’t realize that their outstanding 401k loan balance becomes due when they leave their employer. In the case of an involuntary job loss, an outstanding 401k loan can add significant pain to an already difficult situation. Regardless of whether a job change is voluntary or involuntary, few of us have the financial resources available to immediately pay back a 401k loan if we leave our employer. As a result, most of us are forced to default. Studies  have shown that 86% of individuals who have an outstanding loan when they leave their employer for a new job will default on that loan. The defaulted balance becomes subject to state and federal taxes and possibly state and federal early withdrawal penalty taxes. Plan balances that leave 401k plans due to loan defaults are rarely restored making it less likely that loan defaulters will build adequate retirement savings. Studies  indicate that participants under 30 who experience a loan default (which is treated as a hardship withdrawal for tax purposes) end up reducing their final retirement balance by an average of 20%. That’s a lot!
 
The opportunity costs can be substantial
When you take a participant loan, it becomes one of your investments in your 401k plan account. Assume that you take a $10,000 loan for five years at a 6% interest rate. That portion of your 401k balance will earn a 6% return for five years. Had your loan balance been invested in one of the other investment options in your plan, you may have earned a lot more. For example, the five-year return on the Schwab S&P 500 Index Fund through September 30, 2018, was nearly 14%. That’s more than twice as much!
 
Interest on a 401k loan is not tax-deductible
Anyone needing a loan should investigate the possibility of taking a home equity loan first, because interest on those loans is tax-deductible. Although interest deductibility on home equity loans has been limited by tax law changes,  you may still be able to deduct interest payments, depending upon the loan’s purpose. It is worth checking.
 
Paying interest to yourself is not a good idea
I have heard many participants say  they believe 401k loans make sense because they are paying interest to themselves. They often add that the higher the interest rate, the better! First, it is normally not a desirable financial strategy to pay interest of any kind. Second, why would you want to pay a higher interest rate on a loan just because you are paying interest to yourself? That just means you have less of a paycheck to live on.
 
Easy access can lead to bad loans
Can’t get a loan from anywhere else? Yes, you can still get a 401k plan loan. There is no underwriting. While this may seem like something that is working in your favor, it actually is not. Easy access to a 401k loan can often make your bad financial situation worse, pushing you into bankruptcy and/or resulting in the loss of your home. If a bank won’t give you a loan because you are falling short on the income requirement, it is probably not a good idea to take a loan from your 401k plan. Your 401k plan account balance is protected in the event you declare bankruptcy. Creditors cannot get at your account balance if you need to get a fresh start by declaring bankruptcy. However, if you have an outstanding 401k loan, you may end up defaulting on it if you are forced to go through bankruptcy.
 
Double taxes are paid on interest payments
The interest you pay on 401k loans is double taxed. Since loan payments are made on an after-tax basis, interest on each payroll loan payment is taxed first then and taxed for a second time when paid out to you as a distribution at your retirement. Many 401k plan participants say to me, “Bob, if taking 401k loans is so bad, why  would the company let me do it?” Good question! I believe that 401k loans should be eliminated as an option from all 401k plans. It is clear that 401k loans can drastically reduce your chances of achieving retirement readiness. In addition, they are one of the worst investments you can make in your 401k account.
Robert C. Lawton, Lawton Retirement Plan Consultants, February 9, 2019.
 
5. HOW MUCH WOULD IT TAKE? ACHIEVING RETIREMENT INCOME EQUIVALENCY BETWEEN FINAL-AVERAGE-PAY DEFINED BENEFIT PLAN ACCRUALS AND AUTOMATIC ENROLLMENT 401(K) PLANS IN THE PRIVATE SECTOR:
A rapidly growing public policy concern facing the United States is whether future generations of retired Americans, particularly those in the Baby Boomer and Gen X cohorts, will have adequate retirement incomes. There have been several policy studies in recent years that suggest that the decreasing relevance of defined benefit plans relative to defined contribution plans (such as 401(k) plans) since the 1980s will have a negative impact on the percentage of future retirees who will achieve a specified level of retirement income adequacy. Previous EBRI research reported on a comparative analysis of future benefits from private-sector, voluntary enrollment 401(k) plans and stylized, final-average-pay defined benefit plans. The current research expands the previous research by computing the actual final-average DB accrual that would be required to provide an equal amount of retirement income at age 65 as would be produced by the annuitized value of the projected sum of the 401(k) and IRA rollover balances under automatic enrollment 401(k) plans. Assuming historical rates of return as well as annuity purchase prices reflecting average bond rates over the period from 1986 to 2013, the analysis shows that:
For males, defined benefit “break-even” rates -- or the percentage accrual rate that would be required in order for a DB plan to generate the same retirement income that is projected to come from 401(k) plan participation for a given worker cohort -- are rarely less than 1.5 percent of final pay: in only 2 of the 16 combinations of wage quartiles and years of plan eligibility for males are defined benefit “break-even” rates less than 1.5 percent of final pay per years of service. In the case of females, only 5 of the 16 combinations have “break-even” rates under 1.5 percent. When these findings are subjected to the scrutiny of various “stress tests” both by reducing the rate of return assumptions by 200 basis points as well as utilizing current annuity purchase prices, results show that in many cases the AE 401(k) plans lose their comparative advantage to the stylized, final-average DB plans, especially for lower-paid employees as demonstrated by the lower “break-even” accrual rates. Jack VanDerhei, Employee Benefit Research Institute, February 7, 2019.
 
6. NASRA ISSUE BRIEF: PUBLIC PENSION PLAN INVESTMENT RETURN ASSUMPTIONS:
As of September 30, 2018, state and local government retirement systems held assets of $4.41 trillion. These assets are held in trust and invested to pre-fund the cost of pension benefits. The investment return on these assets matters, as investment earnings account for a majority of public pension financing. A shortfall in long-term expected investment earnings must be made up by higher contributions or reduced benefits. Funding a pension benefit requires the use of projections, known as actuarial assumptions, about future events. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; when participants will retire, and how long they’ll live after they retire. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund’s assets. As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. This brief discusses how investment return assumptions are established and evaluated, compares these assumptions with public funds’ actual investment experience, and the challenging investment environment public retirement systems currently face. Because investment earnings account for a majority of revenue for a typical public pension fund, the accuracy of the return assumption has a major effect on a plan’s finances and actuarial funding level. An investment return assumption that is set too low will overstate liabilities and costs, causing current taxpayers to be overcharged and future taxpayers to be undercharged. A rate set too high will understate liabilities, undercharging current taxpayers, at the expense of future taxpayers. An assumption that is significantly wrong in either direction will cause a misallocation of resources and unfairly distribute costs among generations of taxpayers. Since 1988, public pension funds have accrued approximately $7.5 trillion in revenue, of which $4.7 trillion, or 62 percent, is from investment earnings. Employer contributions account for $2.0 trillion, or 26 percent of the total, and employee contributions total nearly $900 billion, or 12 percent. Most public retirement systems review their actuarial assumptions regularly, pursuant to state or local statute or system policy. The entity (or entities) responsible for setting the return, typically works with one or more professional actuaries, who follow guidelines set forth by the Actuarial Standards Board in Actuarial Standards of Practice No. 27: Selection of Economic Assumptions for Measuring Pension Obligations (ASOP 27). ASOP 27 prescribes the factors actuaries should consider in setting economic actuarial assumptions, and recommends that actuaries consider the context of the measurement they are making, as defined by such factors as the purpose of the measurement, the length of time the measurement period is intended to cover, and the projected pattern of the plan’s cash flows. ASOP 27 also advises that actuarial assumptions be reasonable, defined in subsection 3.6 as being consistent with five specified characteristics; and requires that actuaries consider relevant data, such as current and projected interest rates and rates of inflation; historic and projected returns for individual asset classes; and historic returns of the fund itself. For plans that remain open to new members -- which includes most public plans -- actuaries focus chiefly on a long investment horizon, i.e., 20 to 30 years, which is the length of a typical public pension plan’s funding period. One key purpose for relying on a long timeframe is to promote the key policy objectives of cost stability and predictability, and intergenerational equity among taxpayers. The investment return assumption used by public pension plans typically contains two components: inflation and the real rate of return. The sum of these components is the nominal rate of return, which is the rate that is most often used and cited. The system’s inflation assumption typically is applied also to other actuarial assumptions, such as the level of wage growth and, where relevant, assumed rates of cost-of-living adjustments (COLAs). Achieving an investment return approximately commensurate with the inflation rate normally is attainable by investing in securities, such as US Treasury bonds, that are often characterized as risk-free, i.e., that pay a guaranteed rate of return. The second component of the investment return assumption is the real rate of return, which is the return on investment after adjusting for inflation. The real rate of return is intended to reflect the return produced as a result of the risk taken by investing the assets. Achieving a return higher than the risk-free rate requires taking some investment risk; for public pension funds, this risk takes the form of investments in assets such as public and private equities and real estate, which contain more risk than Treasury bonds. Although the average nominal public pension fund investment return has been declining, because the average rate of assumed inflation has been dropping more quickly, the average real rate of return has risen, from 4.21 percent in FY 02 to 4.56 percent in FY 17. One factor that may be contributing to the higher real rate of return is public pension funds’ higher allocations to alternative assets, particularly to private equities, which usually have a higher expected return than other asset classes. In the wake of the 2008-09 decline in capital markets and Great Recession, global interest rates and inflation have remained low by historic standards, due partly to so-called quantitative easing of central banks in many industrialized economies, including the U.S. Although interest rates have increased in recent years, they remain low by historical standards. These low interest rates, along with low rates of projected global economic growth, have led to reductions in projected returns for most asset classes, which, in turn, has resulted in an unprecedented number of reductions in the investment return assumption used by public pension plans. This trend plots the distribution of investment return assumptions among a representative group of plans since 2001. Among the 128 plans measured, 40, or more than 30 percent, have reduced their assumed rate of return since February 2018, and more than 90 percent have done so since fiscal year 2010, resulting in a decline in the average return assumption from 7.91 percent to 7.28 percent. If projected returns continue to decline, investment return assumptions are likely to also to continue their downward trend. Appendix A lists the assumptions in use or adopted for future use by the 128 plans in this dataset. One challenging facet of setting the investment return assumption that has emerged more recently is a divergence between expected returns over the near term, i.e., the next five to 10 years, and over the longer term, i.e., 20 to 30 years. A growing number of investment return projections are concluding that near-term returns will be materially lower than both historic norms as well as projected returns over longer timeframes. Because many near-term projections calculated recently are well below the long-term assumption most plans are using, some plans face the difficult choice of either maintaining a return assumption that is higher than near-term expectations, or lowering their return assumption to reflect near-term expectations. If actual investment returns in the near-term prove to be lower than historic norms, plans that maintain their long-term return assumption risk experiencing a steady increase in unfunded pension liabilities and corresponding costs. Alternatively, plans that reduce their assumption in the face of diminished near-term projections will experience an immediate increase unfunded liabilities and required costs. As a rule of thumb, a 25 basis point reduction in the return assumption, such as from 8.0 percent to 7.75 percent, will increase the cost of a plan that has a COLA, by three percent of pay (such as from 10 percent to 13 percent), and a plan that does not have a COLA, by two percent of pay. Conclusion The investment return assumption is the single most consequential of all actuarial assumptions in terms of its effect on a pension plan’s finances. The sustained period of low interest rates since 2009 has caused many public pension plans to re-evaluate their long-term expected investment returns, leading to an uprecedented number of reductions in plan investment return assumptions. Absent other changes, a lower investment return assumption increases both the plan’s unfunded liabilities and cost. The process for evaluating a pension plan’s investment return assumption should include abundant input and feedback from professional experts and actuaries, and should reflect consideration of the factors prescribed in actuarial standards of practice. National Association of State Retirement Administrators, February 2019.
 
7. IRS ISSUES PRIVATE LETTER RULING ON CODE SECTIONS 415 AND 414(H)(2) REQUIREMENTS:
In late November 2018, the Internal Revenue Service (IRS) issued a private letter ruling addressing, among other things, the: 1) application of the limits under Section 415 of the Internal Revenue Code (the Code) when a plan has defined benefit and defined contribution features; and 2) requirements for valid pick-up elections under Code Section 414(h)(2).1 These portions of the ruling are described in more detail below.
 
Facts
Historically, a State sponsored Plan 1 and Plan 2, each of which consisted of a defined benefit pension benefit funded by employer contributions, and a defined contribution benefit paid from an annuity savings account (ASA) and funded by employee contributions. The State treated each of Plan 1 and Plan 2, including their ASA portions, as single defined benefit plan structures. Thus, Plans 1 and 2 tested benefits payable under the ASAs based on the rules applicable to governmental defined benefit plans under Code Section 415(b). Prior to a “Transition Date,” the payment of the lifetime annuity from each ASA was guaranteed by the applicable Plan, and an investment fund with a guaranteed rate of return was available (the Guaranteed Fund). However, beginning on the Transition Date, the State began outsourcing the annuity payments of the ASAs to a third-party annuity provider, eliminating internally guaranteed lifetime annuity payments from the ASAs. The State later added Plan 3 as an alternative to Plan 1 for certain employees. Plan 3 functions as a defined contribution plan with employer contributions going to an ASA rather than to fund a defined benefit pension benefit. While the State initially treated Plan 3 as a component of Plan 1 rather than a separate defined contribution plan, Plan 3 is now treated as a separate plan. The State also established Plan 4 as an alternative to Plan 2. Plan 4 is a defined contribution plan that operates similarly to Plan 3. As of the Transition Date, Plan 1 was split to create two plans: Plan 5, which includes the Plan 1 defined benefit structure, and Plan 6, which includes the Plan 1 ASAs. Further, Plan 2 was split to create three plans: Plan 7 and Plan 8, which are two Plan 2 defined benefit structures, and Plan 9, which includes the Plan 2 ASAs. Plan 3 and Plan 4 remain separate plans. For all plans, the mandatory employee contribution rate is 3% of compensation. State law authorizes the State to pick-up and pay all or a portion of a member’s contribution under Code Section 414(h)(2), and schools or political subdivisions may choose whether or not to pick up contributions.
 
Rulings Requested
The State requested the following rulings with respect to Code Sections 415 and 414(h)(2):
1. As of the Transition Date, for any member of Plan 6, Plan 3, Plan 9, or Plan 4 who has not yet commenced receipt of benefit payments from his or her ASA account, the State will convert the member’s ASA balance to an annual benefit (under Code Section 415(b)(2)) and test that annual benefit under the Code Section 415(b) limit, as applicable to governmental plans, and after the Transition Date all contributions to the member’s ASA will be tested under Code Section 415(c).
2. Mandatory employee contributions under Plan 6, Plan 3, Plan 9, and Plan 4 will be treated as pickedup contributions under Code Section 414(h)(2).
 
IRS Rulings
The IRS approved the State’s requested application of Code Section 415. The IRS looked to the elimination of the Guaranteed Fund and guaranteed lifetime annuity payments from the ASAs as of the Transition Date as a defining point. For any member of Plan 1, Plan 2, Plan 3 or Plan 4 who had not commenced receipt of benefit payments from their ASA account as of the Transition Date, the State was required to convert that member’s ASA balance to an annual benefit and test that annual benefit under the Code Section 415(b) limit. As of the Transition Date, Plan 3 and Plan 4, and the ASA accounts formerly under Plan 1 and Plan 2 (i.e., new Plan 6 and Plan 9) were separate defined contribution plans. Therefore, after the Transition Date, Code Section 415(c) would apply to all contributions to the member’s ASA for any member of Plan 6, Plan 3, Plan 9, or Plan 4. The IRS also granted the State’s request in connection with the picked-up contributions. The State represented in its submission that formal action was taken specifying that the mandatory employee contributions will be paid by the employer in lieu of employee contributions and was evidenced by contemporaneous written documentation via either statute or resolution by the applicable legislative body. In addition, although a member may choose whether to be in Plans 5 and 6 or Plan 3, or whether to be in Plans 8 and 9 or Plan 4, no cash or deferred election arises from this election (i.e., the member cannot choose between receiving amounts directly or having them paid to the Plan), because the State represents that the mandatory employee contribution to each of the Plans is 3% of the employee’s compensation. Therefore, the mandatory employee contributions under Plans 6, 3, 9, and 4 satisfy the conditions to be treated as picked-up by the employer under Code Section 414(h)(2). Note that private letter rulings are directed only to the taxpayers requesting them and may not be used or cited as precedent.
GRS, January 2019.
 
8. THE 2019 PENSION RISK TRANSFER POLL:
For U.S. defined benefit (DB) pension plans, 2018 was another very robust year of pension derisking activity. If market dynamics continue their current course, it is expected that a significant portion of the over $3 trillion of DB plan liabilities that have not yet been derisked will flow through the pension risk transfer (PRT) pipeline over the next decade. In fact, a key finding from MetLife’s latest Pension Risk Transfer Poll is that 76% of DB plan sponsors with de-risking goals plan to completely divest all of their company’s DB plan liabilities at some point in the future. One way of reducing pension liabilities is for a plan sponsor to pay a lump sum to participants who have not yet begun collecting pension payments to settle any and all claims that those participants have under the plan. Another PRT option involves the purchase of a group annuity contract from an insurance company, known as an annuity buyout. This transfers some or all of a DB plan’s benefit obligations and related risks to the insurer, while retaining all of the plan design features and benefits in which participants are vested. For MetLife’s latest Pension Risk Transfer Poll, U.S. DB plan sponsors were surveyed to:

  • Probe on voluntary contributions made to improve a plan’s funded status;
  • Assess the likelihood they would engage in PRT to achieve their plans’ de-risking goals;
  • Determine what specific PRT activities they were mostly likely to use and for which participant population(s);
  • Understand the current catalysts driving interest in PRT to an insurance company;
  • Identify the most important drivers when selecting an insurer for a PRT; and,
  • Determine how quickly companies plan to completely divest themselves of their DB plans.

Key findings
Most plan sponsors with de-risking goals plan to completely divest their defined benefit pension liabilities A key finding from MetLife’s latest Pension Risk Transfer Poll is that 76% of DB plan sponsors with de-risking goals plan to completely divest all of their company’s DB plan liabilities at some point in the future. This includes 10% of all plan sponsors surveyed who will completely divest their plans within the next two years; 24% who will completely divest their plans in the next two to five years; 43% who will take more than five years to completely divest their plans; and, 24% who never plan to do so.
 
Metlife, 2019.
 
9. UNDERSTANDING ACTUARIAL ASSUMPTIONS:
Actuarial assumptions are intended to be forward looking expectations of future results, not just rote extrapolations of the past into the future. The experience study is the process by which those assumptions are selected. Currently, the experience study process is becoming much more exacting than it was in the past, possibly in response to plan liabilities being much larger and much more heavily weighted toward retirees than they were previously. At the same time, actuarial standards are being tightened. Further, liability weighting for demographic assumptions and fully generational versions of mortality tables are becoming more common today than they were in the past. Economic assumptions are being heavily affected by the current low interest rate/ low inflation rate environment, leading many plans to reduce their investment return assumption. Reasonable actuarial assumptions are very important for a plan’s well-being. Out-of-date assumptions are of questionable validity and can potentially do great harm to a plan, causing decisions about the future to be based on out-of-date expectations. If your plan has not had an experience study recently, or if you are concerned about the validity of the assumptions, discuss them with your actuary. It matters. GRS, January 2019.
 
10. THE 2018 PUBLIC PENSION FUNDING STUDY:
The Milliman Public Pension Funding Study annually explores the funded status of the 100 largest U.S. public pension plans. We report the plan sponsor’s own assessment of how well funded a plan is. We also recalibrate the liability for each plan based on our independent assessment of the expected real return on each plan’s investments. Beginning with our 2016 study, we have utilized the Total Pension Liability figures that are used for financial reporting under the accounting standards that apply to governmental entities, Governmental Accounting Standards Board (GASB) 67/68. GASB 67/68 reporting requirements mandate use of a uniform and consistent liability measurement, so there is more comparability across plans than is the case with the liability figures that the plans use to determine contribution amounts (see the sidebar “Financial Reporting vs. Funding”). GASB 67/68 also requires disclosure of metrics that enable us to project the Total Pension Liability forward beyond the plan sponsor’s fiscal year-end. This allows us to estimate how a plan’s assets and liabilities, i.e., the plan’s funded status, will respond to changing market conditions. This 2018 report is based on information that was reported by the plan sponsors at their most recent fiscal year-ends-June 30, 2017, is the measurement date for most of the plans in our 2018 study. At that time, plan assets were riding the wave of strong equity returns in the first half of 2017. Total plan assets as of the last fiscal year-ends grew to $3.49 trillion, up from $3.19 trillion as of the prior fiscal year-ends (generally June 30, 2016). Market performance since the last fiscal year-ends has been a mixed bag, with strong performance in the latter half of 2017, relatively flat performance in the first half of 2018, and considerable volatility toward the end of 2018. We estimate that aggregate plan assets rose to $3.67 trillion as of June 30, 2018. We estimate that the plans experienced a median annualized return on assets of 8.29% in the period between their fiscal year-ends and June 30, 2018.
 
Highlights
As of June 30, 2018, the aggregate funded ratio is estimated to be 72.1%, with plan assets earning slightly more than anticipated by the plans’ interest rate assumptions ··Nearly one-half of the plans reduced the interest rate assumptions they use for determining contribution amounts ··Adoption of more conservative assumptions added $73 billion to reported liabilities; plan changes shaved off $14 billion The aggregate Total Pension Liability reported at the last fiscal year-ends was $4.93 trillion, growing from $4.72 trillion as of the prior fiscal year-ends. We estimate that the Total Pension Liability has since passed the $5 trillion mark as of June 30, 2018. The aggregate system-reported underfunding as of the last fiscal year ends stood at $1.44 trillion, and we estimate that the underfunding has narrowed just slightly to $1.41 trillion as of June 30, 2018. To the extent that systems lowered their interest rate assumptions after the fiscal year-ends reflected in this report, our estimated figures as of June 30, 2018, likely understate the aggregate liability and the aggregate underfunding. Due in large part to the strong equity market performance of early 2017, the aggregate system-reported funded ratio improved to 70.8% as of the most recent fiscal year-ends, and we estimate that it continued this trajectory to settle at 72.1% as of June 30, 2018. Look for our funded ratio updates on a quarterly basis. Note that some plan sponsors have recently announced reductions in their discount rates, which will depress funded ratios. Overall, the 100 plans reported benefit payouts totaling $263 billion in their most recent fiscal years; we project that number will grow to $284 billion in July 2018 to June 2019. Reported contributions totaled $168 billion, with $121 billion and $47 billion provided by employers and members, respectively. We project that combined contributions from employers and members will grow to $181 billion in July 2018 to June 2019. With the inclusion of projected administrative expenses of $3 billion, we project a net cash outflow from the plans of $105 billion from July 2018 to June 2019. This cash outflow will be offset (or widened) by investment gains (or losses) on plan assets. In general, a plan’s liability is increased by service cost and interest, and reduced by benefit payments. Changes in assumptions or plan provisions can increase or decrease a plan’s liability, depending on the nature of the change. See our analysis of service cost on page 3. Read full report here .
Rebecca A. Sielman, FSA, Milliman, 2018.
 
11. ELECTRONIC SIGNATURES AND TRANSACTIONS IN THE UNITED STATES:
Electronic signatures have become common practice in the United States, but confusion still persists regarding the law at a state and federal level. This document provides an overview covering: 1) the legislation enabling electronic signature usage, and 2) the key legal factors arising in electronic transactions. What is an electronic contract? Before addressing the specifics of electronic signature legislation, it may be helpful to first make one point perfectly clear--under U.S. law, it is absolutely possible to form a contract electronically. The Electronic Signatures in Global and National Commerce (ESIGN) Act and Uniform Electronic Transactions Act (UETA) have helped cement this conclusion, but in most cases this would have been true even before these were enacted. Electronic contracting is essentially contracting, and contract law fundamentals apply. Any contract, electronic or not, requires:
 
1. An offer,
2. Acceptance,
3. Consideration (some promised exchange of value), and
4. No Defenses (A contract, electronic or not, will not be enforced if a successful defense can be raised. For example, if an element of the contract is unconscionable or violates public policy, or if one of the contracting parties is too young to create a contract)
 
The most important contribution of ESIGN and UETA is establishing that electronic record satisfies the legal requirement that certain documents be in writing. Access the full report here . White Paper, DocuSign, January 2019.
 
12. DID YOU KNOW BENJAMIN FRANKLIN SAID THIS?:
Beware of little expenses. A small leak will sink a great ship.
 
13. POSERS:
The word “swims” upside-down and backwards is still "swims".
 
14. INSPIRATIONAL QUOTES:
Challenges are what make life interesting and overcoming them is what makes life meaningful. – Joshua J. Marine
 
15. TODAY IN HISTORY:
On this day in 1922, Britain declares Egypt a sovereign state.
 
16. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.

 

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.


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