Bryan, Pendleton, Swats & McAllister, LLC January/February 2015

Developments RECENT DEVELOPMENTS IN EMPLOYEE BENEFITS

In Part 1 (see the Nov/Dec 2014 issue of Developments), we discussed the vital role total compensation statements play within an organization’s total rewards program in helping to retain and reward key employees. When used effectively, total compensation statements can benefit employees and employers, with the ultimate aim of influencing worker behaviors and attitudes that directly align with a predetermined business strategy. The total compensation statement production process—from design to distribution—should always support this underlying goal, while at the same time carefully balancing cash and noncash incentives to create a holistic rewards picture that is both focused and highly personal.

Part 2 looks at what is required to build a statement, including some design guidelines and best practices along with insights into common design concerns. We will also examine two relatively new areas of employee benefits that often add significant value to a total rewards program and increase the impact of a total compensation statement.

Chart your courseAs with any effective communication campaign, delivering a successful total compensation statement begins with adequate planning. This is where current business strategy is reviewed and specific initiatives are outlined as the focus for the statement. Management should determine specifically what their organization is positioned to achieve and how results will be measured. Within the total compensation statement, any proposed

content that could act against the goals of an organization should be carefully scrutinized.

It is also important to consider other communication tools and media channels, either in lieu of or in conjunction with a total compensation statement. For example, a preliminary webcast on “how to read your statement” disseminated through personal email may

increase the effectiveness of a total compensation statement. Carefully selecting the proper communications strategy mix can mean the difference between success and failure and can minimize unnecessary use of the company’s time and resources.

As a first step, decisions must be made to determine who should receive a statement. An organization may wish to reach only the segment of the employee population that supports the underlying goals of the communication campaign. If one of the initiatives were to increase participation in a specific savings program, employees below a minimum contribution level would be included in the target audience.

This relatively simple approach may work well for an employer with few benefits or a fairly uniform target demographic, but an extensive rewards package across a diverse workforce may be better served by a more complex approach. In such cases, one critical factor is how benefits differ by employee group (e.g., division, job

Also in this issue: Audit Survival Tips for Retirement Plans – 6 BPS&M Pension Liability Index – 10

Maximizing Employee AppreciationA Look at Total Compensation Statements (Part 2) by Alex Kamm, QKA

classification, exempt/nonexempt pay status, rank-and-file/managers, etc.). Other factors may include grandfathered benefits from prior acquisitions along with special treatment of collectively bargained benefits. These differentiations will determine how much customization is needed, affecting the size, scope, and total cost of producing a statement.

Creating contentOnce a target group is determined, the next questions become what content to display, in what order, and to what degree of detail? Remember that the best total compensation statements are both comprehensive and balanced so that appropriate weight is given to intrinsic and extrinsic incentives. For example, too much emphasis on compensation components may weaken the value of a new wellness program. A checklist will aid in the selection of rewards and the assignment of hierarchy.

As nontraditional benefits increase in popularity, employers are including the following emerging areas within their total rewards statements:

• Flexible work arrangements

• Health and wellness (e.g., employee assistance programs, health screenings, business travel health services, reproductive health/pregnancy programs, fitness programs)

• Community volunteer programs

• Dependent care

• Financial support programs

• Diversity programs

• Performance and recognition awards

• Career development programs

While generally less quantifiable, and therefore more difficult to measure, these rewards can provide that special “glue” for a truly holistic total compensation statement by bridging the gap between traditional benefits and employees’ extended physical, social, and psychological needs.

Although typically reserved as a separate communication piece, retirement projections may also be included if retirement plan appreciation and

utilization is one of the goals of the campaign. Extra caution should be given here in choosing appropriate assumptions, including inflation rates and investment returns, as these factors will greatly impact an individual’s projected retirement figures. Including proper disclosures in the statement is essential.

Design for effectivenessA common statement layout might begin with an introductory message, such as a brief letter from the CEO, followed by tables and illustrations that segment

the various types of rewards into meaningful categories. Although detail and thoroughness are critical, it is equally important not to clutter a statement with overly elaborate graphics and confusing text, as this will hinder readability and weaken the statement’s impact. Common sense should always prevail, including using legible typefaces, providing adequate white space, and choosing appropriate color schemes. In the end, the degree of complexity and overall design should directly relate to business strategy.

Expanding the universe increases the valueMany of today’s employers continue to expand the value and importance of their total rewards packages by adding nontraditional benefit programs that meet the greater needs of today’s workforce.

Two recent reports published by WorldatWork, a leading global organization for human resources professionals, highlight the increasing value of well-being and employee recognition programs to help boost retention and employee motivation. Employers first began introducing wellness programs several years ago to satisfy America’s growing interest in fitness, proper diet, and healthy lifestyles, while simultaneously decreasing employer healthcare costs and enhancing worker productivity. Today, well-being programs broaden the benefits available by focusing on emotional, financial, and spiritual health.

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The following items, when applicable, are commonly included in a total compensation statement.

Compensation• Basesalary• Bonus• Commissions• OvertimePay• IncentivePay(e.g.,stock

options,equitygrants)• Paidtimeoff• Autoallowance

Health & Welfare Benefits• MedicalCoverage• DentalCoverage• VisionCoverage• PrescriptionDrug

Coverage• HSAs,HRAs,FSAs• LifeInsurance

(individual,spouse,dependent)

• AD&DInsurance• Short-term,Long-term

DisabilityCoverage• SupplementalCoverage

Retirement Benefits• DefinedContribution• DefinedBenefit• Non-Qualified• ESOP• CashBalancePlans• EmployeeStock

PurchasePlan

Legally Required Benefits• Unemployment

Insurance• Worker’sCompensation

Insurance• SocialSecurity• Medicare

Often, these newer rewards provide a huge return at a minimal additional cost to the employer. For example, the annual cost of providing parenting skills workshops or debt management seminars can equate to just a small fraction of the total employer contribution for a single employee, yet the potential benefits derived can lead to meaningful long-term gains in terms of employees’ mental health and financial well-being.

The effects of such initiatives are already being realized for many employers. According to WorldatWork’s 2011 survey of mostly large North American based companies, the top areas of focus that have witnessed significant improvement as a result of strategically managed well-being programs are 1) employee engagement, 2) employee satisfaction, and 3) employee productivity.1

Despite the positive news, only 69% of employers say they are actually communicating their well-being programs on an ongoing basis.2 This is where incorporating well-being rewards into a total compensation statement can be extremely effective both in giving these programs their deserved attention and in balancing their significance in a total rewards package alongside more tangible benefits such as compensation elements and insurance programs.

Employee recognition programs are another excellent way to enhance an employee’s total value proposition. We’re not talking about indistinct “Employee of the Month” placards or coffee mugs and desk clocks awarded for service time alone—although we know these recognition tools and others remain a continual facet of corporate culture. Surprisingly, the overall utilization of employee recognition programs throughout today’s corporate landscape has not budged much in the past decade, as evidenced by WorldatWork’s 2013 survey of large employers. Out of the top five forms of recognition programs examined in the survey—length of service, above-and-beyond performance, peer-to-peer performance, programs to motivate specific behavior, and retirement focus—only programs to motivate specific behavior have seen any growth in recent years.

What has changed, however, is that many of these programs are now aligned with achieving clearly identifiable business goals. As an example, suppose a company is expecting significant growth next year with the launch of a new product line. At least initially, the company does not have the means of acquiring additional labor to support increased consumer demand. An employee recognition program could be designed to award employees who voluntarily work additional hours or take on new roles and responsibilities. Workers who agree to

▲ The goal of this statement is simply to help employees understand their employer’s total investment in its workforce. Compensation components are graphically portrayed, emphasizing the percentage associated with company contributions to noncash benefits.

▼ Total compensation statements allow employers to explain how specific benefits may apply to an individual employee. This highly personalized approach is particularly effective for more complex rewards such as health care benefits.

relocate to new locations could be given spotlight awards in company publications with stories written about the transition to their new role and their accomplishments along the way. When paired with more traditional benefits, recognition awards add the elements of personal and professional fulfillment to a total compensation statement, all for typically 1% to 2% of an employer’s payroll budget. Effectively implemented, employee recognition programs are an extremely low cost option for boosting morale, employee retention, and differentiating an employer’s total rewards program from competing organizations.

Think finishing firstThe concept behind total compensation statements is straightforward, but before leaping to the decision to provide statements there are three important factors that need to be considered during the initial planning stage: data sources, distribution methods, and follow-up measurements.

Determining what data is available and the ease of access is essential in deciding what content to include in the final statement.

Data sources

Determining what data is available and the ease of access is essential in deciding what content to include in the final statement. For instance, certain rewards may be more easily quantifiable and more heavily used than others (e.g., payroll-deducted medical plan premiums compared to dependent care flexible spending accounts). Time constraints and resource limitations could push an employer to include only those benefits that are most meaningful to the targeted employee population.

Once an employer has determined data needs, the data collection process can begin. While gathering the data necessary to create a total compensation statement usually begins in the early stages of design, data collection, including data updates, may continue until the day the statements are produced. Rarely does data arrive in one neat spreadsheet, and the more complex the total compensation statement, the more likely it is to have multiple third-party data sources, such as payroll providers, actuaries, plan recordkeepers, and insurance companies or TPAs, in addition to the employer’s internal HRIS system. Multiple data sources can be a challenge when joining together different data sets. This is

▲ Recognizing the shifting needs of its evolving workforce, this company has chosen to incorporate an array of work-life benefits into its total rewards program. Listing them in a total compensation statement helps spread appreciation and awareness. In this case, feedback is encouraged through the company’s HR department.

▼ The company producing this statement is in the process of transitioning employees from defined benefit to defined contribution plans. The statement emphasizes overall retirement readiness and the benefits of a 401(k) plan along with other savings vehicles.

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especially true if data is organized differently or kept in varying formats. Also, if this is the first total compensation statement project for an employer, the task of tracking down and preparing the required data may be particularly arduous, especially if a company has gone through mergers or acquisitions. Most employers find it is well worth the time investment in the first year to implement a process that can be easily repeated for the annual task of data collection.

Distribution

When it comes time to actually deliver the statement, it is important to choose the most effective media. Printed and mailed statements tend to make good impressions as dependable and trustworthy sources of information; however, this may not always be the best approach given today’s online society. A younger workforce in particular may be more responsive to statements displayed on a computer screen or, better yet, their preferred mobile device.

In regard to physical versus virtual formats, the degree of statement interactivity and privacy is worth taking into account. In an increasingly paperless world, will employees demand instant access to their statements anywhere at any time? Will they feel a need to physically highlight or take notes on their statements? Will the total compensation statement be shared with a spouse or other family members, or is the information solely for personal use? These are just a few questions for the employer to ponder before a statement is viewed by an employee.

When it comes time to actually deliver the statement, it is important to choose the most effective medium(s).

Measurement

The importance of thorough measurement in the total compensation statement production process should not be overlooked. After delivery, there is often a period of time allotted for employees to take direct actions on their rewards, based on their newly found total compensation knowledge. These activity indicators (e.g., deferral rate changes, program utilization rates, etc.) are then recorded and compared to prestatement delivery levels. The results can be organized and presented to create useful metrics for managers to see how employees currently use their benefits and which aspects of the statement worked best to produce an immediate effect on employee behavior.

While comparing pre and post-statement activities accounts for much of the traditional communication evaluation, it only scratches the surface in terms of measuring what truly matters to the employer: achieving bottom line business results. To effectively measure outcomes, employers should carefully monitor and record all noticeable direct and indirect changes that occur after a statement is distributed that appear to lead to the desired results (e.g., improving employee satisfaction, preparing for regulatory changes, or increasing revenues). Although it can be difficult to conclude that x triggers y, it is often possible and entirely appropriate to say with confidence that by doing x we have helped to achieve y. With a well devised and complete measurement strategy, along with plenty of diligence, this approach can support the case that total compensation statements are aligned with business strategy, thereby leading to better future statement design and ultimately a more effective total rewards program.

In perspectiveThe growing needs of today’s workforce continue to challenge employers on how to attract, motivate, and retain the best talent. With careful planning and execution, total compensation statements serve as a vital tool in helping companies stay competitive and strategically positioned to achieve their goals.1 “ Total Rewards and Employee Well-Being,” WorldatWork,

February 2012, p17

2 ibid, p22

Alexander F. Kamm, QKAAlex joined BPS&M in 2013 as a member of the Defined Contribution team. He is responsible for specialized benefits reporting and analytics, compliance testing, and data management services. Alex has a background in insurance and financial services for the small business owner market. He graduated magna cum laude with a BS in Business Management and Economics from Stony Brook University. He received his MBA in Finance from Fordham University and has attained the Qualified 401(k) Administrator (QKA) designation from the American Society of Pension Professionals & Actuaries. Alex works in our Nashville, TN office.

Although only a small fraction of retirement plans are audited each year, over time it’s almost certain that you and your plan will be audited by either the Internal Revenue Service (IRS) or the Department of Labor (DOL). Your preparation for an audit and your approach to an audit will save your organization thousands of dollars in productive time, penalties, and interest.

Audit or investigation: A rose by any other name still has thornsWhile both the DOL and IRS perform plan audits, their enforcement powers are governed by different laws and regulations, and they focus on different issues.

The DOL is responsible for the enforcement of labor laws, including the Employee Retirement Income Security Act (ERISA). The DOL has the power to exact penalties for breaches of fiduciary conduct, and if it chooses, it can sue fiduciaries for these breaches on behalf of a plan. In cases of egregious misconduct, it can initiate litigation that may put a plan’s fiduciaries in jail. The DOL’s investigation and enforcement emphasis is on fiduciary breaches and prohibited transactions. The DOL calls its enforcement program the Employee Benefit Plan Investigation Program.

The IRS is responsible for the management of our tax system through the Internal Revenue Code (the Code) and has the power to enforce infractions under the Code. When infractions are found, it can impose taxes, penalties, and interest. The IRS’s audit and enforcement emphasis is on compliance with the requirements of the Code, which rolls up under the umbrella of the plan’s tax qualification. The IRS calls its enforcement program the Employee Benefit Audit Program.

Both the DOL and the IRS select plans for audit primarily by random selection; however, there are a number of other audit triggers that sponsors should keep in mind. Answers to certain questions on the Form 5500 may trigger an audit. For example, checking the box indicating this is the plan’s final 5500 return or answering “yes” to the question, “Was there a failure to

transmit to the plan any participant contributions within the time period described in the DOL regulations?” can trigger an audit. Participant or union notifications, complaints, or lawsuits also often trigger DOL investigations. For the fiscal year ending September 2013, of the 3,677 investigation cases closed, 775 (21%) were triggered by participant complaints. Bankruptcy filings and reports from the media can also trigger an investigation. In the spirit of interagency cooperation, the DOL may refer a case to the IRS if it discovers compliance infractions that are subject to penalties and interest under the Code.

While selection is generally random, there are certain audit initiatives that may focus on types of plans or

sizes of employers, thus increasing the audit-selection odds for plans that fall within the initiative’s criteria. In 2014, 50 large employers were part of a program to determine the audit focus on future nonqualified plan audits. It is not uncommon for the IRS to issue plan sponsor questionnaires designed to help determine areas of audit focus, and—we suspect—to mark a certain number of plans for later audit. Failure to respond to an IRS questionnaire is comparable

to sending the IRS an invitation to audit your plan.

The bottom line: although the odds of your plan being audited are low, if the DOL or the IRS perceives some elevated risk of noncompliance, your chances of an audit will go up substantially.

It begins with a letterThe DOL and the IRS initiate their audit process through what they call an Information Request Letter. The Information Request Letter indicates the date the audit team plans its on-site visit to review documents and conduct interviews with individuals who have responsibilities in the administration of the plan. The letter also lists specific information that is to be made available to the auditor(s). This list often provides insight into the types of violations the auditor will be looking for during the audit.

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Audit Survival Tips for Retirement Plans by Tom Swain, FSA, EA, FCA, MAAA

The following list summarizes a DOL Information Request Letter that was recently sent to one of our clients regarding its pension plan. Looking at the list, it is apparent the focus is on fees and expenses.

1. Corporate minutes

2. Trust reports showing all receipts and disbursements

3. Detailed documentation of fees and expenses paid from the trust

4. Documentation regarding alternative investments

5. Documents showing valuation of assets if assets are not readily tradable

6. Service agreements and engagement letters

7. Fee disclosure statements

8. List of parties-in-interest

9. Organization chart of the plan sponsor

10. Trustee and investment committee minutes

11. Plan documents, summary plan description, trust agreements, investment policy statements

12. Summary annual reports

13. Participant statements

14. Evidence of fidelity bond, fiduciary liability insurance policy, if any

15. Fiduciary training

For this client, follow-up questions focusing specifically on items 3, 6, and 7 required more detailed responses about the nature of the services provided and the fees charged. In DOL audits of defined contribution plans, we typically see a focus on fees and the timing of deposits.

Preparing for the auditIt goes without saying, both preparation and attention to detail are essential for a positive audit experience. If you receive an Information Request Letter, don’t panic, but do recognize that you’ll need to immediately begin preparing for the audit process.

Your goal for the on-site visit is to make the auditors’ tasks as efficient as possible. Being difficult, defensive, or uncooperative is counterproductive; it wastes time, and it won’t make the auditors go away. Instead, use your time to review all of your plan documentation and begin collecting and organizing the information requested before the first auditor steps through your door. Investing ample time and energy before the on-site visit will insure that your entire team is fully prepared for dialogue, questions, and requests for further information during the on-site visit.

As part of the preparation process, we recommend that you defer or delegate projects due at the time of the scheduled audit, and you should also clear your calendar during that time in order to be available for dialogue and questions. Depending on your other responsibilities and projects, it may be wise for you to delegate the management of the audit to another team member while you retain decision-making and internal management reporting responsibilities. It’s also essential that you notify other members of your plan administration team that your plan is entering into an audit to ensure they will be available to the auditors. Keep in mind that your plan team includes more than just fellow employees who work on the plan; it also includes your ERISA attorney, plan consultant, administrator, investment advisor, and trustee. You may want to consider having your legal counsel or consultant manage the audit for you. This is particularly useful if your provider is supporting you in most of the advisory roles of the plan.

...both preparation and attention to detail are essential for a positive audit experience.

Schedule a team meeting prior to the on-site visit to review the Information Request Letter, review plan provisions and procedures, and prepare for any questions. Having your plan documents and plan governance documentation organized, labeled, and bound makes the auditor’s job more efficient and conveys the message, “We’re ready for this audit, and we are not worried about anything.”

Finally, whether it’s the DOL or the IRS, if your schedule doesn’t permit you to be fully prepared or responsive, don’t be afraid to ask for more time before the on-site visit. The regulators recognize and appreciate it when you ask for a different schedule for good reasons. Like you, they can’t afford to waste time in an inefficient audit.

The auditAuditors are looking for specific information, so provide only what is requested. Ideally, your plan is in good condition, but if it isn’t, providing more information than is requested is like giving a hangman extra rope. During the audit, proactively address any issues of concern raised by the auditor, be available and responsive, and be patient with the process. In addition to the on-site visit, the audit team may take certain documents for further review.

Bryan, Pendleton, Swats & McAllister / January – February 2015 7

Auditors are looking for specific information, so provide only what is requested.

The DOL

The DOL focuses its examinations on prohibited transactions. The most common forms of “technical prohibited transactions” are late deposits of deferrals, problems with loans to participants, and improper processing of qualified domestic relations orders (QDROs). And as we saw in the Information Request Letter above, fees are of particular interest to the DOL. With most fees now paid by plan participants, the DOL focuses on enforcement of the fundamental fiduciary conduct that:

• the fiduciary is acting at all times in the best interests of plan participants,

• that fees paid by the plan (and its plan participants) are reasonable, and

• fiduciaries are diligent to avoid conflicts of interest in their hiring of advisors and service providers to the plan.

The IRS

While the DOL focuses on participants and fiduciary roles and responsibilities, there is clearly a shared focus with the IRS on compliance (i.e., compliance with the plan document, compliance with regulations, etc.). Obviously, tax-related issues, such as current deductions or delaying the recognition of income, are in the IRS's jurisdiction. So is compliance with the regulations that pertain to plan qualification, including nondiscrimination testing and all limits. The IRS also looks at compliance with the plan document, which includes consistency among all your plan documents and plan operation, compliance with constantly changing regulations, and administration of plan eligibility. More recently, the IRS has become concerned with improper investment valuations in cases where an asset is illiquid or is not readily valued, which can cause an undervalued or overvalued benefit distribution.

The IRS will request information on your nondiscrimination and limits testing, including the primary data. You can expect your recordkeeper to provide the reporting of this testing and the primary data for their review.

The following is a list of the 12 most common issues the IRS finds in its audits of retirement plans:

• Plan document not up-to-date

• Plan operation doesn’t follow the plan document

• Plan definition of compensation not followed

• Matching contributions not made to all eligible employees

• ADP/ACP test performed improperly

• Eligible employees not allowed to defer

• Deferral limits exceeded

• Deferral deposit delay

• Participant loans don’t follow plan documents, procedures and/or law

• Hardship distributions improperly administered

• Top-heavy requirements ignored

• Failure to file Form 5500 timely

The process for both agencies becomes more complex if enforcement issues are found.

After the auditMost auditors we meet are assigned to multiple cases, so while you should be prepared to hurry up for them, you must also be prepared to patiently wait for their responses to you. Once the audit is completed, the auditor will follow-up with a phone call to verbally convey the audit findings; this phone call is followed by a written audit findings letter.

The DOL

In the best case, the result of a DOL investigation is a “no action” letter. The plan has passed the DOL’s testing, and no further action is being pursued by the DOL. The letter may include disclaimer language that says there may be ERISA violations in certain areas, but no such activity was found during the investigation. The more common letter these days is a Voluntary Compliance Letter, which documents that certain infractions were found (most commonly late deferrals or issues relating to the loan program), and certain corrective action under the Voluntary Fiduciary Compliance Program (VCP) is required. When egregious compliance errors are found, the DOL can sue for civil penalties on behalf of plan participants and initiate litigation against fiduciaries for breach of fiduciary responsibilities.

The IRS

For an IRS audit, the best case is an audit findings letter showing that no further actions are necessary and that the audit file has been closed. If errors are found, then certain corrective action may be necessary through the IRS’s Audit Closing Agreement Program. Here, the general principle is to make the plan and its participants whole. This often includes a corrective contribution plus interest to plan participant accounts, excise taxes required by Code Section 4975, and other fees and penalties payable to the IRS.

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If you and your legal counsel disagree with the audit conclusions in some way, there is an appeals program that enables another review of the audit findings and your position.

Fortunately for plan sponsors, the voluntary corrections and audit corrections programs have made plan disqualification extremely rare.

Staying prepared: a different kind of “selfie”Because plan administration is so complex, it’s common for plan sponsors to have some correction issues at some point in the life of the plan. Many of the errors that occur and corrections that need to be made arise out of a triggering event, such as payroll staff turnover, system changes, one-off processing events, annual limits, or business reorganizations. If you’ve had a potential error-inducing event, it may be time to conduct a self-audit to ensure that your plan’s operation is consistent with plan documents and all laws. Performing regular self-audits will give you greater protection against an IRS or DOL audit.

If you’ve had a potential error-inducing event, it may be time to conduct a self-audit to ensure that your plan’s operation is consistent with plan documents and all laws.

As a plan sponsor, there are three things you can do to make your plan audit-ready, should that letter arrive from the DOL or the IRS: organize, review, and retain. We’ve provided a list of action steps below. You’ll notice that organize and retain steps are simple and really only involve good record-keeping practices, while some of the steps in the review phase may involve engaging an advisor to ensure the correct result.

Organize

• Current records

• Records eligible for summarization and archiving

Review

• Updated roster of key plan officials, including external advisors

• Investment policy statement, loan procedures, QDRO procedures documents

• Determination letter and upcoming determination letter cycles

• Service agreement for necessary changes to reflect actual operation of plan, changes in law or regulation

• Documentation of internal controls and update as needed

• Fees and fee changes, fee disclosures, and documentation

• Plan and data transmission requirements with payroll staff

• Plan document and summary plan descriptions against plan operation

• Fidelity bond coverage

• IRS 401(k) Fix-It Guide and make self-corrections as necessary

• Plan operation relative to terms of plan

• All documentation related to corrections under SCP or VCP

Retain

• Signed plan documents, trust agreements, plan amendments, and board resolutions

• Summary of materials modifications, summary annual reports, and other required participant notices and document their dates of distribution

• Investment process documentation and decisions, committee minutes

• Compliance testing, participant allocation, and other plan operation reports

• Current Form 5500, schedules, and audit report

• All documentation related to corrections under SCP or VCP

As you can see, this process is similar to the year-end close of a corporation’s financial statements and tax return filings, and it’s an opportunity for you to review, update, and finalize your records for the year. You should adopt this practice as part of your year-end close or annual review and planning process.

CONSULTANTS in the LIMELIGHTMatthew Gilliland hasearnedtheCERAdesignation.CERAstandsforCharteredEnterpriseRiskAnalyst.ThisisanewdesignationwithintheSocietyofActuariesthatrequiresanEnterpriseRiskManagement(ERM)moduleandanERMessayexaminadditiontotheASAdesignation.

For more information about our consultants, please visit www.bpsm.com.

Matthew Gilliland

Bryan, Pendleton, Swats & McAllister / January – February 2015 9

Correcting errorsIf you find a problem during the self-audit of plan operations or in your review of plan documentation, there are ways to voluntarily correct these problems. Depending upon the nature of the issue, you may be able to self-correct your plan, document the corrections for the file, and move forward without a formal filing with the IRS or the DOL. More significant issues, such as failing to amend the plan timely or failing a nondiscrimination test and discovering the problem in a later plan year, generally require filing for and obtaining approval of the self-correction methodology.

Depending upon the nature of the issue, you may be able to self-correct your plan...

The more common the problem, the more likely it is that other plan sponsors have experienced the same thing. The IRS and the DOL continually publish new procedures for automatic corrections and guidance on how to perform formal corrections, so it’s likely that an issue you’ve uncovered can be corrected efficiently through a self-correction program before being discovered during an audit.

In perspectiveWhile getting that letter from the IRS or the DOL is never pleasant, if you do receive one of those much-dread

letters, there are things plan sponsors can do to prepare. Reviewing the Information Request Letter, collecting the required information, being thoroughly familiar with your plan’s operation, and of course, fully cooperating with your auditors will go a long way in getting you through the audit. And while the chances of being audited are relatively low, the most successful approach is to assume that you will be audited and prepare accordingly by performing an annual self-audit. Adding a self-audit to your annual compliance calendar will save you time and your organization dollars. And if that’s not enough motivation, consider these words of wisdom from Dave Barry: “We’ll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.”

Thomas A. Swain, FSA, FCA, MAAA, EA, Principal Tom Swain has been a BPS&M principal since 1987 and is experienced in the design, funding, administration, and regulatory compliance of retirement and nonqualified deferred compensation plans. He has an in-depth understanding of—and is highly skilled in implementing—the complex rules and regulations inherent in qualified retirement plans. His clients comprise a variety of employers, including governmental entities, not-for-profit, and for-profit private employers. Tom is based in our Nashville, TN office.

The BPS&M Pension Liability IndexUpdated as of January 31, 2015 by Jeffrey Thornton, ASA, EA, MAAA

Interest rates are arguably the primary driver of the volatility in pension plan liabilities. BPS&M has established a set of liabilities and applied the yield curves to those liabilities in order to create the indices used to demonstrate the effect of interest rates on plan liabilities. The BPS&M Pension Liability Index tracks the percentage change in liabilities for a typical defined benefit plan under the following four interest rate standards, which are in general use:

1. The Full Yield Curve published by the IRS for minimum funding purposes under IRS Code §430.

2. The 24-month Averaged Yield Curve published by the IRS for minimum funding purposes under IRS Code §430.

3. The Adjusted Average Yield Curve reflects the impact of the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA). HATFA extended the funding relief, which was introduced by MAP-21 in 2012. Originally, under MAP-21, the funding relief began to diminish in 2013. HATFA extends the funding relief, such that it does not begin to diminish until 2018.

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4. A Corporate Financial Yield Curve used for financial statement pension liability determinations. Prior to January 1, 2014, this was measured using the Citigroup Pension Discount Curve; now it is measured using the Wells Fargo Pension Discount Curve (AA-rated or higher). For more information about the Wells Fargo Pension Discount Curve, please read the article titled “Introducing the Wells Fargo Pension Discount Curves” in the Jan/Feb 2014 issue of Developments.

The BPS&M Pension Liability Index uses a hypothetical plan for benchmarking purposes based on “typical” pension plan features. The duration of the liabilities under this hypothetical plan is 15 years. The benchmark period for the Index starts with the effective date of the Pension Protection Act (January 2008), and the graph shows the rise and fall in liabilities due to changes in interest rates relative to that date. All other factors remain constant throughout the benchmarking period; ergo, the change in liabilities is due solely to the interest rate environment.

The trends demonstrated in the graph will generally hold true for most pension plans, but the magnitude of the percentage changes will vary depending on a given plan’s demographics and benefit accrual patterns.

The table below shows the percentage changes in the indices over various periods.

The BPS&M Pension Liability Index is updated regularly. If you have questions or comments concerning the BPS&M Pension Liability Index, please contact your BPS&M consultant or jeffrey.p.thornton@bpsm.com.

Jeffrey Thornton, ASA, EA, MAAA Jeff has 10 years of actuarial experience in defined benefit plan administration. He specializes in liability studies and has provided plan-specific analyses for clients of various sizes and diverse industries. He is a consulting actuary in our Louisville, KY office.

Full Yield Curve Average Yield CurveCorporate Financial Yield Curve

Adjusted Average Yield Curve (HATFA)

80

90

100

110

120

130

140

150

160

15-J

an

14-J

an

13-J

an

12-J

an

11-J

an

10-J

an

09-J

an

08-J

an

126.0%

145.1%

152.1%

96.4%

BPS&M Pension Liability Index since inception

Indices Changes

Indices

Since Inception (1/1/08)

2015 Year to Date

Last 12 months

FullYieldCurve +45.1% +5.8% +16.9%

Averaged YieldCurve +26.0% +0.2% -1.1%

AdjustedAverage YieldCurve -3.6% 0.0% +2.7%

CorporateFinancialYieldCurve +52.1% +7.9% +18.6%

About BPS&M

Bryan,Pendleton,Swats&McAllister,LLChasbeenprovidingactuarialandbenefitconsultingservicestoclientssince1971.

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DevelopmentsisfurnishedbyBryan,Pendleton,Swats&McAllister,LLC(BPS&M),aWellsFargoCompany,toprovidegeneralinformationaboutrecentdevelopmentsandcurrenttopicsinemployeebenefits.Theinformationprovidedisasummaryandshouldnotberelieduponinlieuofthefulltextofaparticularlaw,regulation,notice,opinion,legislativeproposalorotherpertinentinformation,andtheadviceofyourlegalcounsel.BPS&Mdoesnotpracticelaworaccounting,andthispublicationisnotlegalortaxadvice.Legalissuesconcerningyouremployeebenefitplansshouldbediscussedwithyourlegalcounsel.Thispublicationisintendedforinformationalpurposesonlyandisinnowayintendedtoofferinvestmentadviceorinvestmentrecommendations.

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