by Mary B. Andersen, CEBS, ERPA, QPA
The Moving Ahead for Progress in the 21st Century Act (MAP-21) in 2012 created a participant and plan sponsor advocate for the Pension Benefit Guaranty Corporation (PBGC) whose role is to “act as a liaison between the corporation, sponsors of defined benefit pension plans insured by the corporation, and participants in pension plans trusteed by the corporation.”
The Advocate is required to submit an annual report to various government committees that:
- Summarizes requests for assistance from participants and plan sponsors in the latest year and describe the Advocate’s activities and effectiveness during the year;
- Identifies any significant problems;
- Describes specific legislative and regulatory changes to address those problems; and
- Explains corrective actions taken to address problems identified in a previous report.
Overview of the 2016 Report
The most recent report called for revamped procedures at the PBGC, which insures participants’ benefits when companies with defined benefit plans can no longer pay them out for a variety of reasons, including bankruptcy.
The 2016 report said that “[t]he issues faced by participants and plan sponsors who come to the Advocate for help raise the need for changes in the administrative practices adopted by PBGC that may have served the corporation well in its early years, but now need a fresh look.”
Here are some positive, and more critical, assessments from the 2016 report. First, it applauds:
- A more reasonable, practical, and cost-effective approach by the federal agency to tackling benefit claims issues;
- The expanded PBGC Missing Participants Regulation that will cover defined contribution plans as well as defined benefit plans. The proposed rule, to become effective in 2018, is optional for sponsors of most defined contribution plans. It will allow plan sponsors of terminated 401(k) plans to transfer account balances of missing participants to the PBGC, eliminating the need for the plan sponsor to select an individual retirement account (IRA) provider. Collaboration with the Chicago regional office of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) to analyze data and locate lost participants in that area; and
- Reductions to premium penalty rates and the waiving of penalties for plans that meet a compliance standard.
At the same time, the latest PBGC Advocate’s report sees problems in some other realms. It criticizes:
- A substantive disconnect between two departments at the agency exercising judgement and discretion over benefit entitlement claims;
- Recurring problems discussed in previous reports that will require alternative dispute resolution for longstanding disagreements;
- Interactions with PBGC that can be adversarial, rather than collaborative;
- Lack of transparency in the PBGC’s decision-making rationales;
- Demands by the agency for documentation, costly analysis, and historical records that many businesses do not maintain; and
- What it deems to be mechanical rule-following that lacks judgment and discretion when it comes to some claims and penalties.
The report provides case studies to illustrate the Advocate’s findings on both plan-sponsor and participant issues.
Plan Sponsor Issues
For example, the report said one plan sponsor identified by the PBGC’s Early Warning program as having a potential problem with an ERISA requirement related to employers needing to provide security to PBGC when they cease operations at a facility, was in discussions with the agency about the weaknesses for 5 years. Numerous meetings between the plan sponsor and PBGC staff were held during that stretch without reaching resolution. The Advocate’s report noted that the PBGC should listen more, and act in partnership with plan sponsors.
The PBGC’s Early Warning Program was designed to enable PBGC staff to keep an eye on certain underfunded defined benefit plans to anticipate possible insolvency. The PBGC looks for corporate transactions that could affect pension plans, with the goal of protecting participants’ benefits and preventing losses at the PBGC.
The Advocate has heard from plan sponsors selected for the Early Warning Program that the PBGC will intervene in routine business transactions and the Advocate in the report questioned the PBGC’s authority to do so.
Recent expansion of the Early Warning Program to include creditworthiness and financial factors such as cash flow (see February story) has troubled plan sponsors. The report noted that the PBGC may ask plan sponsors to make a contribution in excess of the minimum funding requirement to their plans, or threaten them with involuntary plan termination if the plan sponsor refuses to cooperate. Such a contribution requirement for a company in financial straits could make it impossible for the company to survive.
One plan termination case study in the 2016 report noted a PBGC interpretation of a plan provision that was contrary to what was followed by the plan administrator for more than 30 years. The PBGC and the plan sponsor eventually held a meeting but the PBGC provided limited feedback about its contrarian position.
After 4 years, the PBGC did reach an amicable resolution in this case. The report said the PBGC can engage in alternate dispute resolution (ADR) with plan sponsors in cases of this type, and concluded that ADR is better than the costly back-and-forth of an administrative review appeal process.
The report mentioned “major strides” by the PBGC regarding participant issues, namely through its missing participants locator program and the collaboration with the Chicago EBSA office on missing participants data. There also have been increased interactions with participant advocacy groups; however, room for improvement still exists, according to the Advocate.
The Advocate also said in the report it has been told by plan sponsors of PBGC requests for historical documentation and long wait times before receiving a response from the agency.
As more and more Baby Boomers reach retirement age, a growing number of participants, including some in plans now administered by PBGC, receive notices from the Social Security Administration about a potential retirement benefit. The former participant may contact the PBGC for assistance, but these cases can be complex.
For example, consider a participant who was an employee of a company that was bought and sold many times. Two different PBGC departments (the Office of Benefits Administration and the Standard Termination Compliance Division) work on such cases. The Advocate has observed a lack of consistency between these departments when analyzing benefit requests. However, the Advocate notes that the Office of Benefits Administration is making benefit determinations “based on the exercise of sensible judgment and sound discretion,” which sounds like a positive step.
The Standard Termination Compliance Division is faced with resolving benefit issues for plans that may have terminated many years ago—in cases where PBGC records are not in the best condition and the company may be long gone. This places the burden on participants to produce proof that they didn’t receive a lump-sum distribution.
Old tax returns are requested as proof (in one case, the PBGC requested returns that were 30 years old), but many participants simply don’t retain these indefinitely. Yet the division is reluctant to use other sources of proof. The Advocate recommended in the latest report that the PBGC look for ways to analyze available documentation, rather than finding ways to deny a claim.
This is a tough situation for which there are no easy answers. People discard old tax returns. Some may forget that they have received a lump-sum distribution from a past pension plan. Companies go out of business.
PBGC is charged with determining whether a benefit is payable while remaining mindful of the potentially limited source of funds available to pay all such benefit claims without proof of previous nonpayment. Apparently, the report indicates PBGC standard termination records could be in the same woeful shape as the participant’s.
It is no secret that traditional defined benefit plans have declined in number. Additionally, the country has experienced tremendous economic volatility, and the current bull market will end at some point. Volatility affects the financial status of corporations, which in turn directly influences pension plan funding costs. Hence, the trend toward “derisking” pension plan liabilities by removing them from the corporate books.
If the PBGC does not become more collaborative in its dealings with financially distressed defined benefit plan sponsors, the sponsors could be forced to take more drastic measures, such as declaring bankruptcy and freezing more plans. That scenario benefits neither the participants nor the PBGC. Hopefully, the Advocate’s findings will be taken to heart by the agency soon.
Reports from the PBGC Advocate have been issued for 2014, 2015, and 2016, and can be found at https://www.pbgc.gov/about/oppsa-home/annual-reports.html.
|Mary B. Andersen is president and founder of ERISAdiagnostics Inc., an employee benefits consulting firm. She is the contributing editor of the Pension Plan Fix-It Handbook.|