defined contribution in review… · 2015. 10. 27. · • data from the aon hewitt 401(k) index...

Defined Contribution in Review A Quarterly Briefing for Plan Sponsors: 3Q15

FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION

FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION Quarterly Briefing 3Q15 | 2

What’s Inside?

Our Defined Contribution in Review is designed to help CEOs, CFOs, Treasurers,

Human Resource and Benefits Professionals and Investment Committees stay abreast of

recent events that could have an impact on your plan or plan participants. Inside you will

find the following information:

• Quarterly Highlights: A summary of plans and sponsors making the news

• Plan Sponsors’ Corner: Timely insights about plan sponsors’ retirement readiness

• Legislative Review: A summary of new and pending legislation

• Regulatory Review: News out of the Department of Labor and other regulatory bodies

• Legal Review: An update on high-profile ERISA cases

• Defined Contribution Capabilities: Janus Capital’s defined contribution capabilities

We hope you will find the information helpful, and we are happy to answer any questions you

may have.


Quarterly Highlights


General Motors Offers Annuities to 401(k) Participants

• General Motors, with more than $11B in assets and approximately

58,000 plan sponsors in its 401(k) plan, adopted a platform that allows

plan sponsors to partially annuitize their defined contribution portfolio by

having insurers bid for their business

• The insurers provide plan sponsors with real time quotes for products

and how much monthly income they can expect; once a plan sponsor

selects a product, they roll the assets used to purchase the product into

an IRA with the selected insurance provider

• The platform includes deferred income solutions, such as qualified

longevity annuity contracts (QLACs), but not variable annuities


Farm Credit Foundations Provides Single Benefit Statement

• Private corporation that supplies benefits, administration, payroll and other

HR-related services for 44 distinctly separate Farm Credit organizations and

approximately 8,500 employees

• The corporation built a four-page document with their service providers that

includes:

• Health and welfare elections

• 401(k) benefits

• Social Security projections

• Defined Benefit plan information

• The statement is mailed to plan sponsors annually and posted to the

employee’s individual 401(k) accounts online


Several Sponsors Encouraging Participant Roll-Ins

• A recent study published by Boston Research Technologies reported 96% of

DC plans with assets of more than $5M allowed roll-ins

• Only 45% actively encourage roll-ins

• An average of 5% of new employees rolled in assets from a former employer

• A number of plan sponsors have begun to actively encourage roll-ins due to:

• Reduced burden of managing multiple accounts

• Lower fees

• Sponsors include International Paper, Intuit, HCA Holdings, Oregon Savings

Growth Plan and the Federal Thrift Savings Plan

6


Plan Sponsor Implements a Financial Wellness Program

• New York City’s $334M Senior Officers Council Annuity Trust Fund,

with approximately 1,700 active and 3,100 retired members, recently

launched a financial wellness program

• The program started with an employee assessment to identify financial

vulnerabilities and determine areas of focus

• Employees who completed the assessment were eligible for a drawing; the winner

received one month’s free rent or mortgage payment up to $2,000

• The assessment revealed member interest in college savings

and budgeting

• A number of educational workshops were conducted and a no-cost managed

accounts service was introduced to help plan sponsors make better

investment decisions

7


Illinois 457 Plan Sets Auto Re-enrollment

• The Illinois State Board of Investment has announced plans to auto

re-enroll all 52,000 participants in the state’s $4.1B 457 Deferred

Compensation Plan

• The move comes after concern that the plan’s small-cap growth option

represented 23.3% of total assets

• The new default option will be a series of target-date funds, replacing a

stable-value fund; the stable-value fund will remain an option in the plan

• After the change, the plan will offer 16 options, managed by 10 different

managers, and 13 target-date funds

8


The Children’s Hospital Streamlines 403(b) Plan

• The Boston-based health care provider is reducing the number of

investment options in its two 403(b) plans with a combined $623M in assets

• The new investment lineup will consist of 17 options, a target-date series

and self-directed brokerage account; the streamlined menu will include both

active and passive options

9


Defined Benefit De-risking Trend Continues

• U.S. Steel recently announced plans to freeze pension accruals for

non-union employees; the plan was closed to new employees in 2003

• The plan is currently 87% funded with $7.3B in pension obligations

• Lincoln Electric Co. plans to transfer $425M of outstanding pension

obligations to an insurance company for about 1,900 U.S. retirees and

beneficiaries who retired on or before June 1, 2015 and are now

receiving benefit payments

• The plan has approximately $900M in assets and a funding ratio of 106%

• E.W. Scripps Co. announced that it would offer lump sums or immediate

annuities to about 4,300 former vested employees who participate in the

company’s defined benefit plan

• The plan has $495M in assets and $620.6M in projected liabilities for a funding

ratio of about 80%

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Plan Sponsors’ Corner


EBRI and ICI Study Finds Consistent 401(k) Participation Leads

to Higher Balances

• A new study by the Employee Benefit Research Institute (EBRI) and

the Investment Company Institute (ICI) compared the results of 4.2M

“consistent participants” to a large cross-section of 26.4M participants

from 2007 to 2013

• A consistent participant is one who remained active in the same 401(k) plan over

the six-year period

• The study found that the average account balance of the consistent

participants was $148,399 at the end of 2013, more than twice the average of

$72,482 among the larger group

• More than two in five participants in the consistent group had more than

$100,000, with nearly a quarter having more than $200,000, compared to one

in five participants having more than $100,000 and one in 10 having more

than $200,000 among the larger group

12


Participants React to Latest Round of Market Volatility

• Data from the Aon Hewitt 401(k) Index that tracks the investment activity of

1.5M 401(k) investors, shows trading spiked with recent market swings

• On Friday, August 21, 2015, trading activity among retirement plan participants

was twice the normal level, and activity on the following Monday was seven

times the norm

• The movement on Friday was chiefly out of equities and into fixed income

• Participants who failed to reinvest quickly missed the strong rebound

of the following days

13


401(k) Plan Participants Pay Lower Investment Fees

• The Investment Company Institute (ICI) has found that in 2014, 401(k)

participants who invested in equity mutual funds paid an average of 0.54%

compared to the average expense ratio of 1.33% for “retail” equity

mutual funds

• Since 2000, expense ratios have declined 30% for equity funds,

24% for hybrid funds and 28% for bond funds inside of 401(k) plans

• The downward trend in the 401(k) plan expense ratios continued from

2013 to 2014

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Asset Class 2013 2014 Expense Ratio

Difference

Equity 0.58% 0.54% + 0.04%

Hybrid 0.58% 0.55% + 0.03%

Fixed Income 0.48% 0.43% + 0.05%


Callan Survey Highlights Institutional Trends

• Callan has released its 2015 Defined Contribution Trends Survey –

a detailed look at practices among 144 plan sponsors – mostly of large

and mega 401(k) plans. Some of the highlights include:

• The proportion of plans that offer their record keeper’s proprietary target-date

fund declined from 47.5% in 2013 to 28.7% in 2014

• More than twice as many plan sponsors changed the way fees are paid

in 2014 as in 2013, such as moving from revenue sharing to an explicit

per-participant fee

• The Supreme Court’s ruling against using the presumption of prudence

as a DC stock-drop case defense did not spur immediate changes among

plan sponsors

• Automatic enrollment usage increased for the fourth year in a row to reach 61.7%

of plans

• More than three-quarters of plans (77.3%) now offer some kind of institutional

structure – either collective trust, separate accounts or unitized private label funds

15


Aon Hewitt Paper, Customized DC Investments for Participant

Success, Recommends Ways to Improve Participant Outcomes*

• Suggestions include:

• Re-enrollment is the most effective way to improve plan sponsors’ suboptimal

diversification and inappropriate risk taking

• A custom target-date fund to address a plan’s unique needs and provide

employees an institutional approach to portfolio management that blends best-in-

class active managers with low-fee passive managers

• An objective-based menu, rather than 18-25 asset-style funds, will reduce

participant confusion and improve outcomes (suggested objectives include

growth, income, capital preservation and inflation-protection)

• Usage of a self-directed brokerage fund window to effectively reduce concerns

among a vocal minority

*For the full whitepaper, please visit www.aon.com

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http://www.aon.com/human-capital-consulting/default.jsp


EBRI: Improving Retirement Security Through a QLAC

• A new EBRI analysis models two scenarios under which Qualified Longevity

Annuity Contracts (QLACs) could be utilized as part of a 401(k) plan

• Scenario 1: Converts 15% of a 401(k) balance to a QLAC over a 10-year period

from ages 55-64

• Scenario 2: Converts accumulated employer contributions to a QLAC when the

employee reaches age 65

• Analysis concluded that even at today’s historically low interest rates, the

use of QLACs through the transfer of longevity risk to the insurer provides a

significant increase in retirement readiness for the longest-lived quartile with

only a small reduction for the general population

17


Guardian Workplace Benefits Study Finds More Employees

Want Plan Enrollment Help

• New findings from the Guardian Workplace Benefits Study

highlight the personal and financial needs of employees at

different ages and how education and enrollment plays a role

in their decision making

• Top three concerns among employees in the first five years of

their careers:

1) Paying the bills

2) Job security

3) Work/life balance

• Top three concerns among near-retirees:

1) Adequate health insurance

2) Comfortable retirement

3) Maintaining health

• Only 13% of employers provide the tailored approach that

employees need

*For the full study, please visit wbs.guardianworkplace.com

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85%

61%

Younger Employees Older Employees

% of Employees Wanting More Help with Benefits & Financial

Decisions

http://wbs.guardianworkplace.com/


Schwab Retirement Plan Services Survey Finds Plan Participants

Prioritizing Wealth Over Health, Hurdles Remain

19

• A nationwide survey of 1,000 401(k) plan participants found that people are taking

retirement savings very seriously in much the same way they strive to maintain

their health. Specific findings include:

• More than two-thirds (68%) of plan participants surveyed consider making the best

401(k) investment choices a key priority – even more so than staying in shape (59%)

• 73% of plan participants surveyed would rather have their 401(k) balance grow by 15%

this year than lose 15 pounds

• Participants pay more attention to 401(k) investment fees (64%) than ATM fees (60%),

airline baggage fees (50%) or gym sign-up fees (49%)

• Despite recognizing the importance of retirement saving, hurdles remain

as 35% say they aren’t saving more for tomorrow because they are

unwilling to sacrifice their quality of life today – expenditures such as

eating out or vacations


Financial Finesse’s 2015 Gender Gap in Financial Wellness

Report Shows Progress Made But Financial Savings Gender

Gap Still Wide

• There remains a 26% gap in the shortfall between the median 45-year-old man

and 45-year-old woman’s needed retirement savings to replace 70% of their

income plus projected health care costs

• Widest in the areas of investing and money management

• Recently narrowed in areas of risk management, estate planning and retirement

plan participation

• Suggestions employers can take for closing the gap:

• Provide financial education for women that is collaborative and actionable

• Add auto-escalation to their plan design

• Offer unbiased guidance that is easy to understand

20


Vanguard Finds Most Older Participants Preserve Assets

• In an update to its December 2013 analysis of retirement-age (age 60

or older) defined contribution plan participants, Vanguard found that more than two-

thirds of participants take steps to preserve assets, and nine in ten plan dollars are

preserved for retirement

• Most retirement-age participants and assets leave employer plans within five calendar

years following the year employment terminates

• Vanguard suggests:

• These findings support the notion of “through” glide paths in target-date fund design

• More sponsors should encourage in-plan distributions by eliminating rules that

preclude partial ad hoc participant distributions

21


The Plan Sponsor Council of America 2015 403(b) Plan Survey

Highlights Plan Trends

• The Plan Sponsor Council of America has released its 2015 403(b) Plan

Survey of 478 organizations; one of the more notable findings is the number of

organizations that offer an employer contribution in 2014 is 96.6%, up from

82.7% in 2013

• The availability of Roth contributions has more than doubled in the last five

years with 25.2% of 403(b) plans currently permitting the after-tax contributions

• Most popular services provided to participants via mobile devices:

• Balance inquires (12.7%)

• Investment changes (9.6%)

• Plan inquiries (9.3%)

• Nearly half of organizations surveyed use an independent retirement plan

advisor separate from their service providers

• Most common services provided by an independent retirement plan advisor:

• Investments (73.6%)

• Plan design (64.4%)

• Participant education (60.3%)

• Provider selection (52.3%)

22

82.7%

96.6%

2013 2014

# of Organizations that Offer an Employer Contribution


Legislative Review


GAO: Federal Action Should Clear Way For State-Run Plans

• The Government Accountability Office (GAO) issued a report finding that

about half of private sector workers in the United States lack a workplace

retirement savings program

• After studying two states – California and Illinois – that are planning to

introduce state-run plans that would require certain employers to

automatically enroll workers, the GAO concluded that Congress should

consider providing states limited flexibility regarding ERISA preemption

in an effort to expand private sector coverage

• On September 1, 2015, the Department of Labor (DOL) sent a proposed

rule to the Office of Management and Budget that would:

• Provide a clear path forward for the states to create retirement savings programs

24


GAO: More Guidance Needed for QDIA Selection and Monitoring

• The Government Accountability Office (GAO) recently conducted a study to

examine which QDIA options are selected and why, how QDIAs are

monitored and what challenges, if any, plan sponsors continue to face

regarding their plan’s QDIA

• The GAO suggested that the DOL provide additional guidance regarding:

• How to factor the ages of participants into their selection

• Whether each QDIA option provides the same levels of protection

• How to incorporate additional features, such as guaranteed income, into

a plan’s QDIA

• The DOL generally agreed with the GAO’s recommendations

25


GAO Holds Forum on Financial Literacy and the

Role of the Workplace

• Recognizing the importance of financial literacy – the ability to use

knowledge and skills to manage financial resources effectively – the

Government Accountability Office (GAO) convened a forum of leaders and

experts to focus on financial education in the workplace

• Topics of discussion:

• The role of the employer in promoting financial literacy

• The effectiveness of such efforts

• How best to serve low-income and other underserved populations

• The federal government’s role in supporting these efforts

26


Regulatory Review


Reminder: Fourth Quarter Compliance Calendar

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October December

October 15

• Extended deadline for filing

Form 5500

• Deadline for adopting a retroactive

amendment (to correct an IRC

Section 410(b) coverage or IRC

Section 401(a)(4) nondiscrimination

failure for 2014)

• Extended deadline for filing tax

returns for unincorporated

businesses and final contribution

deadline for these entities

December 1

• Deadline for sending annual

401(k) and (m) safe harbor notice


QDIA notice


automatic contribution

arrangement notice

December 15

• Extended deadline for distributing

Summary Annual Report (SAR)

December 31

• Deadline for processing corrective

distributions for failed 2014

ADP/ACP test with 10% excise tax

• Deadline for correcting a failed

2014 ADP/ACP test with QNEC

• Deadline for amendment to convert

existing 401(k) plan to safe harbor

for next year

• Deadline for amending plan for

discretionary changes

implemented during plan year


DOL Guidance Eases Use of Annuities in 401(k) Plans

• On July 13, 2015, the DOL issued Field Assistance Bulletin (FAB)

2015-02 focusing on an employer’s liability when selecting and monitoring

annuity providers

• The FAB clarifies that:

• An employer’s fiduciary duty to monitor the solvency of the insurance

company generally ends when the plan no longer offers the annuity as

a distribution option, not when the insurer finishes making all promised payments

• A fiduciary need not review the prudence of retaining a provider each time

a participant elects an annuity, but rather the frequency of periodic reviews

depends on the facts and circumstances

• Absent fraud or concealment, claims of fiduciary actions or omissions that

are alleged to violate ERISA generally must be litigated within six years

29


IRS Announces Major Curtailment of Determination Program

• New changes described in IRS Announcement 2015-19 will:

• Eliminate the staggered five-year determination letter remedial amendment

cycles for Individually Designed Plans and

• Generally restrict the issuance of IRS determination letters for Individual

Designed Plans to a request for an initial plan qualification and request when

plan terminates

• The IRS has not announced any changes to the determination letter

program for prototype and volume-submitter plans

30


Supreme Court Decision on Same-Sex Marriage May Require

More Changes

• In Obergefell v. Hodges, the U.S. Supreme Court ruled by a 5-4 margin that

the 14th Amendment of the Constitution requires states to allow and to

recognize same-sex marriages

• After the Windsor decision, most employers:

• Amended their health and group benefit plans to allow for coverage of same-sex

spouses whose marriages were celebrated in states that recognize same-sex

marriage; now those changes must apply to all same-sex marriage couples

• Changed the treatment of same-sex spouses because most retirement benefits and

spousal protections are regulated by state law; The Obergefell decision may,

however, require changes by public-sector employers and churches who are

generally not subject to the same federal benefit laws as private-sector employers

31


IRS Notice on Pension Lump Sums Causes Confusion

• On July 9, 2015, the IRS issued Notice 2015-49 that prohibits defined benefit

plan sponsors from offering participants a lump-sum distribution if the

participant is already receiving annuitized pension payouts

• Some mistakenly believed the Notice prohibited lump-sum payout

options from all defined benefit plans

• Survey findings released by Mercer in July 2015 found:

• Nearly two-thirds (59%) of companies sponsoring defined benefit pension plans have already

offered some type of one-time lump sum payment to vested plan participants

• 49% stated their companies are likely to employ a form of lump sum payout in the next two years

32


IRS Issues List of Top 403(b) and 457 Mistakes

• An article in the July/August 2015 edition of the Journal of Compensation

and Benefits provides a list of issues that the IRS has identified as

problem-areas in 403(b) and 457 plans

• Some of the issues addressed regarding 403(b) plans include:

• Excess annual pre-tax deferrals

• Excluding eligible employees from participation

• Plan loans

• Excess IRC Section 415 contributions

• Hardship distribution failures

33


News Regarding IRS Form 5500

• On July 31, 2015, the President signed the “Surface Transportation and

Veterans Health Care Choice Improvement Act of 2015,” that revised the

rules relating to extensions for filing Form 5500

• Currently, the form is due within seven months after the end of the plan year

• An automatic extension is available, upon a timely request, for up to another two

and one-half months

• The new legislation extends the maximum extension period to three and one-half

months for plan years beginning after December 31, 2015

• In September 2015, the IRS and DOL announced a joint project to begin

contacting plan sponsors suspected of failing to file Form 5500 for the plan

year ending in 2011

• Sponsors who may have failed to file the form should attempt to remedy

the situation using the DOL’s delinquent filer program (DFVCP)

34


Legal Review


Boeing Settles 401(k) Lawsuit

• Boeing reached a settlement in a class-action lawsuit that alleges the

company failed to uphold its fiduciary duties to employees by allowing

excessive fees to go unchecked, choosing higher-cost retail mutual funds

over cheaper options and improperly making 401(k) plan decisions to

benefit vendors receiving other Boeing business

• In the court documents, the plaintiffs say participants paid $103 each for

administrative services in 2005 when a plan of its size should have been

charged no more than $42, according to an expert witness

• In 2007, the company reduced its per-participant fees to $32 after putting the

plan out to bid for a new contract

• Terms of the settlement were not announced

36


ABB Wins Part of Long-Standing 401(k) Suit

• In the case of Tussey v. ABB, the company was originally ordered to pay

$21.8M on plaintiff claims that the investment committee breached its

fiduciary duty by improperly mapping assets from one investment

to another

• On appeal, the District Court found that the defendants breached

their ERISA fiduciary duties, however, the court ultimately held the

defendants victorious because the plaintiffs could not prove

monetary damages

• Separately, the court affirmed an earlier judgment and award

of $13.4M for excessive recordkeeping expenses

37


Supreme Court Declines to Hear RJR Case

• The Supreme Court has announced that it will not hear the Tatum v. RJR

Pension Committee reverse-stock drop case

• Dating back to actions taken in 1999, the plaintiffs allege that the company sold

employer stock at an inopportune moment, leading to significant but

unnecessary losses to participant accounts

• Less than a year after the liquidation, Nabisco became the object of a bidding

war and the stock price rose significantly

• RJR petitioned the Supreme Court for a writ of certiorari after the Fourth Circuit

upheld a lower court’s ruling that the retirement plan committee

had indeed breached its fiduciary duty by selling the company stock

as an investment

38


Stock Drop Case Against Delta Dismissed, Again

• The Eleventh Circuit affirmed dismissal of ERISA breach of fiduciary claims

against Delta Airlines in connection with an investment of Delta stock by the

company’s retirement plan

• After a participant’s account value declined when the price of the stock fell

between 2000 and 2004, a lawsuit was filed alleging that the plan fiduciaries

acted imprudently by allowing participants to invest in Delta stock despite the

company’s poor performance and questions about its ability to survive

• The district court originally dismissed the complaint and the Eleventh Circuit

affirmed. The Supreme Court vacated and remanded for further consideration

following its Dudenhoeffer decision. On remand the district court again

dismissed the claims and the Eleventh Circuit again affirmed

39


Appellate Court Rules on Posthumous QDRO

• An appeals court has recently ruled on a case in which a deceased plan

participant’s retirement assets were sought by both his surviving spouse

and an ex-spouse

• Although the surviving spouse was named as beneficiary, the court found

that the QDRO provided by the ex-spouse was valid and therefore, entitled

her to the assets in three of the decedent's four retirement plans

• The court also overturned a lower court’s decision which determined,

incorrectly, that a divorce settlement agreement qualified as a QDRO for all

four retirement plans

• The net effect is the same, except for the one plan which was not

named in the QDRO, and therefore will be directed to the decedent’s

surviving spouse

40


Defined Contribution Capabilities


Janus Capital’s Defined Contribution Capabilities

Janus Capital Group Inc. is a global asset manager offering individual investors and institutional clients complementary asset management disciplines.

• 45+ years of industry experience

• Pioneering investment solutions for

retirees and plan sponsors

• Key DC Platforms

– Fundamental Fixed Income

– U.S. Equities

– Global/International Equities

– Alternatives

$23.4 Billion in DC Assets Under Management*

Products utilized by the top 25 DC record keepers in the industry

Availability on over 200 recordkeeping platforms

*AUM as of 6/30/2015


The information contained herein is provided for informational purposes only and should not be construed as legal or tax advice. Your circumstances may change over time so it may be appropriate for you to evaluate tax strategy with the assistance of a professional tax advisor. Federal and state tax laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information contained in this document. Janus does not have information related to and does not review or verify your financial or tax situation. Janus is not liable for your financial advisor’s or your use of, or any position taken in reliance on, such information.

A retirement account should be considered a long-term investment. Retirement accounts generally have

expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be

subject to taxes and penalties. For more detailed information about taxes, consult a tax attorney or accountant

for advice.

No investment strategy can ensure a profit or eliminate the risk of loss.

In preparing this document, Janus Capital has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources.

For more information, contact us.

Janus Capital Management LLC serves as investment adviser.

151 Detroit Street, Denver, CO 80206 I 800.227.0486 I www.janusinstitutional.com

Janus is a registered trademark of Janus International Holding LLC.

C-1015-101036 10-30-16 366-19-29638 10-15

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defined contribution in review… · 2015. 10. 27. · • data from the aon hewitt 401(k) index...

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