Colleges and Universities Should also Evaluate their Defined Benefit Plans

The complexities of retirement plan management have been highlighted by a spate of lawsuits targeting prominent colleges and universities. Duke, Emory, Johns Hopkins, Vanderbilt, NYU, Yale, Columbia, MIT, and Washington University have all been sued because of their workplace retirement plans.

The litigation has higher education plan sponsors re-evaluating plan risks and taking steps to minimize vulnerabilities. Many institutions are reviewing their defined contribution plans – specifically the plans’ investment choices, fees, recordkeeping structures, contract options, and oversight processes – with fresh eyes.

While they’re at it, colleges and universities also should evaluate the risks associated with their defined benefit plans, which are likely to become more costly when the Internal Revenue Service updates mortality tables in 2018. A brief from Willis Towers Watson explained the potential changes,

“The effects of the proposed change in mortality tables will vary greatly depending on the demographics of the pension plan. In general, the change is likely to increase (traditional or annuity-formula based) plan liabilities for funding requirements and Pension Benefit Guaranty Corporation (PBGC) premium calculations by 2% to 5%. The proposed change would also increase most minimum (annuity-formula based) lump sum values 2% to 5% at current interest rates.”

One way for defined benefit plan sponsors to reduce the impact of IRS changes is by more effectively managing small accounts left behind by former employees. The Department of Labor’s (DOL’s) preferred solution for accounts belonging to missing and non-responsive participants is the automatic rollover, which was established under EGTRRA.

By adding automatic rollover provisions, plan sponsors can move accounts with balances of $5,000 or less into rollover IRAs each year. Once the IRA rollover is complete, the former employee is no longer considered a participant in the plan, and the company is considered to have satisfied its fiduciary duties, as long as the DOL’s Safe Harbor Regulations have been met.

Millennium Trust recently worked with a leading private research university that wanted to add an automatic rollover solution to its defined benefit plan. Within two years of implementation, the solution had simplified plan management, lowered plan costs, limited fiduciary liability, and promoted positive perceptions by:

• Removing more than 450 participants from the plan

• Reducing PBGC premiums by approximately $30,000 per year

• Lowering plan administrative costs significantly

• Reconnecting former employees with their retirement savings

Automatic rollovers also can help clean up plan data by removing missing and unresponsive participants from defined benefit plans. Maintaining high quality plan data has always been a challenge for plan fiduciaries. Current and past employees often forget to keep plan sponsors apprised of address and beneficiary changes. In some cases, plans lose touch with former employees and that makes any fiduciary task requiring communication with all plan participants more complicated.

The process for adding automatic rollovers to a defined contribution or defined benefit plan is relatively straightforward. Plan sponsors:

• Select and enter an agreement with an IRA provider

• Communicate the change to all plan participants

• Send a letter to terminated employees explaining the change

• Transmit all former participants’ data to IRA provider

• Send former participants’ balances to individual accounts at the IRA provider

• Repeat the process as often as required by plan provisions

While plan fiduciaries have a responsibility to choose the right IRA provider, once a provider has been chosen, fiduciaries are not required to monitor the provider or ensure its compliance with IRA agreements. After a participant’s funds have been transferred into a rollover IRA, the terms of the agreement are enforceable by the participant.

Colleges and universities that are concerned their plans may become litigation targets should complete informal plan audits, establish best practices, and automate processes so their plans run smoothly and remain in compliance over time. Reducing plan expenses, and limiting exposure to fiduciary and financial risk, should be among the goals of the audit – and automatic rollovers should be on the short list of possible de-risking strategies.

The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.