Thursday, November 29, 2018

Surprise -- Employees Want Pensions

I read an article yesterday highlighting, as the author pointed out, that employees value benefits more than a raise. Some of the findings were predictable -- the two most important were health insurance and a 401(k) match and they were followed by paid time off. But, just barely trailing those were pension benefits with flexible work hours and the ability to work remotely far behind.

Let's put some numbers behind the ordering:

  • Health insurance -- 56%
  • 401(k) match -- 56%
  • Paid time off -- 33%
  • Pension -- 31%
  • Flexible work hours -- 21%
  • Working remotely -- 15%
What I found remarkable about this is that five of those six get constant attention. In today's workplace, however, as compared to one generation ago, pensions get little, if any, attention yet nearly one-third of workers would rather have pensions than a raise.

Why is this the case? Neither the survey nor the article got into any analysis as to the reasons, so I get to way in here entirely unencumbered by nasty things like facts. I get to express my opinions.

Ask a worker what they fear. I think they will tell you that two of their biggest fears are losing their health and outliving their savings. The second, of course, can be mitigated by guaranteed lifetime income.

Workers are beginning to realize that 401(k) plans are exactly what Congress intended them to be -- supplemental tax-favored savings plans. In fact, generating lifetime income from those 401(k)s is beyond what a typical worker is able to do. Their options for doing so, generally speaking, are to self-annuitize (when you run out of money, however, the guarantee goes away) or to purchase an annuity in the free market. 

That, too, comes with a problem. While that purchase is easy to do and does come with a lifetime income guarantee, it also comes with overhead costs (insurance company risk mitigation and profits plus the earnings of a broker). Roughly speaking, a retiree may be paying 20% of their savings to others in order to annuitize. That's a high price. Is it worth it? Is that why workers want pensions despite often not really knowing what they are?

Pensions are not for everybody; they're also not for every company. But, this survey strongly suggests that companies that provide pensions may become employers of choice. In the battle for talent, that's really important.

Many companies exited the pension world because the rules made those pensions too cumbersome. But, the rules have gotten better. They've put in writing the legality of plans that many employers wanted to adopt 15 to 20 years ago, but feared doing something largely untried. And, there is bipartisan language floating around in Congress that would make such plans more accessible for more employers.

Designed properly, those plans will check all the boxes for both the employer and the employees. It seems time to take another look.

Thursday, November 8, 2018

When the American Academy of Actuaries has no Clothes


We're all familiar with the Hans Christian Andersen tale, "The Emperor's New Clothes," about two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent – while in reality, they make no clothes at all, making everyone believe the clothes are invisible to them. When the emperor parades before his subjects in his new "clothes", no one dares to say that they do not see any suit of clothes on him for fear that they will be seen as stupid. Finally, a child cries out, "But he isn't wearing anything at all!"  
Such appears to be the current position of the American Academy of Actuaries. They have opened voting on two amendments to their bylaws which voting will close November 9 just before midnight. Amendment 1 would take away most rights of Members not on the Board of Directors while Amendment 2 would ensure transparency to the processes of the Actuarial Standards Board (paralleling what we see in other professions such as accounting).
Tuesday, a group of 9 Presidents of the Academy (current, future, and 7 former) sent an email to all members of the Academy urging Members to vote in favor of Amendment 1 and against Amendment 2. They preached transparency and independence. They offer neither.
In fact, were Amendment 1 to pass, in order for a member-driven bylaws amendment to have even a chance to be brought to a vote, it would take a petition of 15% of the membership. Think about that for a moment. 15%. Since no member has a distribution list of contact information for Academy members, gathering signatures of 15% of members would be a herculean task, nigh impossible. And, even if 15% were gathered, the Academy Board could by 2/3 vote of Board members refuse to bring such bylaws amendment to a vote of members.
On the other hand, Amendment 2, the supposedly uppity, disruptive Amendment 2, would have its greatest effect by making meetings of the Actuarial Standards Board -- the professional standards setting organization for US actuaries -- open.
Quel dommage.
Meetings of the ASB should be open. They should be open because we are now at the point where members of the Actuarial Standards Board are chosen in significant part by the Academy's Board (actually, they are chosen by a Selection Committee chaired by the Academy President and having 1/3 of its votes from the Academy, but if the proposed SOA-CAS merger takes effect, that 1/3 will increase to 1/2).
The 9 presidents tell us how important this is for the Academy and for the profession. They talk about the independence of the Academy. They talk about the transparency of the Academy. They expect that the masses -- the sheeple -- to chant in agreement.
So, I urge you to vote NO on Amendment 1 and to vote YES on Amendment 2.
Be like the little boy. Tell the 9 presidents. Tell the Academy. Tell them that the Academy wears no clothes.

Thursday, October 11, 2018

The Big Surprise Gotcha in the Million Dollar Pay Cap

Even those of us who have been hiding under rocks know that late last year, the President signed into law the Tax Cuts and Jobs Act. And, as part of that Act, there was language that amended Code Section 162(m) also known as the million dollar pay cap. After Treasury gave us guidance on those changes in Notice 2018-68, some observers were surprised by a few of the interpretations that the regulators took. One in particular, however, that they didn't quite spell out, meets my criteria for a big surprise gotcha.

I'll come back to that and consider how an employer might get around it, but first some background. Under the old 162(m), deductions for reasonable compensation under Section 162 were limited to $1,000,000 per year for the CEO and the four other highest compensated employees of, generally speaking, publicly traded companies. However, most performance-based compensation was exempt from that calculation and was deductible as it would have been before the cap came into being.

Under the new 162(m), the definition of covered employee has been changed to be the CEO, CFO, and the three other highest paid employees. But, once you become a covered employee, you remain a covered employee. So, by 2030, for example, a company could easily have 25 covered employees. [Hats off to the cynics who know this is a silly example because no law stays in place unchanged for 13 years anymore.] Further, performance-based compensation is no longer exempt.

Like most law changes that affect compensation and benefits, this one, too, has a grandfather provision. Here, the new rules are not to apply to remuneration paid pursuant to a binding contract that was in effect on November 2, 2017, and which has not been materially modified after that date. The keys then relate to what is compensation for these purposes, what sort of modifications might be material, and what constitutes a binding contract.

Compensation is essentially any compensation that would be deductible were it not for the million dollar pay cap. Whether a modification is material remains a bit subjective, but the guidance does specify that cost-of-living increases in compensation are not material, but that those that meaningfully exceed cost-of-living are.

The binding contract issue is the really sneaky one. Your read and your counsel's read may be different, but my read is that if the employer has the ability to unilaterally change the contract, it's not binding. That is problematic.

Consider a nonqualified retirement plan be it a defined benefit (DB) SERP or a traditional nonqualified deferred compensation (NQDC) plan. In my experience, it's fairly common (completely undefined term) to see language that gives an employer the unilateral right to amend said plan, subject to any employment agreements that may overrule. Well, if the company can amend the plan, there would seem to be no binding agreement. And, that means that when that nonqualified plan is paid out to the employee, perhaps none of a large payout will be deductible for the employer. I'm aware of some payouts well into nine figures.

When it's a nine-figure payout, there really aren't great solutions. But, for the typical nonqualified plan, whether it's DB or DC, qualifying some of the benefits changes the treatment. If the benefits can be qualified in a DB plan using a QSERP device, employer funding will be deductible if it is deductible under Section 404. That's far more forgiving and, in fact, it is not at all unlikely that the deductions will already have been taken before the covered employee retires.

Yes, it's still a big surprise gotcha, but don't you prefer a surprise gotcha when it has a surprise solution.

Tuesday, October 9, 2018

Time to Revisit the Work Relationship

I read an article the other day highlighting some findings from a Willis Towers Watson survey. Quoting from the article:
Yet only 25% rank contributing to a health savings account (HSA) as a top current financial priority, falling below saving for retirement in a 401(k), paying for essential day-to-day expenses and paying off debt. The survey found the majority of employees (69%) who didn't enroll in an HSA said they chose not to because they didn't see the benefit, understand HSAs, or take the time to understand them.
Let's think about the hidden part of what is being said there. The relationship between employers and employees has changed. As two factions battle for dominance in what that relationship should look like -- those who preach self-reliance think that employers should provide availability of savings options only and those who preach mandated pay and benefits think that the only differentiators should be things like office gyms and juice bars -- we are left in a world where creativity is encouraged, but not in any determination of how employees are rewarded.

If you were to take a survey of which benefits employees find the most important (many have, but I can't put my hands on one right now), I suspect that numbers one and two would be their health benefits and their 401(k). Why? The data that I cite above shows that most don't understand their health benefits and having worked in the retirement space for more than half my life, I can tell you that the large majority don't understand their 401(k) either. Many understand what it is, but relatively few understand what it's not.

So much for the people who preach self-reliance as in 2018, those are two benefit types that are the epitome of self-reliance.

Let's turn for a moment to another side of the equation -- pay. The other side of the spectrum would have us believe that as an employer, you are not particularly entitled to differentiate between employees based on much of anything because if the data suggests that any two employees are paid any differently from each other and it is even remotely possible that maybe someone in their wildest dreams could divine that those differences in pay are based on something that the law doesn't or shouldn't, in their opinion, allow, the company is in trouble.

Suppose we were to scrap the current system. Suppose different companies offered different benefits that their employees could understand. Suppose they paid employees based on the value they brought to those companies (yes, I know that value is nigh impossible to measure).

In the thought to be antiquated employer-employee relationship that existed 30-35 years ago, consider what we had:


  • Companies were generally nicely profitable;
  • Employees tended to stay with the companies that they worked for at age 35 until they retired;
  • Those employees, generally speaking, lived as well as or better in retirement than they did while they were working;
  • Health benefits were such that employees didn't go into debt to pay their share of them from every paychecks; and 
  • Neither the country nor its citizens were reeling in debt.
I also see data that tells me that more than half (usually about 55%) are on track to retire. Translated, that means that nearly half are woefully behind. That's not a success. That is an utter failure.

The experiments of employee self-reliance and of paying everyone the same because you're not allowed to pay them differently have been failures. More likely than not, they will remain failures. 

Perhaps it's time to see what was right about the employer-employee relationship in the 80s and bring it back. Let's aim for 100% of employees being on track to retire. Let's aim for benefits that employees use because they do understand them. Let's pay people that deliver value in the workplace. It is time to revisit the work relationship.

Tuesday, September 11, 2018

As President of the Conference of Consulting Actuaries

I have had the honor and privilege to serve my profession and the members of the Conference of Consulting Actuaries (CCA) for almost a year now. My term will come to an end at the close of our Annual Meeting on October 24.

Last Thursday, I received a phone call and later an emailed letter from the President of the American Academy of Actuaries. The Academy later notified its membership with a similar communication.

Here is a paragraph from the Academy's communication to its members:

  • The Board believes that ACOPA and CCA perform important functions for their members. Those functions, which include advocating for the commercial interests of their members and their members’ clients, are highly valued by many in the profession. They are, however, incompatible with maintaining the independence and objectivity of the ASB and ABCD. Preserving this independence is vital to the public’s confidence in the U.S. actuarial profession’s ability to regulate itself.
None of the functions of the CCA is advocating for the commercial interests of our members and our members' clients. In fact, the CCA is not a lobbying organization. We do not currently and to my knowledge, never have had a presence on Capitol Hill.

The Academy does.

Of the five major US-based actuarial organizations, the CCA was the first to impose upon its members formal standards for continuing professional education. Later, the Academy and others adopted ours.

In 2006, in response to a crisis within the actuarial profession in the UK, a specially appointed task force of the US-based actuarial organizations released the final CRUSAP report (Critical Review of the US Actuarial Profession) outlining a series of recommendations to keep the independence of the US actuarial profession intact. To my knowledge, the last remaining remnant of CRUSAP had been the Joint Discipline Council (JDC), a group and function whose role was to jointly recommend discipline for violations of the Code of Professional Conduct. Leadership of the CCA took perhaps the largest role in seeing that the JDC came to fruition. All five major US-based actuarial organizations were signatories to it. Last fall, the Academy withdrew causing the JDC to be disbanded.

It's not up to me to be the arbiter of right and wrong.

I've laid out facts.

You decide.

Wednesday, August 1, 2018

Using Cash Balance to Improve Outcomes for Sponsors and Participants


In a recent Cash Balance survey from October Three, the focus to a large extent was on interest crediting rates used by plan sponsors in corporate cash balance plans. In large part, the study shows that those methods are mostly unchanged over the past 20 years or so, this, despite the passage of the Pension Protection Act of 2006 (PPA) that gave statutory blessing to a new and more innovative design. I look briefly at what that design is and why it is preferable for plan sponsors.

Prior to the passage of PPA, some practitioners and plan sponsors had looked at the idea of using market-based interest crediting rates to cash balance plans. But, while it seemed legal, most shied away, one would think, due to both statutory and regulatory uncertainty as to whether such designs could be used in qualified plans.

With the passage of PPA, however, we now know that such designs, within fairly broad limits, are, in fact allowed by both statute and regulation. That said, very few corporate plan sponsors have adopted them despite extremely compelling arguments as to why they should be preferable.


For roughly 20 years, the holy grail for defined benefit plan, including cash balance plan, sponsors has been reducing volatility and therefore risk. As a result, many have adopted what are known as liability driven investment (LDI) strategies. In a nutshell, as many readers will know, these strategies seek to match the duration of the investment portfolio to the duration of the underlying assets. Frankly, this is a tail wagging the dog type strategy. It forces the plan sponsor into conservative investments to match those liabilities.

Better is the strategy where liabilities match assets. We sometimes refer to that as investment driven liabilities (IDL). In such a strategy, if assets are invested aggressively, liabilities will track those aggressive investments. It’s derisking while availing the plan of opportunities for excellent investment returns.


I alluded to the new design that was blessed by PPA. It is usually referred to as market-return cash balance (MRCB). In an MRCB design, with only minor adjustments necessitated by the law, the interest crediting rates are equal to the returns on plan assets (or the returns with a minor downward tweak). That means that liabilities track assets. However the assets move, the liabilities move with them meaning that volatility is negligible, and, in turn, risk to the plan sponsor is negligible. Yet, because this is a defined benefit plan, participants retain the option for lifetime income that so many complain is not there in today’s ubiquitous defined contribution world. (We realize that some DC plans do offer lifetime income options, but only after paying profits and administrative expenses to insurers (a retail solution) as compared to a wholesale solution in DB plans.)

When asked, many CFOs will tell you that their companies exited the defined benefit market because of the inherent volatility of the plans. While they loved them in the early 90s when required contributions were mostly zero, falling interest rates and several very significant bear markets led to those same sponsors having to make contributions they had not budgeted for. The obvious response was to freeze those plans and to terminate them if they could although more than not remain frozen, but not yet terminated.

Would those sponsors consider reopening them if the volatility were gone? What would be all of the boxes that would need to be checked before they would do so?

Plan sponsors and, because of the IDL strategies, participants now can get the benefits of professionally and potentially aggressively invested asset portfolios. So, what we have is a win-win scenario: very limited volatility for sponsors with participants having upside return potential, portability, and wholesale priced lifetime income options.

The survey, as well as others that I have seen that focus on participant outcomes and desires, tells us that this strategy checks all the boxes. Now is the time to learn how 2018’s designs are winnersfor plans sponsors and participants alike.

Friday, July 20, 2018

Imagining Retirement Plans Through the Eyes of a Child

Imagine retirement plans. Imagine retirement plans through the eyes of a child (gratuitous Moody Blues reference for readers in my age range).

I know, this sounds really strange. Of all the people who are not thinking about retirement, kids are at the top of that list. Bear with me though. I will bring you back.

Before I do, however, think back to when you were a child. You probably either lived in a house on a street where there were other kids or in an apartment where there were other kids around or went to school where there were other kids. One way or another, most of us found ourselves around other children.

Now, think about what really made you beam with pride and joy. There were lots of things -- good grades, winning a game or a race, and being the first kid on the block to have something that every kid wanted. It didn't have to be something big. But, if you had it first, every kid wanted to be you.

I promised that I would bring you back and I'm going to start now. Take yourself out of the mind of a child. At least do that a little bit, but we're going to be meandering back and forth a bit on this short journey.

Think about the employer-employee relationship. Some employees want a job; others want a career. Some employees want a paycheck; others want to be somewhere where they want to come to work. Some employers want to have employees who collect a paycheck and perhaps as small a paycheck as the employer can get away with; others want to be employers of choice.

From an excellent article in Fast Company, "[O]ne of the top factors most likely to keep professionals at their company for 5+ years ... is having strong workplace benefits ... ." The article continued, "[I]n comparison, the least enticing factor for keeping professionals at their current companies is having in-office perks such as food, game rooms, and gyms."

Employers that want to be employers of choice will care about this stuff. And, so will employees. And, many of these employees actually do remember being children. Just as I do, they remember things like spending a nickel on a stick of Topps bubble gum that came with five baseball cards and upon opening the pack seeing that they were the first kid they knew of to get a Mickey Mantle. You really do have something special then.

Often times, employers that want to be employers of choice want that because they know that the cost of unwanted employee turnover is so high. In fact, when companies are counting their beans, if they use 150% of one year's pay as a proxy for the cost of an unplanned and unwanted turnover of a professional employee, then 1) they are likely pretty close, and 2) they will realize that the cost of benefits probably pales in comparison to the cost of turnover.

One of those benefits that we mentioned is a retirement program (note that I talk about a program not an individual plan). Most companies, or certainly many if not most, have 401(k) plans. Their employees don't really know what they are, but everybody thinks they are important, and, in fact, they are. So, giving an employee a 401(k) plan doesn't make her feel special when she looks at it through her eyes of a child.

But, suppose I told her that I had a special plan for her. We don't have to give that plan a name. Suppose I told her that I, her employer, value my employees and that I was going to give her something like a match, but that it was better. Suppose I told her that I was going to auto-enroll her in our 401(k) plan because everybody says auto-enrollment is a best practice, but even if a year came where she had to stop deferring to the 401(k) plan, I was still going to contribute the same 5% of pay to her retirement account. And, by the way, those assets that accumulated from those over and over again five percents were going to grow based on professional investments. And, someday when she retires, she'll be able to take her benefit as a lump sum, or as an annuity, or as some combination of the two.

Imagine how a child thinks about that.

The child's eyes light up.

She is the first kid on her block to have this special benefit.

She is special.