4 Problems at the Intersection of Finance and HR

They are two of the most visible departments in corporations even though neither directly produces revenue, but does require expenditures -- Finance and HR. Historically, they have been at odds neither particularly caring about the worries of the other despite being inextricably linked. This occurs in many ways, but I'm going to focus on four in the order that they seem to arise:

1. Recruiting
2. Cost control and stability
3. Retention
4. Workforce transition

Of course there are many more, but I have some thoughts that link all four of these together. In 2019, that's not always easy as there are constant pushes in Congress to tell employers how much they must pay, which benefits they must provide, and at what costs. How then does one company differentiate itself from another?

To the extent possible, every employer today seems to offer teleworking, flexible work hours, and paid time off banks. While they once were, those are no longer differentiators. After the Affordable Care Act took effect, the health plans at Company X started to look a lot like the health plans at Company Y.

I have a different idea and while I am probably biased by my consulting focus, I am also biased by research that I read. Employees are worried about retiring someday. They are worried about whether they will have enough money or even if they have any way of knowing if they will have enough money. They are worried about outliving their wealth (or lack thereof). They are worried about having the means to support their health in retirement.

I know -- you think I have veered horribly from my original thesis. We're coming back.

Today, most good-sized companies have 401(k) plans and in an awful lot of those cases, they are safe harbor plans. They are an expectation, so having one does not help you the employer in recruiting. While once they had pizzazz, today they are routine. 

Cost stability seems a given, but it's not. Common benchmarks for the success of a 401(k) plan including the percentage of employees that participate at various levels. You score better if your employees do participate and at higher levels. But, that costs more money.

If there's nothing about that program that sets you apart, it doesn't help you to retain your employees. And, as we all have learned, the cost of unwanted turnover is massive often exceeding a year's salary. In other words, if you lose a desirable employee earning $100,000 per year, it is estimated that the total true cost of replacing her is about $100,000. That would have paid for a lot of years of retirement plan costs for her.

There will come a time, however, that our desirable employee thinks it's time to retire. But, she's not certain if she is able. And, even if she works out that she is able, retirement is so sudden. One day, she's getting up and working all nine to five and the next, she has to fill that void. Wouldn't it be great to be able to transition her into retirement gradually while she transitions her skills and knowledge to her replacement?

You need a differentiator. You need something different, exciting, and better. You need to be the kid on the block that everyone else envies. 

You would be the envy of all the others if you won at recruiting, kept your costs level (as a percentage of payroll) and on budget, retained key employees, and had a vehicle that allows for that smooth transition.

I had a conversation with a key hiring executive earlier this month. He said he cannot get mid-career people to come to his organization from [and he mentioned another peer organization]. He was exasperated. He said, "We're better and everyone knows it, but their best people won't come over." I asked him why. He said, "It's that pension and I can't get one put in here." I asked him to tell me more and he explained it as one of those new-fangled cash balance plans with guaranteed return of principal -- i.e., no investment risk for participants, professionally managed assets, the ability to receive 401(k) rollovers, and the option to take a lump sum or various annuity options at retirement. He said that it's the "talk of the town over there" and that even though it seems mundane when you first hear about it, it's their differentiator and it wins for them.

We talked for a while. He wants one. He wants one for himself and he wants one to be as special as his competitor. He wants to be envied too. We talked more.

Stay tuned for their new market-based cash balance plan ... maybe. He and I hope that maybe becomes reality.

Good News -- IRS Floods Us With Guidance on Lifetime Income Options

When it rains, it pours. And, unlike in days of future past (for you, Moody Blues fans, with a slight spelling change), when the IRS decides to provide guidance on a topic, we get a package. In this case, the package is related to distribution options, primarily from qualified defined contribution (DC) plans, but also with implications for defined benefit (DB) plans and individual retirement accounts (IRAs).

So, here's what we got:

• Proposed regulations essentially on partial annuity distributions from DB plans
• Proposed regulations on longevity annuity contracts
• Revenue Ruling 2012-3 on survivor annuity requirements for deferred annuity contracts in DC plans and IRAs
• Revenue Ruling 2012-4 on treatment of rollovers from qualified DC to qualified DB plans in order to receive an additional annuity

So, what's in them? Since it's American Idol season, dim the lights, here we go. 

Partial Annuity Options

For participants, this is good news. For plan sponsors and especially for plan administrators, this could be a nightmare, because participants may actually elect split options. Under these regulations, participants could take a split distribution option from a defined benefit plan. For example, a participant could elect a partial lump sum and a partial annuity. 

The proposed regulations specify that [Code Section] 417(e)(3) assumptions would be used to calculate the lump sum amount, but that plan assumptions (plan's definition of actuarial equivalence) would be used to calculate the amount of the annuity. This makes things way simpler than the existing rules which would require use of 417(e)(3) assumptions for the entire calculation.

Let's consider an example. Suppose a participant was entitled to an immediate single life annuity of $1000 per month or a lump sum of $140,000, among other options. Further, suppose that the plan conversion factor for this participant and this participant's spouse for a 50% Joint and Survivor Annuity payable immediately is 0.95 (if you don't like my factors, you may write your own blog, but they seemed simple and convenient for my purposes). Now, suppose that the participant elects a split option: 60% as a lump sum and 40% as a 50% Joint and Survivor. The math gets simple. The lump sum would be 0.60*140,000 = $84,000. The monthly annuity would be 0.40*0.95*1000 = $380 per month.

Hmm, maybe this is more of a pleasant daydream than it is a nightmare for plan administrators, but computer-based administration will require a lot of re-programming.

Longevity Annuities

This is great news for plan participants. I repeat, this is great news for plan participants. When a participant uses their DC or IRA account to purchase a longevity annuity (sometimes referred to as longevity insurance), the longevity annuity piece will be disregarded for purposes of the minimum distribution rules under Code Section 401(a)(9).

Here is how it works. Sometime before a participant turns 70, he elects to allocate some portion of his account to a Qualified Longevity Annuity Contract (QLAC). In order to be a QLAC, the single premium for the annuity must not exceed the smaller of 25% of the account balance or $100,000 (indexed for inflation). A participant may make multiple QLAC allocations, but in that case, the total QLAC premium is similarly limited. The QLAC must specify the deferral date for the deferred annuity and that date cannot be later than age 85. 

In the event that participant makes such an allocation, the QLAC allocation will not be subject to the required minimum distribution rules. 

And, in a piece of bad news, money in a Roth account will not be considered a QLAC.

DC Spousal Consent Rules

This one is very simple. It clarifies that when a participant invests part of his DC account balance in a deferred annuity, that part of the account is not subject to the Qualified Preretirement Survivor Annnuity (QPSA) requirement until the participant makes an affirmative election to begin annuity distribution immediately.

DC --> DB Rollovers

This is another piece of good news. Suppose you are a participant in both a DC plan and a DB plan. Revenue Ruling 2012-4 allows a DB plan to be amended to accept rollovers from a DB plan. And, when you do so in order to get an  annuity, you get the DB plan's definition of actuarial equivalence rather than having to subsidize the profits of an insurance company.