As a trusted advisor, we stand ready to guide Plan Sponsors through the complexities and everchanging landscape of pension plans. Below find valuable updates from our dedicated Defined Benefit Business Council.
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Traditional Pension Plans
The average pension discount rate increased 12 basis points (+0.12%) during the second quarter to close at 4.92%, but fell 10 basis points since the start of the calendar year.
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Overall, the increase in the discount rate seen in the second quarter was a positive for funded statuses as plan liabilities decreased.
- Over the past year ending June 30, the rate has increased 44 basis points and nearly doubled over the past two years.
Discount rate volatility has settled down significantly as expectations around future rate hikes has also reduced (see chart below). As the discount remains elevated from its recent levels, this continues to give Plan Sponsors the opportunity to look at both de risking and risk transfer opportunities.
Source: https://www.yieldbook.com/m/indices/FTSE-pension-liability.shtml
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Plan Termination
We continue to see interest in plan termination and other pension risk transfer (PRT) activities. As of May 31, Legal and General estimates the first half of 2023 will total $23 billion in transactions, outpacing last year’s record-setting first half.
We have seen competitive bidding to be more limited in the fourth quarter due to capacity limitations for annuity providers. Each calendar year, annuity providers target a certain level of business they are able to write for that year. As pension risk transactions are completed, that “capacity bucket” gets filled. As the end of the calendar year approaches, there is much less room in the “bucket” for additional transactions which may encourage some providers to forgo bidding on deals they might otherwise bid. Typically, the target level of PRTs is reset at the beginning of each calendar year. It is important that Plan Sponsors consider the timing of an annuity purchase as part of their plan termination journey.
Source: https://www.lgra.com/knowledge-center/prt-monitors
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SECURE 2.0 Act Update
One provision of SECURE 2.0 Act that impacts defined benefit plans is the increase in the automatic cash-out limit to $7,000 form $5,000. This provision is available beginning in 2024 and, depending on your plan’s design and demographics, may provide Plan Sponsors an effective and low-cost avenue to cash out small balances without the cost and uncertainty of a lump sum window.
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Source: SECURE 2.0 Act of 2022, part of the Consolidated Appropriations Act (CAA) of 2023, Title III – Simplification and Clarification of Retirement Plan Rules, Section 304, BILLS-117hr2617enr.pdf (congress.gov)
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Cash Balance Plans
Cash balance plans continue to be an area of growing interest for professional services firms. A modern cash balance plan may be able to allow partners of a professional services firm to defer significantly more of their earning into a qualified retirement vehicle versus a 401(k) plan alone (~$200k+ per year). If you are interested in learning more, please reach out to your Fiducient consultant.
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Municipal Plans
On June 27, 2023, Connecticut Governor Ned Lamont signed House Bill 6930 into law as Public Act 23-182 (Act) which requires municipalities and other governmental employers to provide information to the Office of the State Comptroller (Comptroller) regarding their retirement plans. Required information includes:
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If there is an investment policy statement and a copy of such statement
- Summary plan documents for the previous five fiscal years; however, documents do not need to be included for any year in which there were no changes to the plan
- The five most recent actuarial valuations for the plan
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Details regarding the form and governance structure of the board or committee or other organization that provides management or oversight of the plan
- Whether or not a third-party advisor or administrator provides management or oversight of the plan
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The estimated fees paid in the previous five fiscal years for investments under the plan (it does not appear that fees related to administration of the plan need to be provided).
Fiducient Advisors’ Fiduciary Governance Calendar can help Plan Sponsors efficiently meet these new requirements.
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- Webcast: Mid-Year Capital Markets and Economic Update
- Replay Now Available! Watch the replay as Brad Long, CFA, Partner, Deputy Chief Investment Officer and Chris Kachmar, CFA, Partner, Chief Market Strategist discuss rising risk of recession, inflation and the Federal Reserve response and our mid-year outlook and portfolio allocation updates.
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Mid-Year Capital Markets Update - Paper Now Available! Despite one of the most anticipated recessions in U.S. history, we sit here halfway through the year defying those predictions even in the face of developing geopolitical risks, a banking crisis (remember that?) and the Federal Reserve (Fed) continuing to raise rates.
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Demystifying Pension Liabilities - Blog Now Available! For many Defined Benefit Plan Sponsors, the uncertainty around the annual pension valuation and the calculation of the pension liabilities can sometimes feel like a mystery — that there is a special secret code to calculating liabilities for which only actuaries know.
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This report is intended for the exclusive use of clients or prospective clients (the “recipient”) of Fiducient Advisors and the information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of Fiducient Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on Fiducient Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.
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