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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
ERISA permits investment strategies that weigh liabilities in defined benefit plan pension risk management, if certain standards are met, according to an Employee Benefits Security Administration (EBSA) advisory opinion letter.
A bank, acting as a fiduciary for the investment portfolio of defined benefits plans, sought confirmation concerning a proposal to “risk manage” assets associated with benefit liabilities. The goal of the bank was to reduce the probability that liabilities of plans would increase at a time when the assets were declining. The bank stated that, generally, DB plan liability was dependent on a number of factors, including the demography of the participant population and the interest rates used to calculate the present value of a plan’s obligations for funding and accounting purposes. Although the liabilities of a plan could be correlated most closely with a portfolio of fixed-income securities for the duration of a plan’s benefit obligations, the bank asserted that other aspects of a plan’s obligations may correlate more closely with other types of investments. In addition, the bank maintained, it might not be possible to match liabilities precisely with fixed-income securities. The bank noted that a variety of approaches may be used in practice, depending on the facts and circumstances affecting a particular plan.
The bank also explained that the focus of its services would be to reduce the risk of underfunding to a plan and protect its participants and beneficiaries by reducing volatility in funding levels. Incidentally, plan sponsors would benefit from reduced volatility by being able to maintain more consistent funding levels. Decreased volatility would reduce the need for a plan to rely on the plan sponsor to meet its funding obligations, thereby protecting participants and beneficiaries in the event of the sponsor’s insolvency.
In response, EBSA noted that under ERISA §403(c) and ERISA §404(a)(1)(A) , fiduciaries are required to discharge their duties in respect to a plan solely in the interest of plan fiduciaries and beneficiaries, for the exclusive purpose of providing benefits to them, and defray the reasonable expenses of plan administration.
The “prudent man” standard under ERISA §404(a)(1) applies to any investment by a plan subject to Title I of ERISA, including investments made according to the risk management strategy described above. In addition, under ERISA Reg. §2550.404a-1 the prudence requirements are satisfied if (1) the fiduciary involved in an investment course of action has given sufficient consideration to the facts and circumstances that the fiduciary knows, or should know, are relevant and (2) the fiduciary acts accordingly.
In conclusion, the advisory opinion reaffirms that a “fiduciary would not, in the view of the Department, violate their duties under sections 403 and 404 solely because the fiduciary implements an investment strategy for a plan that takes into account the liability obligations of the plan and the risks associated with such liabilities and results in reduced volatility in the plan’s funding requirements. Whether any particular investment strategy is prudent with respect to a particular plan will depend on all the facts and circumstances involved.”
For more information on this and related topics, consult the CCH Pension Plan Guide.
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