1. YOU’VE OVERPAID RETIREMENT BENEFITS TO A PARTICIPANT … NOW WHAT?
Running a retirement plan is challenging enough. Plan sponsors’ added responsibility of trying to claw back benefit overpayments from participants just adds to the headache, experts say.
However, there are steps sponsors can take to better manage their plan data to prevent overpayments from happening in the first place, and the Internal Revenue Service (IRS) suggests four approaches a sponsor can take to rectify an overpayment if one does happen.
“Overpayments to plan participants are a very pervasive problem that can cost companies millions of dollars each year,” John Bikus, president of PBI Research Services, a provider of death data audits, tells PLANSPONSOR. “Many organizations are relying on internal processes and incomplete data sources to validate deaths of participants.”
Continuing to pay benefits to a deceased person is one of the most common reasons a sponsor overpays benefits, and it is, perhaps, the most troubling because it requires the sponsor to step in to make the plan whole since the recipient is deceased and unable to pay, says Eric Gregory, a lawyer with Dickinson Wright who has written a blog about the options sponsors have to correct overpayments.
The most important step sponsors can take to prevent overpayments of benefits is ensure the data in their retirement plan files is correct, Bikus says. “The best thing that plan sponsors can do is address the source of the problem upstream and invest in cleaning up their data and putting a stop to overpayments in the first place,” he says.
Bikus says overpayments have been a bane for many sponsors since 2011, when the Department of Labor (DOL) made changes to data accessible via the Social Security Administration’s Death Master File (DMF).
“This resulted in plan sponsors being able to identify an average of only 23% of deaths among their participants,” he explains. “Without a singular source of reliable information, companies have been left to aggregate and validate data on their own, using sources such as obituaries with personal identifiable information [PII] and the risk of false positives. The increase in disparate data sources, coupled with the complexity of those supplementary sources, makes finding and verifying deaths more challenging and burdensome than ever.”
Bikus says his firm offers an audit solution called CertiDeath that uses artificial intelligence (AI) to cull through 26,000 databases. This enables PBI’s clients to find 95% of deceased participants. Last year alone, he says, PBI’s service prevented clients from making more than $50 million in overpayments.
Sponsors also make the mistake of overpaying benefits to participants because of systemic errors or the incorrect application of a plan provision, such as the definition of compensation, Gregory says.
Should an overpayment occur, he says, “a plan sponsor has an obligation to recover overpayments on behalf of the retirement plan to protect the plan’s tax-qualified status and comply with the sponsor’s fiduciary responsibilities under ERISA [the Employee Retirement Income Security Act].”
The IRS’ Employee Plans Compliance Resolution System (EPCRS) addresses the issue of overpayment of benefits and outlines four options a sponsor can use to rectify this problem, Gregory says.
The first is to ask the participant to return an overpayment in a lump sum with earnings, he says, though he adds that this might be impractical for many sponsors. The second is for the sponsor to step in and repay the funds, with earnings. If the overpayment was the result of a vendor’s mistake--the plan’s recordkeeper, for instance--the sponsor could ask the vendor to step in and make the plan whole.
If the participant is slated to receive ongoing future benefits, the sponsor could reduce each of those payments until the overpayment is returned in whole. “Of course, the risk here is that the participant could pass away prior to full recoupment, which obligates the plan sponsor to repay the remaining amount to the plan,” Gregory notes.
Finally, if the mistake was made because the plan wasn’t being run the way the plan documentation specified that it should, in some circumstances, the sponsor could simply amend the plan document retroactively, he says.
He notes that in a recent case, Zirbel v. Ford Motor Co., a participant had been overpaid nearly $250,000 in retirement plan benefits over the course of a decade. Ford asked the participant for the money back, a right specifically provided to it in the plan document.
Instead, the participant appealed to an administrative committee, which denied her appeal but offered her a hardship reduction, which required full disclosure of her finances. She rejected that option and, instead, sued Ford, seeking a declaration that she was entitled to keep the money. The district court granted summary judgment to Ford, and the participant appealed to the U.S. 6th Circuit Court of Appeals, which affirmed the lower court’s decision in Ford’s favor.
In conclusion, Gregory says, “because overpayments are a frequent problem for plan sponsors, it is wise for sponsors to be prepared for them ahead of time. Like Ford, plan sponsors should consider explicitly providing in the plan document that the plan administrator or other fiduciary has the power to collect overpayments. Although this power has been implied by some courts, the best practice is to be explicit. It also is wise, like Ford, to establish a policy and process for reviewing overpayments and permitting participants and beneficiaries to apply for some level of hardship relief, if appropriate.” Lee Barney, PLANSPONSOR, www.plansponsor.com, May 20, 2021.
2. DESPITE MARKET REBOUND, RISING UNEMPLOYMENT HURT PUBLIC PENSIONS:
Although cuts to state and local employment in response to the COVID-19 pandemic had only a minor impact on public pensions’ funded ratios, they did cause a rise in the required contribution rates, according to a recent report from the Center for Retirement Research (CRR) at Boston College.
The report said that despite better-than-expected revenue for state and local governments during fiscal year 2020, a “dramatic reduction” in the size of the state and local workforce has negatively impacted public pension finances. State and local governments laid off nearly 1.5 million workers between March and August 2020, which represents an approximate 0.5 percentage point drop in state and local government employment as a share of the total US population.
A 0.5 percentage point drop might not seem like much in response to a major event like a pandemic, but the report said it is similar to the decline seen in the wake of the 2008-09 financial crisis, but that drop took place over a much longer period of time.
It also said that while it might seem like lower employment would improve the finances of troubled pension systems because fewer employees means fewer pensions, the decline in payroll can adversely impact plan finances in two ways: reduced employment can lead to less funding and higher required pension contributions, as well as increase the required contribution rates by lowering the payroll base.
According to the report, the aggregate ratio of assets to liabilities for public plans rose to an estimated 74.7% in 2021 from 72.8% in 2020. Despite the projected improvement, the funded ratio is still about 1 percentage point below levels reported more than a decade ago. At the same time, the average actuarially determined employer contribution is estimated to have risen to 22% of payroll from 21.3%.
Because just under half of the 200 major state and local government pension plans in the Public Plans Database (PPD) reported their 2020 funded levels as of May of this year, and none had reported 2021 levels, the report made plan-by-plan projections using data provided in each plan’s most recently released reports.
“The decline in payrolls during COVID caused funded ratios and required contribution amounts to be only slightly worse than they would have been if payrolls had grown as expected,” the report said. “That said, the required contribution rate increased more noticeably due to the lower payroll base, over which the slightly higher required contributions are now expressed.”
The report also noted that some plan sponsors have shifted to charging amortization payments as a fixed-dollar amount rather than a percentage of salary. It said that doing this would remove the potential for unintended underfunding going forward and, if amortization payments are reported as a dollar amount, it would reduce the appearance of rising contribution rates whenever employment declines. Michael Katz, Chief Investment Officer, https://www.ai-cio.com, June 16, 2021.
3. THE DEATH OF PUBLIC PENSION TRANSPARENCY:
Forensic investigations reveal that public pensions in states such as Pennsylvania, California, Tennessee, Rhode Island, North Carolina, and, most recently, Ohio, have long abandoned transparency, choosing instead to collaborate with Wall Street firms to eviscerate state public records laws and avoid accountability to stakeholders. Predictably, billions that could have been used to pay government workers retirement benefits have been squandered.
Transparency in government has long been acknowledged in America as essential to a healthy democracy. On the federal level, the Freedom of Information Act opens up the workings of government to public scrutiny, giving citizens information they need to evaluate and criticize government decision-making.
All 50 states also have public records laws which allow members of the public to obtain documents and other public records from state and local government bodies. State public records laws are built upon the United States’ historical position that the records of government are “the people’s records.”
Transparency is also critical to the prudent management of trillions of dollars invested in America’s state and local government pensions. Indeed, the single most fundamental defining characteristic of our nation’s public pensions is transparency. Of all pensions globally, our public pensions—securing the retirement security of nearly 15 million state and local government workers, funded by workers and taxpayers—are required under our public records laws to be the most transparent.
Public pensions primarily invest government workers’ retirement savings in securities and funds which are regulated on the federal and state level. Our nation’s securities laws require that securities issuers and fund advisers register with regulators, disclose financial and other significant information to all investors, including public pensions, as well as prohibit deceit, misrepresentations, and other fraud. The statutorily mandated disclosure information is commonly provided in the form of prospectuses, offering memoranda, annual reports, performance reviews and other documents.
Absent full disclosure by investment firms to pension boards and staffs, these individuals cannot fulfill their fiduciary duty to diligently safeguard pension assets. Full disclosure of investment information by the pension to the public is necessary for the stakeholders to understand the investment program, as well as evaluate whether pension fiduciaries are prudently performing their duties.
Thus, in public pension matters, we are concerned with two levels of transparency:
First, under state public records laws, all of the workings of the pension must be open to full public scrutiny, including, but not limited to, investments.
Second, under the securities laws, issuers and investment advisers must fully disclose material information to pensions, boards and staffs regarding pension investments.
Alarmingly, my forensic investigations over the past decade have revealed that public pensions in states such as California, Tennessee, Rhode Island, North Carolina, and Ohio have long abandoned transparency, choosing instead to collaborate with Wall Street firms to eviscerate state public records laws and avoid accountability to stakeholders. Predictably, billions that could have been used to pay government workers retirement benefits have been squandered over time as transparency has ceased to be a priority.
Wall Street cockroaches prosper--thrive--in the darkness. Despite global support for greater transparency, pensions are actually becoming less transparent. Ironically, there is less pension transparency today in the Information Age.
Less transparency in pensions results in less accountability and greater looting. Therefore, to protect your retirement, you should do everything in your power to promote transparency at your pension and pay particular attention to secretive investments.
Wherever transparency is denied, you should presume that someone has something to hide.
In pension matters, there is never any justification for keeping secrets from taxpayers and pensioners whose retirement savings are at risk. After all, it’s your money. Edward Siedle, Forbes, www.forbes.com, June 16, 2021.
4. WHAT IF YOUR PENSION PLAN PARTICIPANTS GO MISSING?:
The ability of millions of Americans to retire comfortably depends on pension plans keeping track of their hard-earned benefits. But in 2020 alone, U.S. Department of Labor investigations discovered that more than $1.4 billion in retirement benefits became detached from their rightful owners simply because employers lost touch with their former employees.
To address this problem and help employers reduce the chances of losing retirement plan participants, the Labor Department recently issued guidance that offers best practices for pension plans with missing plan participants.
The department’s recent recommendations are based on trends from well-run plans with low numbers of missing or nonresponsive plan participants. These plans have a strong culture of compliance and adopt practices to keep accurate records.
Employer-provided pension plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which was established to provide for the economic security of American workers in retirement. ERISA regulates a broad range of employer-sponsored benefit plans, including traditional pension plans, 401-k type plans, and other benefits, including health insurance, vacation, or education benefits. The law imposes many requirements on these plans and their corresponding fiduciaries to ensure that benefit plans are fair, funded, and reliable.
ERISA requires that companies with more than 100 employees complete annual plan audits. For many years, Labor Department plan audits have discovered plans with many missing participants, even though no regulations actually require plans to do anything about missing participants. As a result, pension plans and their respective fiduciaries have long requested some direction from the government about how to keep track of participants and stay in compliance.
The Labor Department’s long-awaited guidance suggests that pension plans should adopt the following four best practices to ensure that pension benefits make their way to their rightful owners.
First, plans should maintain accurate census information. The guidance suggests multiple avenues to maintain accurate information, including regularly asking participants to update their contact information, flagging undeliverable mail and uncashed checks for follow-up, and auditing census information and correcting data errors. In addition, the guidance encourages fiduciaries to pay close attention to the transfer of plan information in case of a merger, acquisition, or a change in record keepers.
Second, plans should implement more effective communication strategies. The guidance encourages fiduciaries to offer both plain English and non-English assistance when appropriate. It suggests fiduciaries should encourage ongoing contact with participants through websites and toll-free numbers, and they should build steps into on-boarding and exit processing for new or retiring participants that require the participants to update and confirm contact information. For participants who quit their jobs before the plan changed names or sponsors, which may occur due to a merger or acquisition, communication from the plan should be marked with the name of the original plan or sponsor.
Third, plans should improve missing participant searches. The Labor Department suggests leveraging beneficiary and next-of-kin contact information to find the most recent contact information for the missing participant, or even reaching out to colleagues or other members of the same plan to attempt contact with missing retirees. The pension plan fiduciary may try cross-checking other employer plan documents, such as health care plan documents, for more recent contact information.
The guidance also suggests partnering with other agencies or companies, including commercial locator services, credit-reporting agencies, social media websites, USPS certified mail, or the Social Security death index to attempt to contact the participant or confirm if they are still living.
Finally, plans should document their procedures and actions. The Labor Department encourages plan fiduciaries to record all policies and procedures in writing. In addition, they should document key decisions and the steps they take to implement their policies to ensure consistency. For plans that use third-party recordkeepers, the plan fiduciaries should closely supervise the third party to ensure performance of agreed upon services and that the third party is accurately identifying and correcting any shortcomings in the plan’s recordkeeping and communication practices.
Although not legally binding, the Labor Department’s new guidance marks a step towards ensuring that more pension plans stay in better touch with their participants. Following these best practices may help safeguard plan assets so they are available and deliverable to their rightful owners upon their retirement. Rachel Mann, The Regulatory Review, https://www.theregreview.org, June 17, 2021.
5. TAXPAYERS MAY RECEIVE A REFUND FOR TAXES PAID ON 2020 UNEMPLOYMENT COMPENSATION:
The IRS is reviewing tax returns filed before the American Rescue Plan of 2021 became law in March to determine the correct taxable amount of unemployment compensation and tax. For eligible taxpayers, this could result in a refund, a reduced balance due or no change to tax.
IRS efforts to correct unemployment compensation overpayments will help most affected taxpayers avoid filing an amended tax return. Some taxpayers will receive refunds, which will be issued periodically, and some will have the overpayment applied to taxes due or other debts. For some there will be no change.
The American Rescue Plan Act of 2021 excluded up to $10,200 in unemployment compensation per taxpayer from taxable income paid in 2020. Taxpayers should not have been taxed on up to $10,200 of the unemployment compensation. This is not the amount of the refund taxpayers will recieve.
The agency is also making corrections for the earned income tax credit, premium tax credit and recovery rebate credit affected by the exclusion.
The IRS can adjust tax returns for those who are single with no children and who become eligible for EITC. The IRS also can adjust tax returns where EITC was claimed and qualifying children identified.
Taxpayers who have qualifying children and become newly eligible for EITC after the exclusion is calculated may have to file an amended return to claim any new benefits.
If the IRS adjusts someone’s tax return, the taxpayer will receive a letter within about 30 days, explaining what kind of adjustment was made and the amount of the adjustment. Types of adjustments include a refund, payment of IRS debt or payment offset for other authorized debts. Offsets include past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or certain federal nontax debts, such as student loans.
Taxpayers should keep any IRS notices for their records and review their tax return after receiving any IRS notices. IRS COVID Tax Tip 2021-87, www.irs.gov, June 17, 2021.
6. NEW MAINE LAW REQUIRES STATE PENSION FUND TO DIVEST FOSSIL-FUEL COMPANIES:
Maine Gov. Janet Mills signed into law a bill that would require the $17.6 billion Maine Public Employees Retirement System, Augusta, and the state treasurer to divest holdings in fossil-fuel companies by Jan. 1, 2026.
The signing, late Wednesday, followed approval by the state House of Representatives on June 9 and the state Senate on June 10.
The legislation also requires the pension fund and the state to halt investing in multiple fossil-fuel companies. The state treasurer cannot invest in prime commercial paper or corporate bonds issued by fossil-fuel companies.
Fossil-fuel investments represent $1.34 billion, or 7.6%, of pension fund assets, said Sandy Matheson, MainePERS executive director, in an email Friday.
“One of the key provisions of the bill is that any actions must be in accordance with sound investment criteria and consistent with fiduciary obligations,” Ms. Matheson wrote. “We haven’t developed a plan at this point, but any plan we develop has to put the financial interests of our members first. We will not be taking any actions that create a loss for the plan.”
The law says pension fund’s board of trustees “shall review the extent to which the assets of any state pension or annuity fund are invested in the stocks, securities or other obligations of any fossil fuel company.” In addition, such a review will include "any subsidiary, affiliate or parent of any fossil fuel company." Using "sound investment criteria and consistent with fiduciary obligations," the board must divest these holdings by Jan. 1, 2026, the law says.
Also, the board, "in accordance with sound investment criteria and consistent with fiduciary obligations, may not invest the assets of any state pension or annuity fund in the stocks, securities or other obligations of any fossil fuel company," the law says. The prohibition extends to "any subsidiary, affiliate or parent of any fossil fuel company."
For both divesting and halting purchases, the law doesn't preclude "de minimis exposure" of fossil-fuel investments by the pension fund or by the state, the law says.
The law defines fossil fuels as coal, petroleum, natural gas or any derivative of coal, petroleum or "natural gas that is used for fuel."
The law focuses on the 200 publicly traded companies "with the largest fossil fuel reserves in the world" as well as "the 30 largest public company owners in the world of coal-fired power plants."
In addition, the law identifies companies that have as their "core business the construction or operation of fossil fuel infrastructure" or have as a core business "the exploration, extraction, refining, processing or distribution of fossil fuels."
The law also covers "fossil fuel infrastructure," which means, among other businesses, oil or gas wells; oil or gas pipelines and refineries; oil, coal or gas-fired power plants; oil and gas storage tanks; fossil-fuel export terminals; "and any other infrastructure used exclusively for fossil fuels," the law says. Robert Steyer, Pension & Investments, https://www.pionline.com, June 17, 2021.
7. COLORADO PUBLIC EMPLOYEES RETURNS 17.4% FOR 2020:
Colorado Public Employees' Retirement Association, Denver, returned a net 17.4% for the year ended Dec. 31, down from the previous year's 20.3% return and above its policy benchmark of 14.1%, said an annual report released June 18.
For the three, five and 10 years ended Dec. 31, Colorado PERA reported net annualized returns of 10.9%, 11.6% and 9.4%, respectively. Its 30-year annualized return was 9.1% gross of fees.
Global equity was the top performer, returning 22.4%, followed by private equity at 20% and fixed income, 8.3%. The plan's alternatives and real estate asset classes returned 8% and 5.1%, respectively.
The board of the $58.3 billion pension fund reaffirmed its assumed long-term rate of return at 7.25% but lowered its long-term inflation expectation to 2.3% from 2.4%.
The plan's actual asset allocation as of Dec. 31 was 58% equity, 20.8% fixed income, 8.1% private equity, 8% real estate, 4.1% alternatives and 1% cash. Meanwhile, its target allocation is 56% global equity, 23.5% fixed income, 8.5% each private equity and real estate, 3.5% alternatives and zero cash.
The pension plan's funding ratio was 62.8% as of Dec. 31. James Comtois, Pension & Investments, https://www.pionline.com, June 21, 2021.
8. WHAT TO KNOW BEFORE YOU BUY SOMETHING ONLINE:
Ahh, summer. Ten sweet yet short weeks to enjoy some of your favorite traditions. Maybe it’s sipping an ice cold drink on the porch, spending a weekend at the beach, or cooling off with the kids at the pool. Now that you think about it, you might decide to treat yourself to a new porch swing or a new beach umbrella. Or suddenly realize that you need to buy more goggles because the kids lost theirs…again. Before you start filling up your online shopping cart, we’ve got some tips you’ll want to check out (no pun intended!).
Do some comparison-shopping. Before you buy online, use the power of the internet to compare prices on different websites. We’ve got tips about using comparison-shopping sites.
Think critically about online reviews. Reading other people’s opinions about a product can help you make a decision. But some reviews are downright fake or not completely honest. You may not know when a reviewer got something -- like a free product -- in exchange for the review. Learn more about how to evaluate online reviews.
Pay attention to the details. Before you buy something online, know when it’ll ship and what to do if you want to return it. Read up on delivery, return, and refund policies.
Pay with a credit card if you can. That way, if you get billed twice for the same item, or you get billed for something you never got, you can dispute it. Learn more about the benefits of paying with a credit card.
Find out what personal information shopping apps collect. Shopping apps might give you exclusive deals or rewards points. But they might also take your personal information, like your name, phone number, and email. And they might use your device’s location. Here’s what to know if you’re using a shopping app.
If you spot this or any other scam, report it to the FTC at ReportFraud.ftc.gov. Alvaro Puig, Consumer Education Specialist, FTC, www.ftc.gov, June 18, 2021.
9. FOR THOSE WHO LOVE WORDS - THE HISTORY OF 'WAY':
When spring gives way to summer, people tend to go other ways than their usual ones. They leave their own driveways to take to highways and byways, using parkways and expressways and thruways and tollways and beltways. Those who fly travel airways after taking off from runways. Railways and subways move some to their destinations. Some traverse bikeways, or move down gangways. The beachbound may use a causewayto reach a seaside cottage, which may or may not have a breezeway. Some might take a right-of-way to get to some out-of-the-way place, while others hope for success on the fairway or at the raceway. A few may even lose their way, though we hope for not too long. Click here to learn how 'way' became a word for so many roads.
10. QUOTE OF THE WEEK:
“You’ve got to get up every morning with determination if you’re going to go to bed with satisfaction.”
11. TODAY IN HISTORY:
On this day in 2018, ban on women driving is lifted in Saudi Arabia and women are legally allowed to drive for the first time.
12. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.