Most of the non-regulatory material that I read about 401(k) plans these days deals with participant outcomes. In fact, outcome seems to be one of the big buzzwords for 2014. We are suddenly talking about financial outcomes, health outcomes, and every other kind of outcome you can think of.
Don't get me wrong, I think it would be great if we all have wonderful outcomes. I just don't believe the studies that tell us how to get there.
In the typical piece that I read, I learn that in order to get the best outcomes, participants should begin saving at the beginning of their working career, increase the percentage of their pay that they save over time and convert their account balance (one way or another) to an inflation-adjusted annuity for longevity protection.
That's great. And, when a smart person models what will happen if a young adult follows this guidance, that person will always be destined to have a highly prosperous retirement.
But, it seems that very few people, even those who started saving when they were fairly young, are actually on target to have that very prosperous retirement.
Why not? What happened?
Life happened.
None of these models seem to reflect real life. In real life, people have periods of unemployment. During that unemployment, they stop saving. In fact, to the extent that those people have not also saved well outside of their 401(k), many will need to take distributions from those very 401(k) plans (paying income tax and the early distribution excise tax) just to stay afloat.
Where is this event in the models?
In real life, many young people actually do start to save at a modest rate and gradually increase the amount that they save. But, in real life, many of those people choose to have children and some will have them without having made a truly conscious decision to do so. Kids cost more money than anyone seems to think they will. That increase in savings rate often fails to be sustainable.
Where is this event in the models?
In real life, in 2014, an awful lot of people participate in high-deductible health plans. They are told that one of the great tax benefits of the modern world comes to people who put money away in a health savings account (HSA) to fund the high deductible part of their plans. This is a great idea as well, but real wages have not been increasing for probably the last 15 or more years. This model expects participants to save upwards of 10% of compensation in their 401(k) plans and an additional, say, $4000 per year in their HSAs. That's a lot of money. I think more people than not would tell you that this is just not feasible.
Where is this conundrum in the models?
Purchasing an in-plan annuity or taking an annuity distribution in your 401(k) is often an excellent idea. But, not all plans have them. Among those that do, many are not offered on a particularly favorable or attractive basis. The models that I have seen use a current, no-profit basis for converting your account balance to an annuity.
Where can I get one of these annuities on which an insurer makes no profit?
I'm all for wonderful outcomes. But, somebody needs to merge blip theory with outcome theory. Under blip theory, and I have never heard the term used before the morning of January 17, 2014, just as the road to hell is paved with good intentions, the road to wonderful outcomes is paved with potholes hereinafter known as blips. When models start including realistic numbers of blips, I'll start to believe the expected outcomes.
Subscribe To
Posts
All Comments
Friday, January 17, 2014
Friday, January 10, 2014
Anther Application of Modern Portfolio Theory
Modern portfolio theory deals largely with the allocation of assets between asset classes in a portfolio. The field, grown predominantly from Markowitz's concept of the efficient frontier has been a hot topic among both investment professionals and more casual investors alike during my time in the workforce (no, that doesn't take us back to prehistoric times, just close).
Essentially, the most significant outgrowth of this concept is that there exists a continuum of allocations that maximize expected return for a given level of risk, or conversely, that minimize risk for a given expected return. All of this, of course, is based on a large set of assumptions, in this case, capital market assumptions. Oversimplifying somewhat, what Markowitz, and after him others, discovered was that you can reduce risk in a portfolio while sometime even increasing longer-term expected return.
That's pretty cool. Part of what we learned is the value of populating a portfolio with uncorrelated and inversely correlated assets. Okay, John, what does that mean?
Consider a two-holding portfolio. Suppose each holding has an expected return of 8% per year and that their returns are well correlated. In other words, when one goes up, the other is expected to go up by a similar percentage. And, when one goes down, the other is expected to go down by a similar percentage. Essentially, your diversification is not. You're not getting any additional benefit from the second holding.
Suppose instead, your tow holdings are somewhat inversely correlated. In other words, they are neither expected to perform particularly well nor particularly poorly at the same time as each other. The expected return of each holding doesn't change. But, by decreasing the overall risk of the portfolio, you are able to increase the long-term expected return of the total portfolio by decreasing volatility.
Now that we've got that straight, let's change our portfolio. Instead of looking at financial assets, let's consider the insured lives of a health insurance company. While less is known about correlations of costs among diverse populations, it seems clear to me that a homogeneous population carries with it a higher risk to the insurer than one that is not.
As an example, consider a population consisting of 100 insured lives, all of them men between the ages of 65 and 75. Without doing any research to get the correct percentage, my past reading tells me that a meaningful percentage of them are going to get prostate cancer over the next 10 years. That's a largely unavoidable occurrence, or so I read, and the claims could all come at the same time.
How would an insurer manage that risk (other than reinsuring or hedging in some other way)? Suppose they cut their population of insured age 65-75 males from 100 to 10 and added in 90 other insureds. Some of them might be of the type that represent a very low risk, say 20-30 year-old males. Some might be women in their 40s, mostly past the age that they will be in the maternity ward.
What it seems that we will find is that the more diversification that our insurer has in its portfolio, the less volatility in claims it will have over time. This is good for them.
Under the Affordable Care Act (ACA), again somewhat oversimplified, health insurers must pay out at least 85% of their premium dollars in medical claims. Suppose they develop a set of premiums whereby they expect to pay out, on average, 90% of their claims. Further suppose that the 90% average has a standard deviation of either 5% or 15%. If I am doing my math correctly, then in the case where the standard deviation is 5%, our insurer will only have to pay rebates in about 16% of all years. In the 15% standard deviation case, however, they will pay rebates in 37% of all years.
In a nutshell, here is what this means. Our hero, if you choose, the insurance company will keep its full profit in either 84% (100%-16%) of all years or in 63% of all years. Before rebates, their long-term profits will be identical, but managing their portfolio for lower risk allows them to actually keep more of their profits.
Another application of modern portfolio theory?
Essentially, the most significant outgrowth of this concept is that there exists a continuum of allocations that maximize expected return for a given level of risk, or conversely, that minimize risk for a given expected return. All of this, of course, is based on a large set of assumptions, in this case, capital market assumptions. Oversimplifying somewhat, what Markowitz, and after him others, discovered was that you can reduce risk in a portfolio while sometime even increasing longer-term expected return.
That's pretty cool. Part of what we learned is the value of populating a portfolio with uncorrelated and inversely correlated assets. Okay, John, what does that mean?
Consider a two-holding portfolio. Suppose each holding has an expected return of 8% per year and that their returns are well correlated. In other words, when one goes up, the other is expected to go up by a similar percentage. And, when one goes down, the other is expected to go down by a similar percentage. Essentially, your diversification is not. You're not getting any additional benefit from the second holding.
Suppose instead, your tow holdings are somewhat inversely correlated. In other words, they are neither expected to perform particularly well nor particularly poorly at the same time as each other. The expected return of each holding doesn't change. But, by decreasing the overall risk of the portfolio, you are able to increase the long-term expected return of the total portfolio by decreasing volatility.
Now that we've got that straight, let's change our portfolio. Instead of looking at financial assets, let's consider the insured lives of a health insurance company. While less is known about correlations of costs among diverse populations, it seems clear to me that a homogeneous population carries with it a higher risk to the insurer than one that is not.
As an example, consider a population consisting of 100 insured lives, all of them men between the ages of 65 and 75. Without doing any research to get the correct percentage, my past reading tells me that a meaningful percentage of them are going to get prostate cancer over the next 10 years. That's a largely unavoidable occurrence, or so I read, and the claims could all come at the same time.
How would an insurer manage that risk (other than reinsuring or hedging in some other way)? Suppose they cut their population of insured age 65-75 males from 100 to 10 and added in 90 other insureds. Some of them might be of the type that represent a very low risk, say 20-30 year-old males. Some might be women in their 40s, mostly past the age that they will be in the maternity ward.
What it seems that we will find is that the more diversification that our insurer has in its portfolio, the less volatility in claims it will have over time. This is good for them.
Under the Affordable Care Act (ACA), again somewhat oversimplified, health insurers must pay out at least 85% of their premium dollars in medical claims. Suppose they develop a set of premiums whereby they expect to pay out, on average, 90% of their claims. Further suppose that the 90% average has a standard deviation of either 5% or 15%. If I am doing my math correctly, then in the case where the standard deviation is 5%, our insurer will only have to pay rebates in about 16% of all years. In the 15% standard deviation case, however, they will pay rebates in 37% of all years.
In a nutshell, here is what this means. Our hero, if you choose, the insurance company will keep its full profit in either 84% (100%-16%) of all years or in 63% of all years. Before rebates, their long-term profits will be identical, but managing their portfolio for lower risk allows them to actually keep more of their profits.
Another application of modern portfolio theory?
Wednesday, January 8, 2014
The Useful and Not so Much of Wellness Programs
A friend and reader referred me to this New York Times article that discusses a DOL-commissioned study performed by the RAND Corporation and PepsiCo. The study looked at wellness programs to determine the relative values of disease management components and lifestyle management components.
I was surprised that the results were so glaring. I'll get into that difference in just a minute.
First, for readers who don't deal in this area every day, it's useful to explain what we are talking about here. Disease management programs target people with chronic illnesses by educating them about their risks, reminding them to see their physicians, and reminding them to take medications. Lifestyle management programs focus on things such as stress management and weight loss.
The study found that disease management produces very meaningful cost savings, but lifestyle management results in virtually no savings at all. First and foremost, the PepsiCo disease management program has reduced hospital admissions significantly, and hospital admissions are one of the leading contributors to high medical claims costs.
Personally, I think there is more to the difference than what appears in the NYT article. Consider a patient with hypertension (high blood pressure). That blood pressure can be measured. There are prescription drugs whose primary purpose is to get a patient's blood pressure under control. Taking that medication once a day is easy as long as you can remember to do it. For most people, since the medications usually don't have severe side effects, there is nothing discomforting about doing this. Patients see the improvements and they are happy. Statistically speaking, a person with normal blood pressure is less likely to be admitted to the hospital than a hypertensive person. And, blood pressure medication is not among the more expensive ones.
How about lifestyle management? How exactly would I measure stress? How exactly would I control my stress? How would I know that my stress was reduced?
To my mind, these are all largely indeterminable elements. I know when I feel less stressed, but it's usually not something that can be controlled. If I think I will have trouble paying my bills, I will be stressed. If I think I will lose my job, I will be stressed. If a family member is ill, I will be stressed. No stress management program can change this.
Looking at the numbers cited in the study, the disease management program saved nearly $4 for every dollar spent on it while the lifestyle management program saved only about 50 cents for every dollar spent. In total, the program saved nearly $1.50 for each dollar spent.
One could look at this in several ways. We could say that the program in total is working. We could say that PepsiCo should eliminate the lifestyle management component. What we can't say is that disease management doesn't work.
I was surprised that the results were so glaring. I'll get into that difference in just a minute.
First, for readers who don't deal in this area every day, it's useful to explain what we are talking about here. Disease management programs target people with chronic illnesses by educating them about their risks, reminding them to see their physicians, and reminding them to take medications. Lifestyle management programs focus on things such as stress management and weight loss.
The study found that disease management produces very meaningful cost savings, but lifestyle management results in virtually no savings at all. First and foremost, the PepsiCo disease management program has reduced hospital admissions significantly, and hospital admissions are one of the leading contributors to high medical claims costs.
Personally, I think there is more to the difference than what appears in the NYT article. Consider a patient with hypertension (high blood pressure). That blood pressure can be measured. There are prescription drugs whose primary purpose is to get a patient's blood pressure under control. Taking that medication once a day is easy as long as you can remember to do it. For most people, since the medications usually don't have severe side effects, there is nothing discomforting about doing this. Patients see the improvements and they are happy. Statistically speaking, a person with normal blood pressure is less likely to be admitted to the hospital than a hypertensive person. And, blood pressure medication is not among the more expensive ones.
How about lifestyle management? How exactly would I measure stress? How exactly would I control my stress? How would I know that my stress was reduced?
To my mind, these are all largely indeterminable elements. I know when I feel less stressed, but it's usually not something that can be controlled. If I think I will have trouble paying my bills, I will be stressed. If I think I will lose my job, I will be stressed. If a family member is ill, I will be stressed. No stress management program can change this.
Looking at the numbers cited in the study, the disease management program saved nearly $4 for every dollar spent on it while the lifestyle management program saved only about 50 cents for every dollar spent. In total, the program saved nearly $1.50 for each dollar spent.
One could look at this in several ways. We could say that the program in total is working. We could say that PepsiCo should eliminate the lifestyle management component. What we can't say is that disease management doesn't work.
Thursday, December 26, 2013
Frommert Redux Again
ERISA is a funny law. I guess there are other funny laws as well, but I haven't worked with most of them as often as I have worked with ERISA. Consider the somewhat curious ERISA litigation patterned as Frommert v Conkright (you can read the most recent verdict here.
I'm not quite certain when the original case was brought, but I am certain that I was not yet eligible to make 401(k) catch-up contributions and I started making them in 2007. Since then, the 2nd Circuit Court of Appeals has heard the case three times (well, it hasn't always been exactly the same case). If it follows the pattern that it has thus far, it may even make it to the Supreme Court for a second time. Frankly, I don't know how often that happens, but it doesn't feel like it happens a lot.
So, why is ERISA a funny law? Much like lots of other American laws (and the Constitution for that matter), it was written in a somewhat different era. You know how that goes. As time moves on and creative minds are brought to bear, stuff happens. Not everything that happens could have been contemplated when the law was written.
You need an example? There are a lot of people out there in legal land who refer to the US Constitution as a nearly perfect document (I have heard it referred to that way virtually ever since I knew it existed). In fact, it's only been amended 17 times since the Bill of Rights and one of those amendments was passed to repeal an earlier amendment. So, one could argue that with an average of one amendment being passed and left in roughly every 15 years, it was pretty good.
Okay, what did the Constitution say about the internet? I was pretty sure it was silent on the matter, but I checked (ctrl-F lets you do that pretty quickly). It's not in there. So, how do courts rule on matters related to the internet. They use this legal mumbo-jumbo known as a precedent and then they often construe a relationship from one case to another. And, at the end of the day, it seems to this non-attorney that a judge or panel of judges will determine what they think is the correct answer and then leave it up to a smart, young law clerk to find them a rationale.
At its core, Frommert is about something known to retirement plan experts as a floor-offset plan. Essentially, a participant is entitled to a minimum benefit (the floor) and company defined contributions represent an offset. Since one piece of the benefit (DB) is expressed as an annual annuity and the other an account balance, performing the offset calculation requires that an administrator convert one piece of the calculation to be parallel with the other. This is done using a concept known as actuarial equivalence.
The concept of actuarial equivalence allows us to convert an account balance to an annuity or conversely. So, there's only one way to do this, right? Wrong!
The actual conversion depends on a set of actuarial assumptions, in this case the discount rate and the rate of mortality. Said differently, an account balance will pay you a different amount of money annually for the rest of your life depending upon how long you live and what interest rate is earned on the money.
The math in a floor-offset arrangement is funny, in much the same vein as ERISA is funny. Calculations, even when performed in the fairest sense possible produce unexpected results. One thing about them is certain, however, they tend to provide, relatively speaking, much larger benefits for the higher paid employees than for the lower ones. And, there is nothing in ERISA that specifically tells an administrator how to address every possible situation.
How funny are they? In Frommert (III), the court found a situation where it considered two virtually identical employees. Each retired in 2005 with the same final average earnings. Each had been hired in 1980. Employee A, however, was a rehired employee, having also worked for the company from 1960 to 1970. Employee B was a new hire in 1980. Solely because of that earlier period of employment, Employee A had a smaller benefit than Employee B. That is, Employee A was essentially penalized for his earlier period of employment.
Among other things, the court found that if this was a result of the offset calculation methodology that the method of offset was unreasonable and violated ERISA. Further, it found that the notices provided by the employer (Xerox) to employees about this plan were insufficient. So, the case is remanded (yet again) to the District Court where it will be re-heard, undoubtedly re-appealed regardless of the verdict and will very possibly once again wind up at the Supreme Court. I wonder how many of the plaintiffs will still be alive by the time this case is finally put to rest.
I'm not quite certain when the original case was brought, but I am certain that I was not yet eligible to make 401(k) catch-up contributions and I started making them in 2007. Since then, the 2nd Circuit Court of Appeals has heard the case three times (well, it hasn't always been exactly the same case). If it follows the pattern that it has thus far, it may even make it to the Supreme Court for a second time. Frankly, I don't know how often that happens, but it doesn't feel like it happens a lot.
So, why is ERISA a funny law? Much like lots of other American laws (and the Constitution for that matter), it was written in a somewhat different era. You know how that goes. As time moves on and creative minds are brought to bear, stuff happens. Not everything that happens could have been contemplated when the law was written.
You need an example? There are a lot of people out there in legal land who refer to the US Constitution as a nearly perfect document (I have heard it referred to that way virtually ever since I knew it existed). In fact, it's only been amended 17 times since the Bill of Rights and one of those amendments was passed to repeal an earlier amendment. So, one could argue that with an average of one amendment being passed and left in roughly every 15 years, it was pretty good.
Okay, what did the Constitution say about the internet? I was pretty sure it was silent on the matter, but I checked (ctrl-F lets you do that pretty quickly). It's not in there. So, how do courts rule on matters related to the internet. They use this legal mumbo-jumbo known as a precedent and then they often construe a relationship from one case to another. And, at the end of the day, it seems to this non-attorney that a judge or panel of judges will determine what they think is the correct answer and then leave it up to a smart, young law clerk to find them a rationale.
At its core, Frommert is about something known to retirement plan experts as a floor-offset plan. Essentially, a participant is entitled to a minimum benefit (the floor) and company defined contributions represent an offset. Since one piece of the benefit (DB) is expressed as an annual annuity and the other an account balance, performing the offset calculation requires that an administrator convert one piece of the calculation to be parallel with the other. This is done using a concept known as actuarial equivalence.
The concept of actuarial equivalence allows us to convert an account balance to an annuity or conversely. So, there's only one way to do this, right? Wrong!
The actual conversion depends on a set of actuarial assumptions, in this case the discount rate and the rate of mortality. Said differently, an account balance will pay you a different amount of money annually for the rest of your life depending upon how long you live and what interest rate is earned on the money.
The math in a floor-offset arrangement is funny, in much the same vein as ERISA is funny. Calculations, even when performed in the fairest sense possible produce unexpected results. One thing about them is certain, however, they tend to provide, relatively speaking, much larger benefits for the higher paid employees than for the lower ones. And, there is nothing in ERISA that specifically tells an administrator how to address every possible situation.
How funny are they? In Frommert (III), the court found a situation where it considered two virtually identical employees. Each retired in 2005 with the same final average earnings. Each had been hired in 1980. Employee A, however, was a rehired employee, having also worked for the company from 1960 to 1970. Employee B was a new hire in 1980. Solely because of that earlier period of employment, Employee A had a smaller benefit than Employee B. That is, Employee A was essentially penalized for his earlier period of employment.
Among other things, the court found that if this was a result of the offset calculation methodology that the method of offset was unreasonable and violated ERISA. Further, it found that the notices provided by the employer (Xerox) to employees about this plan were insufficient. So, the case is remanded (yet again) to the District Court where it will be re-heard, undoubtedly re-appealed regardless of the verdict and will very possibly once again wind up at the Supreme Court. I wonder how many of the plaintiffs will still be alive by the time this case is finally put to rest.
Friday, December 20, 2013
If You Like Your Plan, You Can Have Something
Perhaps my mind is easily boggled, but it boggles the mind. The Department of Health and Human Services has once again, this time by Bulletin, reinvented the Affordable Care Act (ACA, PPACA, ObamaCare). This time, Health and Human Services (HHS) Secretary Kathleen Sebelius disclosed through a letter to six senators that HHS had issued a Bulletin modifying enforcement.
According to the Bulletin and letter, "If you have been notified that your individual market policy will not be renewed, you will be eligible for a hardship exemption and will be able to enroll in catastrophic coverage."
Call me a cynic. You wouldn't be the first person to do so. But, here is the way I view the last three-plus years in the evolution of the ACA. First, the bill was getting very close to having enough support to pass. Then, Scott Brown (R-MA) was elected to fill the senate seat vacated by the death of Ted Kennedy (D-MA). This gave the Republicans 41 seats, enough to stop the Democrats from invoking cloture. The Democrats outmaneuvered the Republicans in working around the rules of the Senate and the bill was passed and signed into law. It was trumpeted as we all know quite famously that it would expand coverage, reduce the cost of coverage for most, and if you like your health plan, you can keep your health plan, PERIOD. Then came a website rollout so atrocious that even many of the most ardent supporters of the Obama Administration criticized it. Enrollment deadlines were delayed and insurers were told to reinstate policies for which they had already provided cancellation notices.
Somebody never worked in the insurance industry. Reinstatement is not that easy. And, there is also state insurance law to deal with here. So, many who wanted insurance were left without it. Yes, some number of previously uninsured had found their way to "get covered" as the Administration likes to say, but many who had been covered were left out in the cold.
Now, according to the HHS Bulletin, these same people can go on to the exchange and buy catastrophic coverage. This is the type of coverage that has been labeled as a substandard policy by some in the Administration.
Yes, my mind is boggled.
I was not one of those people who had said that health care did not need reforming. I always thought that it did and I still do. But, this is a perfect example of what happens when debate is cut off and 535 people who between them have little cumulative expertise on a subject (yes, I know there are some physicians in the Senate and the House) and who don't read the bill go ahead and vote on it anyway. Agencies are then left the unenviable task of regulating it and it always seems that, at the very least, a sizable minority of the people don't like the regulations.
So, enforcement apparently will be done as the HHS Secretary, presumably speaking for the President (this is entirely my guess), sees fit.
Silly me, I thought it was a law.
According to the Bulletin and letter, "If you have been notified that your individual market policy will not be renewed, you will be eligible for a hardship exemption and will be able to enroll in catastrophic coverage."
Call me a cynic. You wouldn't be the first person to do so. But, here is the way I view the last three-plus years in the evolution of the ACA. First, the bill was getting very close to having enough support to pass. Then, Scott Brown (R-MA) was elected to fill the senate seat vacated by the death of Ted Kennedy (D-MA). This gave the Republicans 41 seats, enough to stop the Democrats from invoking cloture. The Democrats outmaneuvered the Republicans in working around the rules of the Senate and the bill was passed and signed into law. It was trumpeted as we all know quite famously that it would expand coverage, reduce the cost of coverage for most, and if you like your health plan, you can keep your health plan, PERIOD. Then came a website rollout so atrocious that even many of the most ardent supporters of the Obama Administration criticized it. Enrollment deadlines were delayed and insurers were told to reinstate policies for which they had already provided cancellation notices.
Somebody never worked in the insurance industry. Reinstatement is not that easy. And, there is also state insurance law to deal with here. So, many who wanted insurance were left without it. Yes, some number of previously uninsured had found their way to "get covered" as the Administration likes to say, but many who had been covered were left out in the cold.
Now, according to the HHS Bulletin, these same people can go on to the exchange and buy catastrophic coverage. This is the type of coverage that has been labeled as a substandard policy by some in the Administration.
Yes, my mind is boggled.
I was not one of those people who had said that health care did not need reforming. I always thought that it did and I still do. But, this is a perfect example of what happens when debate is cut off and 535 people who between them have little cumulative expertise on a subject (yes, I know there are some physicians in the Senate and the House) and who don't read the bill go ahead and vote on it anyway. Agencies are then left the unenviable task of regulating it and it always seems that, at the very least, a sizable minority of the people don't like the regulations.
So, enforcement apparently will be done as the HHS Secretary, presumably speaking for the President (this is entirely my guess), sees fit.
Silly me, I thought it was a law.
Thursday, December 19, 2013
Future Shock Meets 1984
I remember reading both of the books. Everyone seems to have read or be familiar with George Orwell's "1984." Fewer recall Alvin Toffler's "Future Shock." While Toffler's was more about the psychological aspects of reacting to rapid change, I am using my blog-owner's license to use it hear.
So, this is a blog usually devoted to benefits and compensation. What does this have to do with these two books by these two authors?
I'm going to take you into a future world. Perhaps it will never occur, perhaps it will occur sooner than you think. As Orwell suggested, Big Brother knows more about you than you would care to believe. Today, Big Brother is not just the government or the Thought Police, it's Google, Amazon, your credit card company, your favorite place to buy groceries, Netflix, and the like.
There are two approaches that you can take. You can hate it. Many people do not like the intrusion. Many people do not like the lack of privacy. But, you know what? This is going to happen to you whether you like it or not. It is virtually impossible in today's world to avoid this intrusion and lack of privacy. So, the second approach is to embrace it.
When Future Shock meets 1984, your identity will live on a chip. As far as my vision can take me, that chip currently lives in your smartphone, but perhaps it will be somewhere else by the time we get there. Perhaps it won't be a chip at all, but that's not the point here.
By this time, Congress has gotten its act together (wow, that seems like it must be far, far in the future) and reformed or eliminated the Tax Code as we know it. This will be important because this new model will require much more flexibility and customization.
So, you start your new job and instead of negotiating your pay, you negotiate your total worth to your new employer, The Third Wave, Inc. (TTWI). [Those who get the reference are pretty literate, by the way.] On your first day with TTWI, you go into a meeting with Winston Smith, the head of all things people. At TTWI, Winston is not even a person, but a drone leading up the people function.
As you walk into the meeting room, your chip activates and based on all the data on your chip, Winston instantly produces a recommended benefits and compensation package for you. Winston knows that you have a mortgage to pay monthly, he knows how much your spouse earns, and he knows about your family. He also knows that you have a proclivity for collecting autographed original vinyl 45s of one-hit wonders and that you need additional cash to cover that.
You look at the flexible design that Winston has provided you, make one small change because Winston didn't know that you plan to accelerate your mortgage payments starting in two months, and you are on your way.
So, what do you think? Are you bothered? Did you like how smoothly the process went? Did you like not having to read hundreds of pages of legalese? Did you like getting recommendations that were customized to you?
It's coming -- maybe not in my lifetime, but it's coming.
So, this is a blog usually devoted to benefits and compensation. What does this have to do with these two books by these two authors?
I'm going to take you into a future world. Perhaps it will never occur, perhaps it will occur sooner than you think. As Orwell suggested, Big Brother knows more about you than you would care to believe. Today, Big Brother is not just the government or the Thought Police, it's Google, Amazon, your credit card company, your favorite place to buy groceries, Netflix, and the like.
There are two approaches that you can take. You can hate it. Many people do not like the intrusion. Many people do not like the lack of privacy. But, you know what? This is going to happen to you whether you like it or not. It is virtually impossible in today's world to avoid this intrusion and lack of privacy. So, the second approach is to embrace it.
When Future Shock meets 1984, your identity will live on a chip. As far as my vision can take me, that chip currently lives in your smartphone, but perhaps it will be somewhere else by the time we get there. Perhaps it won't be a chip at all, but that's not the point here.
By this time, Congress has gotten its act together (wow, that seems like it must be far, far in the future) and reformed or eliminated the Tax Code as we know it. This will be important because this new model will require much more flexibility and customization.
So, you start your new job and instead of negotiating your pay, you negotiate your total worth to your new employer, The Third Wave, Inc. (TTWI). [Those who get the reference are pretty literate, by the way.] On your first day with TTWI, you go into a meeting with Winston Smith, the head of all things people. At TTWI, Winston is not even a person, but a drone leading up the people function.
As you walk into the meeting room, your chip activates and based on all the data on your chip, Winston instantly produces a recommended benefits and compensation package for you. Winston knows that you have a mortgage to pay monthly, he knows how much your spouse earns, and he knows about your family. He also knows that you have a proclivity for collecting autographed original vinyl 45s of one-hit wonders and that you need additional cash to cover that.
You look at the flexible design that Winston has provided you, make one small change because Winston didn't know that you plan to accelerate your mortgage payments starting in two months, and you are on your way.
So, what do you think? Are you bothered? Did you like how smoothly the process went? Did you like not having to read hundreds of pages of legalese? Did you like getting recommendations that were customized to you?
It's coming -- maybe not in my lifetime, but it's coming.
Friday, December 13, 2013
IRS Gives Limited Pension Nondiscrimination Relief
Just 10 days ago, I wrote about the request to the IRS and Treasury from Senators Portman and Cardin to provide pension nondiscrimination testing relief to sponsors who have soft frozen their defined benefit (DB) plans. In Notice 2014-5, the IRS has done that, albeit on a temporary basis.
For background, a DB plan is soft frozen typically when a grandfathered group of participants are allowed to continue accruing benefits, but no new entrants are allowed into the plan. From a testing standpoint under Code Sections 401(a)(4) and 410(b), the plan will typically pass in the early years as the group benefiting under the plan will look a lot like the group that was benefiting immediately before the soft freeze. Eventually, however, as turnover tends to be higher among nonhighly compensated employees (NHCEs) than among highly compensated employees (HCEs) and because more participants will 'graduate' from NHCE status to HCE status than conversely, testing results get worse.
The typical alternative then is to aggregate the soft frozen DB plan with one or more DC plans for testing purposes. The aggregated plan is then referred to as a DB/DC plan, a name that does not quite roll off the tongue, but is descriptive nonetheless. DB/DC plans may be tested on a benefits basis (usually will pass) or on a contributions basis (usually will fail), but in order to be tested on a benefits basis, the DB/DC plan must jump through one of a number of hoops. Without going into detail, this is usually easy in the early years and gets more and more difficult with each passing year. Add to that that the DC plan being aggregated with the DB plan cannot be a plan subject to Code Section 401(k) or 401(m) (or a part of a larger plan subject to one of those sections) or be an ESOP and the process gets a little bit more difficult to deal with.
According to the Notice, if a sponsor soft froze its DB plan before December 13, 2013 and its DB/DC plan met one of the requirements to be cross-tested on a benefits basis for the 2013 plan year, then for any plan year that begins before 2016, the sponsor generally may continue to test this DB/DC plan on a benefits basis. In the meantime, IRS has requested comments on this notice and will continue to evaluate how such situations should be handled.
This relief is only short-term in nature and there are many situations that will not be helped by this relief, but if you are one of the lucky sponsors, this may give you the help you were looking for.
For background, a DB plan is soft frozen typically when a grandfathered group of participants are allowed to continue accruing benefits, but no new entrants are allowed into the plan. From a testing standpoint under Code Sections 401(a)(4) and 410(b), the plan will typically pass in the early years as the group benefiting under the plan will look a lot like the group that was benefiting immediately before the soft freeze. Eventually, however, as turnover tends to be higher among nonhighly compensated employees (NHCEs) than among highly compensated employees (HCEs) and because more participants will 'graduate' from NHCE status to HCE status than conversely, testing results get worse.
The typical alternative then is to aggregate the soft frozen DB plan with one or more DC plans for testing purposes. The aggregated plan is then referred to as a DB/DC plan, a name that does not quite roll off the tongue, but is descriptive nonetheless. DB/DC plans may be tested on a benefits basis (usually will pass) or on a contributions basis (usually will fail), but in order to be tested on a benefits basis, the DB/DC plan must jump through one of a number of hoops. Without going into detail, this is usually easy in the early years and gets more and more difficult with each passing year. Add to that that the DC plan being aggregated with the DB plan cannot be a plan subject to Code Section 401(k) or 401(m) (or a part of a larger plan subject to one of those sections) or be an ESOP and the process gets a little bit more difficult to deal with.
According to the Notice, if a sponsor soft froze its DB plan before December 13, 2013 and its DB/DC plan met one of the requirements to be cross-tested on a benefits basis for the 2013 plan year, then for any plan year that begins before 2016, the sponsor generally may continue to test this DB/DC plan on a benefits basis. In the meantime, IRS has requested comments on this notice and will continue to evaluate how such situations should be handled.
This relief is only short-term in nature and there are many situations that will not be helped by this relief, but if you are one of the lucky sponsors, this may give you the help you were looking for.
Subscribe to:
Posts (Atom)