London Market Monitor – 30 September 2021
September delivers some ups and downs: Equity and bond markets mostly fell, risk-free rates rose, UK inflation increased, and volatility notched upward.
In a space where many retirement plan professionals have set themselves apart as expert consultants who can help guide plan sponsors through DB plan administration, it can be more difficult to find those who have a deep understanding of the unique challenges faced by governmental, or public, plans. A governmental plan is defined in ERISA Section 3(32) and the IRS Code Section 414(d) as “a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.” Also included are some railroad plans, certain tax-exempt international organizations, and certain plans created by or for Indian tribal governments.
While it is commonly known that these plans or systems are not subject to ERISA, it is important to understand where IRS rules and regulations are still relevant, and where separate guidelines must be understood and applied. There are often state or local laws that mandate how a plan may be written and administered. For example, a state may limit a benefit formula, require employee or employer contributions, or dictate allowable compensation definitions. In addition, some IRS requirements are still in place, such as applying Required Beginning Date (RBD) and Required Minimum Distribution (RMD) rules. However, while it is required to commence benefits at RBD, regulations that require actuarial adjustment for commencement after RBD in a DB plan do not apply to public plans. An administrator familiar with these requirements can help plan sponsors navigate these uncertainties.
An added layer of complexity is that plans may choose to model their language after ERISA rules, but they can be applied in surprising ways. For instance, a public plan may choose to require spousal consent for election of certain forms of payment or a non-spouse beneficiary, but then only require consent once, even if the beneficiary or payment election changes.
It is important for the administration team to work closely with the plan sponsor and legal counsel to ensure that required regulations are being properly applied, in addition to following the terms of the plan document or statute.
While sponsors of these governmental plans are free from required filings and notices such as Form 5500, 8955-SSA, and Annual Funding Notices, they face a unique set of challenges that are rarely spelled out in black and white. Special funding requirements, ever changing political landscapes, and employee culture are just a few things to consider. Some of these issues are present with corporate plans, but they are often experienced at a much more intense level with public plans.
State or local regulations may require a sponsor of a public plan to fund retiree payments each month, rather than relying on plan funds in the care of a trust. This means that the expected monthly payments must be known in advance, and issues can easily arise if there are unexpected retroactive payments or lost checks that must be reissued.
It is also important to remember that these plans can be heavily impacted by politics. Newly elected board members may have special agendas based on their constituents. Critical projects may need to be put on hold until the next board meeting so that expenses can be approved. New state legislation may dramatically change how the plan needs to be administered, causing concern over how aging technology can track newly required data points. In addition, the fact that many rules do not apply to the plan means that there are sometimes provisions that are written for specialized groups, and can be confusing in later years when being reviewed. Worldwide changes in how we work during a pandemic like COVID may necessitate a flurry of changes in how board meetings are allowed to proceed, or where data is allowed to be accessed from.
When you consider that all of these issues are also being handled under public scrutiny, it is easy to see why a different approach is sometimes needed to handle what might seem like a normal issue. Many plan details are available to anyone who cares to submit a Freedom of Information Act (FoIA) request, may be published in local newspapers, are impacted by local elections, and may be governed by a board with little to no experience in retirement plan administration. Understanding this unique culture can lead to a much more successful administration partnership.
Governmental or public plans often have unique provisions that can be challenging to administer. Provisions such as Purchase of Permissive Service Credit, Reciprocal Service Agreements with other governmental agencies, non-Integration with Social Security, and required Employee and Employer contributions can add administrative complexity.
As an example, under IRC 415(n), governmental plans may allow the Purchase of Permissive Service Credit. The members purchase these credits with additional voluntary contributions, either after tax or as rollovers from their 457(b) or 403(b) accounts. The increases in service credit under the plan are subject to timing and amount limitations.
Challenges facing the plan administrator for this type of provision include:
The plan administrator is tasked with not only answering these types of questions but anticipating what other questions may arise. These provisions are unique in the overall retirement world, and it can be difficult to ensure that all parties are consistently handling the outlined process correctly.
Many times working with the retirement board to find the right path or structure for administration can also add hurdles. Changes in board members may modify prior administrative decisions that could modify the costs of the plan, potentially exacerbating or mitigating actuarial losses from purchased service decisions. Navigating how to accomplish plan administration can be daunting.
Outsourcing governmental administration may help alleviate some of the challenges faced by a governmental agency. An experienced third party administrator (TPA) can help in multiple ways.
As a plan’s population ages, so do the plan’s administrative experts. Loss of expertise regarding plan provisions and practices combined with varied or no documentation can cause strain when human resources retire or there is turnover. An outsourcing administrator will gather historical records, document practices, and provide fluid service.
A third party administrator will also provide a structured administration with no discrimination – all members will receive the same service. Third party administrators will have checks and balances in place to ensure accurate and timely service. For example, an experienced TPA will have systems in place to verify the funding of the employee and employer contributions occur in the amount required, contributions are applied to participant records and tracked for after tax versus pretax funds, and refunds are provided timely.
Removing the burden of administration can allow a governmental entity to focus on its purpose of serving community need while also providing a retirement for those who serve.