In this article, we briefly cover three topics: (1) decisions with respect to 2011 DB plan contributions and 2012 quarterly contributions; (2) Department of Labor revised guidance on brokerage window disclosure; and (3) the court of appeals decision in Bidwell v. University Medical Center (involving losses in connection with 2008 qualified default investment alternative (QDIA) transfers).
DB plan contributions: 2011 contributions and 2012 quarterlies
For calendar year plans, September 15, 2012 is generally the last day on which contributions may be made for the 2011 plan year. The Moving Ahead for Progress in the 21st Century Act (MAP-21) changed the rules for calculating liabilities for plan funding, effective for the 2012 plan year, and that change may affect decisions about contributions for the 2011 year.
Plan funding for 2012 is, generally, based on end-of-2011 liability and asset numbers. For instance, the 2012 shortfall (which generally must be amortized over seven years) is based on end-of-2011 liabilities minus end-of-2011 assets. And, for instance, a plan’s 2012 AFTAP (for benefit restriction purposes) is based on end-of-2011 assets divided by end-of-2011 liabilities.
Thus, contributions made for 2011 will affect how much a sponsor has to contribute for 2012 and whether benefit restrictions will apply. Consider a plan with, e.g., end-of-2011 assets of $78 million and end-of-2011 liabilities of $100 million (ignoring MAP-21 relief). This plan has a 2012 AFTAP of 78%, and “less than 80%” benefit restrictions will apply (e.g., full lump sums may not be paid) at some point during 2012. However, if the sponsor makes a $2 million contribution for 2011 , by September 15, 2012, it can bring the AFTAP up to 80% and avoid benefit restrictions during 2012.
MAP-21 changed how liabilities are calculated, for this purpose, beginning with 2012. Just to be clear, that means that the end-of-2011 liability number used to calculate funding requirements for 2012 changes because of MAP-21. That change may affect sponsor decisions about how much to contribute for 2011 . For example:
1. Let’s start with the example above (pre-MAP-21 AFTAP of 78%). As discussed, the sponsor of that plan may have intended to make a 2011 contribution by September 15, 2012 of $2 million, bringing the 2012 AFTAP up to 80%. Post-MAP-21, that contribution may be unnecessary — it is likely that MAP-21 will (effectively) reduce the plan’s liabilities enough to get the plan above 80% without an additional contribution.
2. On the other hand, consider a plan with end-of-2011 assets of $65 million and end-of-2011 liabilities of $100 million (pre-MAP-21 AFTAP 65%). The sponsor of that plan may not have wanted to (or could not have afforded to) contribute the additional $15 million needed to bring the 2012 AFTAP up to 80%. However, if end-of-2011 liabilities are determined (post-MAP-21) to be $85 million, it may make sense for the sponsor to contribute the additional $3 million necessary to get the 2012 AFTAP up to 80%.
If a sponsor made April 15, 2012 and July 15, 2012 quarterly contributions (in effect, pre-MAP-21), it is likely that those contributions were greater than they needed to be (post-MAP-21). Those “excess” quarterly contributions may be either: (1) used as 2011 contributions (and applied to increase the 2012 AFTAP); (2) applied towards any September 15, 2012 contribution needed to satisfy minimum funding requirements for 2011; or (3) used to reduce October 15, 2012 and/or January 15, 2013 quarterly contributions.
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All of the foregoing is very fact-dependent. Sponsors will want to consult their actuaries to determine whether MAP-21 changes their contribution strategy for 2011 or 2012. Based on guidance released on August 16, discussed in our article 2012 segment rates under MAP-21 released by IRS , plans now have the interest rates they need to finalize this analysis.
We discuss MAP-21 generally in our article Pension Funding Relief / PBGC Premium Increases , and we discuss particular issues with respect to benefit restrictions and MAP-21 in 2012 in our article Pension funding relief: 2012 benefit restriction issues .
DOL revises brokerage window guidance under FAB
In May 2012 the DOL issued Field Assistance Bulletin 2012-02, providing additional guidance with respect to DOL’s participant-level fee disclosure regulation (we discuss that FAB in our article DOL issues additional fee disclosure guidance ). That FAB included a very controversial Q&A 30, which was understood to impose robust disclosure requirements on investments (including, e.g., a particular mutual fund or equity security) held in a brokerage window by a significant number of plan participants. This new requirement applied to all plans that provided a brokerage window.
On July 30, 2012, DOL issued a revised FAB 2012-02R. The revised FAB brokerage window rules apply only to “window-only” plans — that is plans that do not have (at least) a set of core investment alternatives that do not require investment through the window (and with respect to which robust disclosure is provided).
Bottom line: for the moment at least, plans that provide a “regular” fund menu of investments and in addition the opportunity to invest in “almost anything” through a brokerage window do not have to provide robust disclosure — e.g., historical returns, benchmarks, etc. — with respect to investment available only through the window.
Sixth Circuit affirms decision in Bidwell
In 2011, the US District Court for the Western District of Kentucky issued its decision in Bidwell v. University Medical Center . The case is interesting because it deals with a “worst case” set of facts with respect to the shift from defaulting to money market and stable value funds to QDIAs in 2008. The district court ruled in favor of the defendant, finding no issue with negative election in connection with the 2008 QDIA-related transfer. We note here that, on June 29, 2012, the Sixth Circuit upheld the lower court, finding that compliance DOL’s negative election procedures was a defense to plaintiffs’ claims, notwithstanding plaintiffs’ claim that they never received notice of the transfer/negative election.
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We will continue to update you on these and other issues.