VOLUME 64 • NUMBER 3 ASPEN PUBLISHERS Employee Benefit Plan Review SEPTEMBER 2009 COLUMNS • FEATURE ARTICLES Feature FROM THE EDITOR Steven A. Meyerowitz The Pension Plan Paradigm Has Shifted...Should You? Larry Karle ASK THE EXPERT Focus On ... 401(k) Plans FROM THE COURTS Employers: Time to Take Stock of Your 401(k) Plans Norman L. Tolle Richard E. Baltz REGULATORY UPDATE Linda Lemel Hoseman Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times INDUSTRY UPDATE James P. Baker and David M. Abbey News Transitions Publications, Etc. The Next Evolution of 401(k) Plans Calendar Bill McDermott Special Report A Plan Administrator/Sponsor's Guide to Diminishing the Impact of a Conflict of Interest Susan Reiland ~ Wolters Kluwer f.". Law & Business
Focus On... 401 (K) PLANS Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic TImes JAMES P. BAKER AND DAVID M. ABBEY reaking Up Is Hard to Do" is UNFAVORABLE DEMOGRAPHICS not only the name of a popular In the overall U.S. economy, the ratio of song from the 1960s, it also active workers to retired workers has been describes the feelings of most plummeting for many years-it now stands employers who, because of competition, busi- at about three active employers to one retiree ness costs or our current bad economy must compared to 16 active workers to each retiree reduce the size of their employment budget. By in 1950. At some companies like Ford and the time an employer has to "downsize," the Chrysler, the ratio of active workers to retirees economic factors driving that decision have has fallen from six to one in 1950 to one to already done their damage. The question for one now. At GM there is now only one active management is ordinarily not whether a reduc- employee for every two GM retirees. tion in force or a cut in employee benefits is Beyond demographic factors, the prob- necessary but, rather, how to do it. Navigating lem is compounded by the fact that the U.S. around employee benefit landmines is diffi- economy is shrinking. In May 2008, the U.S. cult even in good economic times. It has now unemployment rate stood at 5.5 percent. It is become a truly perilous undertaking due to the now officially 8.9 percent. Since the recession dramatic declines in retirement plan asset val- began in December 2007, over five million jobs ues and the government's increasing scrutiny of have been lost. The Department of Labor esti- employee benefit arrangements. mates that as of April 2009 almost 14 million Americans are out of work. DRAMATIC DECLINE IN RETIREMENT PLAN ASSETS INCREASED GOVERNMENT SCRUTINY How bad is it? By the end of calendar 2008, The Pension Protection Act of 2007 (PPA) old fashioned pension plans (technically called added a series of new funding requirements "defined benefit plans" by those practicing for defined benefit plan sponsors. Generally, in this area) for Fortune 500 companies had the legislation is aimed at requiring all defined accumulated $1.4 trillion in liabilities and had benefit plans to achieve 100 percent funding just $1.1 trillion in assets. Just one year earlier within the next seven years.! PPA's new fund- these same Fortune 500 plans had a $63 bil- ing mandates include a requirement for every lion surplus. 2008's stock market decline sim- defined benefit plan to now fund the pres- ply decimated plan asset values. For example, ent value of the plans' accrued benefits and the average defined benefit plan experienced amortize any unfunded liabilities over a seven a 24 percent decline in the value of its assets year period, using legislated actuarial assump- tions. 2 The PPA also requires all defined benefit during 2008. At the end of calendar 2007, 46 percent of pension plans had funding levels plan losses to be amortized over seven years. of between 90 percent and 110 percent and Defined benefit plan administrators must also only five percent of plans were funded below now provide a mandatory annual notice to 70 percent. Today it is estimated that only five plan participants, labor organizations and the percent of pension plans are funded above 90 PBGC generally describing the plan's current percent. Over 60 percent of pension plans have funding level. For calendar year defined benefit funding levels below 70 percent. 401(k) plans plans, the first annual funding notice was to be issued by April 30, 2009. 3 Asset smoothing have fared no better. By the end of calendar 2008 the average 401(k) plan account balance techniques which had not been restricted by was down by 26 percent. Sponsors of defined law prior to the PPA, now cannot exceed 24 benefit plans are thus reeling from a double months. If a defined benefit plan's funding level whammy-large negative investment results falls below 60 percent, no lump sum distribu- tions will be allowed. 4 While there has been a occurring at the same time the federal govern- ment is mandating increased plan funding. storm of protest from plan sponsors about the 11 EMPLOYEE BENEFIT PLAN REVIEW SEPTEMBER 2009
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