Lightening the regulatory burden of retirement plan sponsors
Plan sponsors are slowly closing defined benefit pension plans for a number of reasons, but one continuing concern is the increasing cost to operate such a plan. Over the past few years, Congress and federal agencies have been working to encourage plan sponsors to shut down defined benefit pension plans rather than keep them open to employees via increasing premiums that plan sponsors pay to the Pension Benefit Guaranty Corporation and new regulatory actions.
Earlier this year, President Trump issued an executive order mandating federal agencies to determine ways to reduce regulations and control regulatory costs. The EO specifically stated that for every new regulation, the federal agency must determine two regulations that will be repealed. In conjunction with that order, some agencies issued a notice for comments from the public on how that specific agency could reduce the regulatory burden placed upon Americans.
In late July, The ERISA Industry Committee submitted comments to the Department of Treasury on ways that the agency could reduce the regulatory burden imposed on plan sponsors of defined benefit plans. There are three regulations currently proposed but not finalized that should either be repealed or undergo significant changes before being finalized. They are:
· Updates to mortality tables used to calculate pension benefit
· Clarifying changes to the minimum present value of pension benefits (how a benefit is calculated)
· Non-discrimination testing for closed defined benefit plans (testing to ensure a plan sponsor is not favoring highly compensated individuals)
If each of these regulations were implemented, it would cause a significant increase in administrative expense and funding contribution for all plan sponsors of defined benefit pension plans. With any change to the calculation of pension benefits, whether it is updating mortality tables or changing the rules on how pension benefits are calculated, plan sponsors will need to hire outside consultants and other professionals to update documents, re-calculate individual accounts, change participant communication materials and other activities.
A lack of flexibility
On top of these potential changes to the administration of the pension plan, Congress has unnecessarily increased premiums that plan sponsors must pay to the PBGC. The combination of PBGC premiums and new fixed costs to implement regulatory changes will only drive plan sponsors toward closing pension plans at a rate much faster than what we have seen over the past few years.
With respect to the proposed rules on non-discrimination testing for plans closed to new entrants, the lack of flexibility within the rule itself will only cause more plan sponsors to freeze all accruals in the pension plan, which ultimately harms the individual participants. If a pension plan is closed to new entrants, the participants in the plan will most likely increase in age, tenure, and compensation. Rather than move these participants into the company 401(k) plan, the plan sponsor has maintained their benefit in the pension plan. But as the years go by, the plan sponsor will have difficulty in passing non-discrimination testing. The proposed rules do not provide much relief to plan sponsors and should be reviewed to determine a final rule that will prevent future closing of pension plans.
Instead of reviewing each new regulation or law that impacts retirement policy in a silo, Congress and federal agencies should look at the complete picture. A holistic approach to regulations and laws that impact retirement plans is the only path forward to ensuring Americans have a secure retirement. The current piecemeal approach will only bring an increase in costs to plan sponsors, fund that could be used to provide benefits.