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Benefits-Related Challenges &
Opportunities Currently
Keeping Employers Busy
Benefits-Related Challenges & Opportunities Currently
Keeping Employers Busy in P.R.
Agenda
1. Life after Elimination of ERISA Fiduciary Regs.
2. Lessons for P.R. ERs from U.S. ERISA/401(k) Cases.
3. Reenergizing 401(k) Plans Post-Maria.
4. Alternatives for Controlling DB Pension Costs.
5. What if “La Junta” Eliminates P.R. Act No. 80?
6. Other Recent Officer/HCE Pay Developments.
7. Q&As
2
Life After Elimination of ERISA Fiduciary Regs.
• Fiduciaries » duty of care (prudent expert std.), duty of loyalty
(exclusive benefit rule), and conflicts of interest (prohibited
transactions).
• Personal liability (no bankruptcy protection), federal case,
and potential co-trustee liability.
• Plan sponsor, plan admin. & trustee » Fiduciaries
• Service providers » G.R., No (e.g., actuaries, attorneys, CPAs,
recordkeepers) » Suitability & market standards.
Investment Advisors?
• G.R., No.
3
Life After Elimination (cont.)
• ERISA 1975 Regs. » Advisor fiduciary if, among others, (1)
renders investment advice on a regular basis, and (2) under
mutual agreement that it will be primary basis for ER’s investment decisions.
• Thus, no duties of care & loyalty or PTs » Under-performing
and/or expensive investments » Issues with quality, price,
disclosure & conflicts.
DOL 2016 Fiduciary Regs.
• New “Fiduciary Investment Advisor” definition, would have
covered many advisors, brokers, CPAs & insurance agents.
4
Life After Elimination (cont.)
• “Fiduciary” » Renders individualized investment advice to ER,
plan or EEs under agreement that recommendation is based
on client’s particular investment needs & receives
compensation.
• “Investment advice” (1) advisability of buying, holding or
selling investments (usual), or (2) recommendations on
investment management, portfolio composition, IPS,
evaluation and selection of advisors, and distribution options
& rollovers (broader).
5
Life After Elimination (cont.)
Chamber of Comm. v. Hugler (May 15, 2018) » RIP! » Back to 1975
• 2018 SEC Best Interest Regs. » Retail Investors
What to Do?
• ER remains responsible for provider selection.
• Know the providers and their services & roles.
• Understand service fees (direct & indirect).
• Contractual assumption of fiduciary duties.
• Outsource fiduciary responsibility?
6
Lessons for P.R. ERs from U.S. ERISA/401(k) Cases
P.R. » G.R., no ERISA litigation, but lots of bad plans.
Phases:
• First » Stock drop, proprietary funds & primary corporate
benefit (conflicts of interest).
• Then » Excessive fees vs. “comparable plans”, keeping
underperforming & actively-managed funds w/o reasonable
basis, failure to move into lowest share class funds, too many
funds & providers, market value vs. stable value funds.
7
Lessons for P.R. ERs (cont.)
• Next » Cybersecurity of plan assets & participant data, Robo
investment advice.
Lessons:
• Understand plan fees/expenses, both direct & indirect (fee
disclosure) & how they compare vs. market/peers
(benchmarking & RFI/RFP).
• Evaluate, decide & document “Why these funds?”
• Talk IT security with Trustee & Recordkeeper (controls,
insurance & contractual terms).
8
Reenergizing 401(k) Plans Post-Maria
The Problem
• Around 20% of plan assets gone.
• Lower accounts » Why save? This plan sucks!
• Need money to cover current expenses.
The Challenge
• ER money is also limited.
• Limited effectiveness of increased ER Match.
• Lower tax benefit from possible reduction of business tax
rates.
9
Reenergizing 401(k) Plans (cont.)
Alternatives
• Participant Education Campaign
• Importance of retirement planning, different strategies,
emotional aspects for decision making.
• How does my plan works?
• How do mutual funds work?
• Available tools for helping me plan.
• Plan Improvements
• Automatic enrollment (with or w/o auto escalation)
• Company Match (formula or discretionary)
10
Reenergizing 401(k) Plans (cont.)
Parting Comments
• Increase EE engagement with plan (e.g., benefits of early &
long-term savings, favorable features of qualified plans, and
financial education basics).
• Higher engagement » participant empowerment » higher
savings rate & better investment decisions.
• Retirement planning ≠ Daily living expenses.
• Time value of $$ (the later the start, the costlier it is).
• Talk with your plan administrator (e.g., BPPR).
11
Alternatives for Controlling DB Pension Costs
• The Problem » Drastic increase in pension plan costs.
• PBGC Premiums
– No relation between premiums & protection/benefits
• Updated Mortality Tables
– PPA 2006 » “longer” tables beginning 2018 (~10%)
• Upcoming U.S. Multiemployer Pension Plan Crisis
– PBGC fund likely insolvent by 2025
12
Year Per Ppt. Rate Variable Rate
2009 $34 $9
2013 $42 $9
2019 $80 $43
Alternatives for Controlling DB (cont.)
Alternatives
• For P.R.-only qualified plans » Obtain PBGC advisory letter on
ERISA Title IV Coverage.
– https://www.pbgc.gov/prac/other-guidance/advisory-
letters
– Cease PBGC premiums & obtain 6-year refund.
• Voluntary lump-sum election windows
– As interest rates go up, payments go down.
• Annuitization (transfer liability to insurance co.)
13
What if “La Junta” Eliminates P.R. Act No. 80?
Usual Suspect
• Companies with lots of Key EEs (e.g., professional services,
STEMs, and complex manufacturing).
• Absent Act 80, no severance pay?
ERISA Severance Plan
• Fort Halifax v. Coyne (U.S., 1987); and Aguirre v. Pfizer (D.P.R.,
2013).
– Ongoing administrative program (ER administrative duties,
determinable ppts & benefit levels, and regular benefit
payments).
14
What if “La Junta” Eliminates (cont.)
• Considerations of ERISA-covered Severance Plans
– Plan document/SPD highly recommended.
– No funding requirement or discrimination test, but
benefits may not be discretionary (limited ER discretion).
– Form 5500 if “large plan”, but may include w/i overall
welfare benefits Form 5500.
– ERISA claims & appeals requirements (favorable standard
of review, exhaustion of internal process, federal
preemption & statute of limitations).
15
Other Recent Officer/HCE Pay Developments
Problem
• Growing gap between U.S. pre-tax contributions ($18,500)
and P.R. pre-tax contributions ($15,000).
Alternatives
• Adding after-tax contributions
– G.R., voluntary & not eligible for ER match.
– Free from nondiscrimination tests.
• Non-qualified retirement plans and deferred performance
bonus arrangements/LTIP (income deferral vs. extra income).
16