In Profile

A Conversation With Timothy Clark

The New Equations Of Sponsorship

by P.E. Kelley

Mr. Kelley is managing editor of this magazine. Connect with him at pkelley@lifehealth.com.

The number of private employers providing pensions has dropped from 35% to 15%, signaling a generational shift in how we prepare for retirement…and how we pay for it. The equation between employers looking to offer a meaningful vehicle for growing retirement income, and employees who need more of a safety net than ever before, includes the same variable that has always governed these partnerships: affordability.

Timothy Clark is senior vice president of Amalgamated Employee Benefits Administrators, providing third party employee benefits administration services to the market. He spoke with Advisor Magazine about the fraught evolution of the pension market, from the emergence of hybrid and adjustable plans, the growing risk of market volatility, the new threats of cyber-crime and a growing burden of regulatory restraints.

PEK: What are the primary advantages of a pension?


TC: According to the U.S. Department of Labor’s Bureau of Labor Statistics, in any given year, half of American workers, which totaled 145 million (including full and part time workers) participated in a retirement plan at work. In 2023, 19% of those workers participated in a pension plan also known as a defined benefit plan. Pensions, which are protected under the Employee Retirement Income Security Act of 1974 (ERISA), provide important advantages to employees. They are funded by employers who are required to make minimum contributions. In certain cases, employees may also be able to contribute, but are not required to. Pensions also place the risk on the employer when it comes to managing the pension’s investments or contracting an investment professional to do so. In either case, the employer has a fiduciary responsibility to ensure that the pension is managed in the best interests of the participating employees. Finally, pensions offer employees guaranteed fixed payments upon retirement.

PEK: Given these advantages to employees, what is the reason for the shift away from traditional pensions, and how should advisors be guiding their clients in this area?


TC: It is true that the number of private employers providing pension has dropped from 35% to 15% based on data from the U.S. Bureau of Statistics. There also has been a shift from traditional pensions toward hybrid pensions (i.e., plans that combine elements of both defined benefit and defined contribution plans to generate participants’ benefits upon retirement). As evidenced by the Pension Rights Center’s finding, in 2022, 41% of workers in private-sector plans were in hybrid plans. This is largely because pensions have become too costly for employers, but they want to provide employees the opportunity to save for their future with the flexibility to invest their savings on their own to maximize returns. Another drawback for some pensions is not having a joint or survivorship benefit, wherein the pension may end when the employee passes away causing a potential hardship for his/her survivors.

PEK: What are other market developments involving pensions and how can advisors leverage them where possible?


TC: One new development is the growing interest in adjustable pension plans which provide benefits to both plan sponsors and members. Adjustable pension plans work by balancing investment risks and adjusting the accrued or future benefit accruals based on a plan’s investment performance. Contribution amounts are predetermined and made annually. Plan sponsors derive several benefits. These include convenient budgeting via a fixed annual contribution, enhanced funding protection due to the plan’s reduced risk, and their role in attracting and retaining high caliber employees who value retirement security. Corporations and single-employer plans lower their risk of having to pay PBGC premiums in addition to the flat, per participant premiums. Multi-employer plans can avoid withdrawal liabilities as these adjustable pension plans are more likely to remain fully funded. Plan participants benefit from receiving a monthly premium for life, greater funding level protection, and the peace of mind stemming from the knowledge that plan’s investments are being pooled, professionally managed, and that a more conservative risk profile is applied.

Regarding economic impacts, advisors and their clients should note that analysts have observed a rise in pensions’ funded status, however, market volatility has affected plan assets with declines in equity and fixed income values. Regulatory changes have also contributed to the increase in pension expenses. A remaining concern is a possible recession. The combination of higher interest rates leading to higher funded levels also may prompt plan sponsors to enact a pension risk transfer. As for other developments, the increased application of technology is also introducing changes in pension administration. Younger generation workers are relying on technology to access and monitor their pensions and plan sponsors are introducing more pension portals and dashboards to further educate and keep plan participants engaged and informed regarding their pension benefits. Advisors need to encourage pension sponsors who are not leveraging advanced technology to do so.

Finally, cyber-crimes targeting pensions are increasing. The Federal Bureau of Investigation (FBI) reported that financial fraud crimes against people ages 60 years and over had increased in 2022 by over 82% compared with 2021. Cybercriminals are targeting both pension holders and plan sponsors’ websites and member portals, as well as the IT systems of their investment advisors, third party administrators and other service providers. Advisors should strive to raise their clients’ awareness of this trend and suggest that they engage a third party cybersecurity firm to perform penetration testing, vulnerability assessments and other diagnostic measures to help identify IT system weaknesses and take measures such as multi-factor authentication, encryption, and firewalls, to mitigate potential risks. Similarly, clients should be working to ensure that their pension service providers are also taking full cybersecurity measures. All cybersecurity plans should be shared with corporate/union board members involved in private/public pensions, and ongoing cybersecurity benchmarking should be instituted.

PEK: What were some key regulatory developments that employers should be aware of relating to pensions?


TC: There have been changes to pension administration stemming from the changes introduced by SECURE 2.0 which go into effect in 2024. While pension sponsors are getting advice from their accountants and third party administrators on these changes, benefit advisors too should be demonstrating their support by reminding their clients of these changes. Among those pertaining to pensions are changes to the top-heavy plans (those in which the aggregate of accounts for key employees exceeds 60% of the aggregate accounts for non-key employees). The top-heavy rules covering excludable employees previously permitted top-heavy contributions at 3% of a participant’s compensation. Also effective in 2024, pension plans can disregard excludable employees from receiving top-heavy contributions. Excludable employees are those who do not satisfy the Code’s rules for eligibility as they pertain to the minimum age of 21 years and service of one year. In 2024, there is a cap on mortality improvement rates for valuation dates occurring on or after 2024. In addition, pension plan sponsors are now required to provide additional information on a pension plan’s funding status, including a statement of plan assets and liabilities for the preceding two years and the existing plan year.

Pensions have become too costly for employers, but they want to provide employees the opportunity to save for their future with the flexibility to invest their savings on their own to maximize returns...

PEK: Technology’s application in pension administration has been evolving rapidly. What have been some of the new advancements in pension administration technology that advisors should know about?


TC: More pension administrators are recognizing the benefits of automating their pension processes. Automation delivers improved accuracy, efficiency, data security, enhanced reporting functionality, and convenient user tools. Today’s advanced pension administration systems hold all of a plan’s data in one central database. The most sophisticated systems include governance features designed to assist plan fiduciaries and sponsors in their efforts to adhere to a plan’s terms and regulatory requirements. Defined benefit pension fund management software provides plan trustees and sponsors with the ability to monitor their pension’s funding level in real time, as well as its investment de-risking triggers.

PEK: How does Artificial Intelligence (AI) fit in here?


TC: As with so many areas of financial services, Artificial Intelligence (AI) is playing a greater role in pension administration. It is helping pension plan sponsors to reduce costs, improve efficiency and identify emerging risks so that proactive measures can be taken to protect investments. Through its data capture and analysis, AI is also promoting better decision-making relating to a pension plan’s investment returns by enabling investment advisors to rely on AI for analyzing unstructured ESG information and use the relevant data to improve portfolio allocations and reports.

PEK: The Pension Benefit Guaranty Corporation (PBGC), whose mandate is to protect the retirement incomes of over 31 million American workers in private sector defined benefit pension plans, also has been modernizing its IT systems? What is being done and why is this important for advisors to know and share with their clients?


TC: The PBGC has a few noteworthy IT modernization projects underway to protect pensions, ensure timely and accurate pension benefits, and support the organization’s role in high quality pension stewardship. Among the projects the PBGC is implementing is a single, integrated Software as a Service (SaaS) solution slated for a 2025 completion date. It is intended to advance procurement functions; management and internal controls with increased transparency; improve data integrity; and facilitate ongoing updates to technology and cybersecurity measures. Also underway are completing phases 4 and 5 with a 2025 completion date of its Benefit Calculation and Valuation project with 2024 and 2025 completion dates, respectively. This project involves providing an online estimate for pension participants as well as improved reporting and actuarial capabilities and modernizing its database tools to further improve the pension participants’ experience. The PBGC is also working on a Transformational Pension Insurance Modeling System for Single Employers scheduled for completion in 2024.

PEK: Within the public pension sector, there has been a strong movement toward pension benefit tiers primary in response to state and local governments’ financial challenges. When making changes to their pension benefits, there are important regulatory matters that must be addressed. Would you elaborate on some of those outlined by the Government Finance Officers Association (GFOA)


TC: Many state and local governments are revising their pension benefits using tiers, which relate to a group of individuals whose benefit formulas are different from other pension plan members. Their goal is to contain costs, often keeping one tier for existing employees and introducing another tier, which includes an employee contribution component, for new employees. The GFOA, a professional association of approximately 19,000 state, provincial, and local government finance officers in the United States and Canada, recommends that governments considering new benefit tiers carefully evaluate their goals and the potential financial ramifications to the pension plan’s design and for plan participants. It also advises governments to secure advice from actuaries during their analysis process and relating to the plan’s design, potential benefit costs, and employer and employee contribution rates. Other factors to be considered which support a plan’s compliance include employee contribution requirements, vesting periods, notifying employees regarding changes to current employees’ pension benefits, and informing of their intent to make changes on a prospective basis to avoid increasing pension liabilities through retroactive changes. Their intentions should be clearly stated in all plan documents and policy statements that describe the new benefit tiers.

PEK: Given the complexities and evolving regulatory and market landscape for pensions, many employers have turned to third party administrators to manage their pensions. What capabilities and other characteristics should advisors recommend their clients seek in a third party pension administrator?


TC: Third party administrators (TPAs) should be able to demonstrate competency and long-term experience in handling day-to-day pension administration functions such as maintaining records of participants’ benefits, eligibility and payment history, and full financial records; timely processing of pension applications in compliance with fund benefit rules; processing plan distributions and loan applications; preparing government filings; preparing and issuing 1099s; administering fiduciary liability and fidelity bond insurance and attending and reporting at trustee meetings. The TPA should be experienced in assisting with annual reports; managing all billing, collection and reconciliation of monthly employer contributions or withdrawal liability payments; data maintenance; and delinquency and standard reporting. Other important TPA competencies should include communicating with other plan professionals such accountants, auditors, attorneys, actuaries, and other plan advisors in the preparation of annual valuation reports, funding notices and Social Security Administration files for 5500s, as well as managing appeals and maintaining records. The TPA should have a staff of experienced pension specialists knowledgeable regarding regulations pertaining to pension administration such as the Internal Revenue Code’s Part 1 of Subchapter D of Chapter 1 and ERISA, among other regulations. Having modern pension administration technology should also be a TPA selection criterion.

PEK: What are some best practices that pension administrators should be deploying to ensure effective pension administration and regulatory compliance?


TC: It starts with having a sound plan design which relies on the right formula for determining the benefit to be paid, ensuring that the pension is optimally administered, and that minimum funding levels are maintained. Recognizing the complexities and functions involved in pension administration, it is essential that qualified individuals be tasked with this role. It is often more fiscally prudent to outsource pension administration to a TPA which has a group of highly-experienced pension administration professionals. The TPA can provide an end-to-end solution addressing all of the pension administration functions including regulatory compliance.