Thursday, January 4, 2018

Everybody Must Get Sued

I logged into my social media this morning and I noticed a pervasive theme. LinkedIn, Facebook, Twitter -- the trend in their highlights or whatever the particular site is calling that section is that somebody is getting sued. In fact, looking at my top highlights on each of those sites, more than 50% of those highlights is that somebody is suing somebody else. That's a frightening sign of the times.

Suppose instead of those sites, there was a site called BenefitsGram or SnapCompensation, what would they look like? Well, there are sites that are a little bit like that -- there's Plan Sponsor's News Dash and Benefits Link's Benefits Buzz, a pair of news consolidator sites. And, when I look at what's trending there, it's the same -- everybody must get sued.

So, why am I writing about this here?

In these days where many of the pundits talk about risk management and de-risking, is there a bigger risk than getting sued? For many companies, there may not be. A big enough lawsuit can put one of them out of business. I could certainly name some where that has happened (I'll skip that part though as I'm sure you have access to Google search as well).

In my world, it's happening around benefits and compensation programs on a more than daily basis. Somebody is getting sued. And, yes, I will agree, many of those lawsuits are frivolous. And, even among the ones that have some substance to them, an awful lot of those should fail on the merits.

The sad part, though, is that among those that should fail on the merits and even those that should succeed, almost all of them could have been avoided.

Defending a lawsuit is expensive. Even if you win, you probably paid an attorney a lot of money to defend you. And, that attorney likely convinced you (rightfully so in most cases) that you needed an expert witness or two or three on your side and you paid them a lot of money as well. So, even if you won, you lost.

What does real winning look like? It looks like not getting sued in the first place. On the contracts side, the key seems to be to write 100 page license agreements (or similar documents) that you know your customers won't read before they sign off on something that is so one-sided that they have no rights at all. On the benefits and compensation side, it's not so simple. Usually, you have to have things like plan documents and those documents have lots of legal requirements to comply with all the laws that Congress touts, but that are festered with so much junk that makes for great PR, but no sense at all.

So, you write those documents or get counsel to do that for you (probably a better idea). And, back in Section 14.23 of one of the documents, somebody wrote a really long and confusing paragraph. and, they left off an s at the end of a word that would have changed a singular to a plural. Voila! Somebody finds that the s is missing and decides that was always intended and not having that s will entitle an entire class of potential plaintiffs to double their benefits or more.

Will they find a court that will allow them to strike the first blow? Do they win at the District Court level? If they do, you have already spent a lot of money and if you want to appeal, you'll have to spend  a lot more.

So, what's the message here? Do everything you can to make sure that your intent of each of your plans is clear. Explain with examples. While I don't often praise IRS and Treasury for their mastery of the English language, they are well known for using words such as "the provisions of this paragraph (b) can be illustrated by the following examples" and then they give maybe five examples to make crystal clear what they intended.

You can too.

And you should.

But you probably haven't.

And neither have your counterparts at thousands of other companies.

So, here's your checklist:


  1. Address the litigation risks in your plans.
  2. Take steps to fix and problems that you have uncovered.
  3. If you do get sued, make sure your counsel finds great expert witnesses for you.
Otherwise, everybody must get sued ... with apologies to Bob Dylan and Rainy Day Women #12 and 35.

Tuesday, December 12, 2017

Wake Up and See the Light, Congress!

Congress has a once-in-a-generation opportunity. Since its first major overhaul in 1922, Congress has seen fir to make earth-shaking changes to the Internal Revenue Code (Code) once every 32 years. 1922. 1954. 1986. And, while it seems that they may be one year early this time, they are pitching tax reform once again.

The concept of qualified retirement plans as we know them today comes from the Employee Retirement Income Security Act of 1974 (ERISA) signed into law that Labor Day in 1974. Since that time, there have been relatively few changes to the Code affecting retirement plan design. And, frankly, most of them have come on the 401(k) side. In fact, Section 401(k) was added to the Code after ERISA and since then, we have been blessed with safe harbor plans, auto-enrollment, auto-escalation,Roth, and qualified default investment alternatives (QDIAs). Over the same period, little has been codified or regulated to help in propagating the defined benefit plan -- you know, that plan design that has helped many born in the 40s and early 50s to retire comfortably.

Isn't this the time? Surely, it can be done with little, if any, effective revenue effects.

Since ERISA, there have been really significant changes in defined benefit (DB) plan design including the now popular traditional cash balance plan, the even better market return cash balance plan, pension equity plan, and less used other hybrid plans. And, DB plans have lots of features that should make them more popular than DC plans, especially 401(k) plans.


  • Participants can get annuity payouts directly from the plan, thereby paying wholesale rather than the retail prices they would pay from insurers for a DC account balance.
  • Participants who prefer a lump sum can take one and if they choose, roll that amount over to an IRA.
  • Assets are professionally invested and since employers have more leverage than do individuals, the invested management fees are better negotiated.
  • In the event of corporate insolvency, the benefits are secure up to limits.
  • Plan assets are invested by the plan sponsor so that participants don't have to focus on investment decisions for which they are woefully under-prepared.
  • Participants don't have to contribute in order to benefit.
But, they could be better. Isn't it time that we allowed benefits to be taken in a mixed format, e.g., 50% lump sum, 25% immediate annuity, 25% annuity deferred to age 85? Isn't it time that these benefits should be as portable as participants might like? Isn't it time to get rid of some of the absolutely foolish administrative burdens put on plan sponsors by Congress -- those burdens that Congress thought would make DB plans more understandable, but actually just create more paperwork, more plan freezes, and more plan terminations?

Thus far, however, Congress seems to be missing this golden opportunity. And, in doing so, Congress cites the praise of the 401(k) system by people whose modeling never considers that many who are eligible for 401(k) plans just don't have the means to defer enough to make those models relevant to their situations.

Sadly, Congress prefers to keep its collective blinders on rather than waking up and seeing the light. Shame on them ...

Thursday, December 7, 2017

Focusing on the Pension Part of the Deal

Let's suppose you're on the finance side of a business. That business is buying a company and you learn that the company that you are acquiring has one or more defined benefit (including cash balance) pension plans. What do you do now?

Pension plans and the finances associated with them are among the most confusing and misunderstood elements of a deal like this.The rules are unnecessarily complex and are often misunderstood even by people that you might be inclined to engage as experts. Cash flow requirements do not align well with financial accounting charges and not knowing the right questions to ask could seriously impede your ability to get the answers that you need.

So, how can I help?

Among the really nice things about pension plans is the amount of information that is publicly available on each of them. You see, in its infinite wisdom, Congress and the agencies that Congress has entrusted to regulate pensions have deemed that a myriad of such information has to be disclosed every year for each plan. In unknowing hands, that information is just that -- information. In the right hands, however, it's a veritable goldmine.

As a senior finance person, what do you need to do?


  1. Identify all of the plans that you might be (will be) acquiring.
  2. Identify what measures are important to you (e.g., cash flow, financial accounting expense, government disclosures, volatility, loan covenants).
  3. Identify your constraints (e.g., available cash to use for pensions, funded status triggers to loan covenants).
  4. Identify your goals with regard to the plans.
Notice that I didn't mention plan documents, participant census data, plan asset statements, or anything else that you thought you needed to provide. This is where that goldmine comes in.

I call your attention to a recent situation where we had just the information in 1. through 4. above. The goals were fairly simple and included roughly these:

  • Help us to understand the amount of cash necessary to pay for the plan(s),
  • Tell us what is not being done optimally, and 
  • Help us to find ways to optimize these plans on a path to termination.
Our client now has a 10-year forecast of cash flow requirements under multiple scenarios. They understand what has not been done optimally over the last 10 years or so. And, they now have a strategy all set to go so that when they do pull the trigger and finish their deal, they'll be putting their pension dollars to optimal use.

This is a place where off-the-shelf, cookie-cutter solutions don't work. Every plan is different. Every plan has different thresholds. Every company is different. Every company has different resources.

But what makes every company the same is that every company needs a solution that is customized to their situation.

Tuesday, November 21, 2017

Cookie Cutter Doesn't Cut It

I was on the phone with a sophisticated client a few days ago. She remarked that the solution she was looking at was just pulled off the shelf and could equally apply to any [company]. She said that was bad consulting. I have to agree. Thankfully, that consulting was not ours.

When I started in the business, back in prehistoric times, the modus operandi that many of us were introduced to included answer the phone, do the work, record your time, and someone will bill the client for it. Complaints appeared to be limited.

Things got more complex. The booming economy in our business created by the Reagan-era bull markets and the Tax Reform Act of 1986 was a veritable full employment act for consulting actuaries. Employers of those actuaries needed all the quality staff they could find and clients needed all the support they could get.

Things changed. As processes got automated and later, as companies began to exit the business of sponsoring pension plans, this once highly valued actuarial service became more of a commodity. Whether it was true or not, consulting actuaries who could deliver actuarial valuations were viewed as being a dime a dozen.

How did the best differentiate themselves? They began to provide more and more customized solutions. They began to understand the client's business needs. There was a sudden shift in the order of necessary skills. The key ability of being able to do things was replaced in the pecking order by the ability to listen and then to thoughtfully react.

Somewhere around the same time, our society seemed to become far more litigious. The answer to many problems became finding some other party who could be found to be at fault and exacting a price from that party. Some made the observation that in response to this, there were a number of consulting firms that developed solutions that everyone should bring to each of their clients. In fact, I can recall professional friends of mine complaining that they needed to be able to "check the box' for each of their clients even if they felt as if that meant they were providing less than the optimal answer. In other words, they were being encouraged, or even required to pull the answer off the shelf or some might say, to deliver a cookie cutter solution.

Put yourself in the corporate shoes. Your adviser that you have worked with for years brings you a solution that they label best-in-class. A few days later, you find yourself at a gathering with your peers from other local companies. Alas, they have all been brought the same solution.

How is that possible? The companies aren't the same. Their plans aren't the same.

It's then that you remember that you had agreed, based on a referral, to a meeting the next day with some consultant you had never heard of. You wondered if she would try to sell you on the same best-in-class solution.

She didn't. After the initial niceties, she asked you a bunch of questions. And after each question, she listened to your answer and reacted accordingly by asking a follow-up, more probing question. She remarked that she was surprised that you weren't pursuing [pick your favorite strategy to fill in the blank] instead of the not best-in-class one that your longtime adviser had brought you.

You wanted to to business with her, didn't you?

Friday, November 3, 2017

Proposed Tax Bill Would Change the Face of Executive Compensation

Yesterday, Representative Kevin Brady (R-TX), Chair of the powerful House Ways and Means Committee, rolled out the Republican tax reform proposal. And, while no tax bill in my lifetime or likely anyone else's lifetime has made it through the legislative process unscathed, the draft bill fashioned as HR 1 certainly provides an indicator of where we may be headed.

Much seems completely as expected. We knew about the slimming to four tax brackets. We knew about the narrowing of deductions. We knew that some of the more heavily-taxed states would feel the pain of restructuring. What we didn't know and what frankly came as a surprise to me and to others that I know would completely change the face of executive compensation in the US. Honestly, on its surface, these proposed changes look to me as if they they had been constructed by Democrats. It wouldn't surprise me if these changes had been pre-negotiated, but that's entirely speculation on my part.

So, what's the big deal?

There are two extremely significant proposed changes according to my initial reading.


  1. The draft would amend Code Section 162(m) (the $1 million pay cap) to eliminate the exemption for performance-based compensation. In addition, that section would be amended to cover the Chief Financial Officer in addition to the Chief Executive Officer. 
  2. Code Section 409A would be repealed (you thought that was good news, didn't you?) and replaced with a new Code Section 409B. Essentially, 409B as drafted would apply the much more stringent taxation upon vesting rules that have previously applied generally only to 457(f) plans. 
162(m) Changes

Section 162(m) was added to the Internal Revenue Code by the 1993 tax bill. Widely praised at the time as a way to limit executive compensation, the exemption for performance-based compensation turned out to be a far bigger loophole than had been imagined. Many companies saw this as a license to offer base pay of $1 million to their CEO while offering incentive pay (some only very loosely incentive based) without limits while taking current deductions.

That would change. 

My suspicion is that companies would return to paying their top executives as they and their Boards see fit, but with the knowledge that particularly high compensation whether performance based or not would not be deductible. Additionally, so called mega-grants and mega-awards would likely become much rarer as the cost of providing them would no longer be offset by tax savings.

409B

The ability to defer compensation has long been a favorite of high earners. The requirement to defer compensation has also been considered a good governance technique by many large employers (for example, a number of large financial services institutions require that percentages of incentive compensation be paid in company stock and that receipt must be deferred),

Much of this would go away as very few people have the ability or desire to pay taxes on large sums of money before they actually receive that money.

What Might Happen If the Bill Passes

Nobody really knows what might happen. But since this is my blog, I get to guess. Here, readers need to understand that there is no hard evidence that what I say in this section will happen, but it seems as if it could.

The draft of HR 1 appears to keep tax-favored status for qualified retirement plans. That's important because qualified retirement plans are a form of deferred compensation with some special rules and requirements attached. What this means is that to the extent that an individual would like to defer compensation on a tax-favored basis, he would need to do it through a qualified plan.

However, qualified plans need to be nondiscriminatory; that is, they must (not an exhaustive list):
  • Provide benefits that are nondiscriminatory (in favor of highly compensated employees)
  • Provide other plan elements sometimes known as benefits, rights, and features that are nondiscriminatory
  • Cover a group of employees that is nondiscriminatory
There are techniques by which this can be accomplished in a currently legal manner, but they are not simple. It would not surprise me to see more interest in these techniques.

As I said at the beginning, I don't expect this bill to pass as is. But, these particular provisions written by Republicans should not draw ire from Democrats. We'll see where it goes.

Thursday, October 19, 2017

The Most Important Employee Benefit

I started writing this blog back in the fall of 2010 -- about 7 years ago. How? Why?

One day, I was feeling really unhappy and I thought that writing would be a good way to take my mind off of my unhappiness. It turned out that it was. And, while I've been at it, nearly 500 posts and 200,000 hits later, I think I can say that there have been at least a few times that I have imparted some wisdom and some knowledge to at least a few people.

Along the way, there have been some side benefits as well. I've made a few LinkedIn contacts, gotten some Twitter followers, and even developed some business from my blogging. But, the biggest benefit of all has come every day.

What's that? Since the day that I made my first post, not a single day has gone by without at least one person asking me what is the single most important benefit to provide to employees.

That's pretty cool, isn't it? Actually, it would be if it were true. But, the fact is that I don't think that anyone has ever asked me that question. However, because I write this blog, I get to address that question now.

As I said, back in the fall of 2010, I was pretty unhappy at work. Before then, I had worked for a firm that I thought was great. We were creative. We were thinkers. We were innovators. We worked together. And, then we were sold. But, in the new firm, a lot of that remained -- not all of it, but a lot of it to the extent that we could figure out how to fit that culture in. And, then we were sold again.

And, it all went away. Every last drop of it went away, at least for me it did and based on conversations and behaviors, I feel pretty certain that many of my long-time colleagues felt the same way.

We'd lost our best benefit. And, that benefit could have been provided to us at no cost. That's sad, isn't it?

In fact, not only could that benefit have been provided to us at no cost, it would have produced large amounts of additional revenue for our employer or for any employer that chose to provide it to us.

If my cryptic ways have confused you here, you could be wondering. What benefit has no cost, but provides revenue to the employer providing it? It's not your health plan. It's not a 401(k) or a pension. It's not even vacation time or flex hours. But, as the way we work has moved from a 1980s environment when I entered this profession to a 2017 environment, this benefit has become even more important.

It causes people who receive it to work harder, to work smarter, and to work longer hours. It causes them to collaborate more. It causes them to give that extra little bit. It causes them to embrace the company brand even if they can't identify exactly what that brand is. And, it's far more important in 2017 than it was in 1985.

I think back to my work world in 1985. I arrived early. I could get breakfast in the office. I ate lunch with my colleagues. My employer provided that lunch. After lunch, we would all walk around the campus. Yes, it was a ritual and we all looked forward to those 5 or 10 minutes. And, then we would all go back to work and work hard.

Today, in 2017, those opportunities are largely gone. Many people don't work in the company office. They often work from home. Nobody provides them breakfast or lunch. They don't eat with their colleagues and they certainly don't walk with their colleagues. In many cases, other than via email, maybe telephone, and perhaps instant messaging and social media, they don't even know their colleagues.

That all makes one benefit harder to provide, but more important than ever.

Okay, for all those of you (maybe there are two or three who have gotten this far, but haven't figured out where I am going), that most important employee benefit is engagement. Yes, it's free to provide and, in fact, it's quite costly to not provide. But especially in 2017, it's not so easy.

How do we engage our employees in 2017? We have to make sure that they have interesting work. We have to make sure that they have a future. We have to take an interest in them. We have to show them a path forward. In short, we have to talk to them. And, far more important, we have to listen to them.

Listening to them doesn't mean that we do everything that they ask, but it does mean that we should think about what they say. The best idea may come from the recent college graduate who (paraphrasing the late Robert F. Kennedy) may choose not to ask why, but to ask why not. The solution may come from the analyst who is not burdened by rules that she hasn't learned yet, but finds an answer that we discover fits within those rules.

So, why am I writing about this now? This morning, I had two reasons. One is that I am very pleased to be employed by a firm called October Three that does seem to do a good job of engaging its employees. I find that I am working harder and I am working pretty intelligently. And, our employees from bottom to top are finding solutions for our clients that are creative and unique.

The second one is that next week, I will have the honor of becoming President of the Conference of Consulting Actuaries. The pay will be low (zero) and the hours will be longer than you might imagine, but if we get it right, the rewards will be significant. As the head of a membership organization that is voluntary for likely every one of its members, I want to engage that membership. In a perfect world, I'd like for every one of those members to feel like this is their organization. I want them to be part of the organization and to seek more and more ways to be part of it because I want them to be fully engaged.

Hopefully, I'll remember to practice what I preach.


Friday, October 6, 2017

Tax on CEO Pay Ratios That Are Too High

Back in 2010, stuck in Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act, corporate America was blessed with a new requirement -- disclose the ratio of the annual total compensation of the CEO to that of the median-paid employee in the company. It seemed simple enough except that it's not. Here are some reasons:


  • Annual total compensation isn't what you think. It's compensation as defined for proxy purposes (Form DEF 14A) and it includes things like increases in value and retirement benefits as well as the value of certain stock compensation.
  • The median-compensated employee is the one who is compensated such that half the people in the company are better paid and the other half are not paid as well. So, to determine the median-compensated employee, you have to determine that half the company is paid higher and half is paid lower. (Yes, we can make some simplifying assumptions, but it's still not as simple as just picking a person.)
  • Foreign-domiciled employees count and we have to convert currency.
  • Part-timers and seasonal employees count and we are not allowed to annualize their pay.
All of this is so that a company can disclose a single number in its definitive proxy statement -- the ratio of pay of the CEO to that of the median employee.

And, then the pain ends, right?

Wrong!

People will see this number. Shareholders will see it, unions whose members the companies employ will see it, institutional investors will see it, shareholder advisory services will see it, and cities and states will see it.

Cities and states you say? Why would these issuers of proxies care about that?

Frankly, for most companies, the financial effects imposed by cities and states will be more of a nuisance than anything else, but Portland, Oregon led the way by imposing a surtax on companies doing business there if there pay ratio is too high. The business tax in Portland, generally, is 2.2% of income derived from Portland business. But, the following surtaxes will apply:

  • If a company's pay ratio is at least 100 to 1, but less than 250 to 1, there will be a 10% additional surtax;
  • If a company's pay ratio is at least 250 to 1, there will be a 25% additional surtax.
Other cities and several states have proposed similar laws and while some may have passed, I personally am not aware.

As I said, these taxes are not a big deal in the scope of the companies involved, at least not for the most part. At the same time, however, I think we are going to see that companies with pay ratios exceeding 100 are going to be quite common.

To the best of my knowledge, taxes of this sort were first proposed by former Labor Secretary Robert Reich in 2014. Secretary Reich points out that pay ratios in the early 70s averaged about 28, but we should note that statistic as being based almost entirely on full-time American workers. The labor force has changed. And, so has the pay ratio.