Interview conducted by Roberta Hess of Princeton Marketing
The new math of DB plan administration.
Game changers: what every employer should know about DB plan administration.
2023: A different world for DB plan administration.
Allan Bittner joined The Retirement Advantage, Inc. TRA a year ago as Senior Actuary after 25 years at Milliman working on retirement benefit plans for both corporate and public sector sponsors. In this article, Allan discusses key developments transforming DB plan administration.
Tell us about your career path before you joined TRA.
I worked 25 years in the employee benefits practice of a multinational consulting firm, with a variety of both private sector and public sector retirement plans, including traditional defined benefit plans, cash balance plans and retiree medical plans. I also served as an internal consultant to a team developing a defined benefit plan administrative system. In addition, I was one of the lead actuaries on a contract the organization had with the Pension Benefit Guaranty Corporation (PBGC) to assist the agency value and administer plans they had taken over through the distress termination process.
What are the biggest challenges facing plan sponsors today in plan administration?
In a plan sponsor poll that was published in 2022, the biggest challenge for the respondents was compliance and regulations. The second biggest challenge was employee engagement and participation. Based on the poll results, some of the biggest fears that plan sponsors have are investment underperformance and cybersecurity threats.
Why it is important for even a small business owner to engage an experienced TPA, versus trying to administer a plan on their own?
Because of the increased regulation and legislative action concerning retirement plans in the last decade, it is important for plan sponsors to work with an administrator who is knowledgeable regarding the legal and fiduciary requirements inherent in sponsoring a retirement plan. Working with an experienced administrator can help a sponsor avoid compliance issues that could result in a loss of the plan’s tax qualified status, which could result in substantial tax liabilities for both the sponsor and the plan’s participants. For a defined benefit plan, actuarial valuations are required annually to determine minimum funding requirements, to sign the Schedule SB for the Form 5500, and to calculate the plan’s Adjusted Funding Target Attainment Percentage (AFTAP).
Looking at the SECURE Act of 2019 and SECURE Act 2.0 that just passed, what’s the impact on plan sponsors and advisors, relating to plan administration?
The recent legislation is bringing a lot of changes to plan administration. The SECURE Act in 2019 increased the age for required minimum distributions from age 70 ½ to 72. That has changed a lot of administrative procedures. For defined benefit plans, the biggest impact of the SECURE Act may be the relief if provides from non-discrimination testing requirements for frozen defined benefit plans. The purpose of that relief is to allow those plans keep operating without running afoul of the compliance requirements.
SECURE Act 2.0 further increases the age for minimum distributions to age 73 for 2023 and then to age 75 in 2033.
Do plan sponsors and advisors have to start thinking about Secure Act 2.0 immediately?
In some respects they definitely will, because the required minimum distribution age is increasing to 73 in 2023. There are going to be participants that would have needed to take a distribution under the prior rules that can delay that distribution under SECURE 2.0, so the administration for plans that have older participants is going to change immediately.
What do plan sponsors and advisors need to know about funding valuations?
The purpose of the funding valuation under the current regulations is to establish a permissible contribution range for the plan for the current plan year. This range is determined based on a comparison of the plan’s liabilities and the value of the plan’s assets. Our valuation report will demonstrate the development of the minimum required contribution which needs to be made to satisfy the requirements of the Internal Revenue Code. Another calculation important to plan sponsors is the development of the maximum deductible contribution, which sets a limit on how much the sponsor can contribute to the plan and deduct from income. Sometimes that maximum contribution can be determined solely from the defined benefit plan valuation, but in some cases the maximum contribution is based on the funded status of the defined benefit plan and the employer contributions made to participants in a defined contribution plan.
What does a new advisor working with plan sponsors need to know about valuations?
Anyone working with plan sponsors needs to understand what the minimum contribution is, and that the contribution needs to be made so that the plan can maintain its tax-qualified status and to avoid excise taxes on funding deficiencies. Before setting up a new defined benefit plan, the advisor needs to make sure that the plan sponsor has sufficient long-term income prospects to support funding the benefits that they are putting into the plan. Another key concept in the valuation is the funded ratio, which is a ratio of plan assets to plan liabilities. Obviously, you want to target 100 percent or higher. Any shortfall eventually needs to be made up by contributions or by investment returns. An understanding of the 415 limits is also important for many small plans.
What are 415 limits and how do they impact plan participants?
Section 415 of the Internal Revenue Code imposes certain limits on the amount of benefits that can be earned or paid to a participant in a plan. The Section 415 dollar limit is a flat dollar amount and is phased in over 10 years of plan participation. The Section 415 compensation limit is the average compensation over the three consecutive years during which the participant had the greatest total compensation, and is phased in over 10 years of employment. The final Section 415 limit is the lower of the dollar limit and the compensation limit. For a defined benefit plan, those limits are important because the maximum deductible contribution rules typically allow a sponsor to fund up to a 150% funded ratio for the plan. But, as a plan sponsor, you do not want the plan to be funded beyond the 415 limit for the participants at the time that the benefits are paid out, because you cannot get any excess assets back from the plan without paying a significant excise tax.
Does the IRS change the 415 limits every year?
The limits generally will change with the cost of living increase each year. They can also change in terms of the maximum lump sum payable from a defined benefit plan when the IRS adopts new mortality tables for determining present value of annuity benefits in those plans. There is also a Section 415 compensation limit that is based on a participant’s highest three consecutive years of earnings, so a participant’s 415 limit could change independently of any IRS action based on increases in their annual compensation.
How can a business owner be sure they don’t run afoul of IRS 415 regulations?
Keeping track of the 415 limits is a very complicated thing for plan sponsors, particularly in the defined benefit plan. Determining limits in a defined benefit plan will require actuarial calculations. Business owners need to work with an experienced administrator that has the ability to monitor those limits and expertise to calculate them and the experience to advise the owner on strategies to stay in compliance.
New legislation and changing regulations make plan administration more complicated. How does TRA help plan sponsors manage it all?
TRA has been in business for over 25 years now providing administrative services to plans. We bring a lot of experience and expertise to plan administration. We provide customized retirement solutions that best meet employer goals for providing retirement income to their employees, while ensuring that they stay in compliance with applicable regulations.
These are turbulent times: the COVID pandemic, inflation, rising interest rates, possibly a recession. Do these dynamics call for plan sponsors and advisors to hire an experienced TPA?
A typical plan sponsor hasn’t got the time or energy to deal with the analysis of all these economic issues and how they might affect their retirement plan. In addition to the economic turbulence, we have a number of new compliance issues that are arise from the SECURE Act and SECURE 2.0. Plan administration is not something that a small plan sponsor is dealing with on a daily basis, they are just looking at it as needed. It is becoming more and more important for business owners sponsoring retirement plans to work with an experienced administrative group that has the knowledge and expertise to keep the plans in compliance and make sure everything is running smoothly.
At TRA, our business is knowing your business. Whatever challenges you face or goals you want to reach as a plan sponsor or advisor, TRA’s Actuarial Team has the expertise, partnership and integrity to create a customized defined benefit solution.