We have come to the end of our Regulatory Update blog series, so far we have covered updates from the IRS, explored legislative changes and key insights from the Department of Labor, and walked through notable retirement plan lawsuits. In our final blog, we are focused on defined benefit retirement plans and what updates we have seen from 2024.
Pension De-risking
Over the years, many employers have moved away from defined benefit plans, freezing them to new participants. While new employees are not eligible, the plan must continue to provide the promised retirement benefits to those who remain in the plan.
As a result, the employer remains responsible for maintaining sufficient funding in the plan to pay these benefits. Many employers with frozen defined benefit plans seek opportunities to reduce the risk associated with these plans through pension de-risking. This has become even more popular recently, with rising interest rates and strong investment returns allowing the plan to absorb the cost.
Pension de-risking is a way to reduce the future liability of the plan by reducing the number of participants in the plan. One way to reduce participants is to offer to buy out the participant with a lump sum payment that is the accumulated value of their retirement benefit.
This is a voluntary opportunity for individuals to get the cash value out of the plan and forego future benefit payments. A second way to reduce risk is through pension risk transfer, in which the plan purchases lifetime annuities for participants. This removes the participant from the plan and shifts the liability for future payments to the insurance company that provides the annuity. Often, an
employer combines these strategies, opening a window for voluntary buyouts and then purchasing annuities for those not taking the lump sum offer.
Companies looking to de-risk by purchasing annuities should remember that selecting the insurer is a fiduciary duty and must be made in the best interest of participants. Recent lawsuits have been filed against AT&T, Lockheed Martin, and Alcoa, alleging a breach of fiduciary duty in their selection of Athene Annuity and Life as their annuity provider. In selecting an annuity provider, fiduciaries must review the company’s capitalization, reserves, investments, and ratings to assess future claims-paying ability. The
lawsuit alleges Athene was not the safest option due to risky investments and that the companies selected Athene only because of lower costs.
Defined benefits plan sponsors will continue seeking pension risk transfer opportunities but need to understand the importance of their decision when selecting an insurance partner.
You can download a copy of our complete 2024 Regulatory Update here.
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