Watson Wyatt Worldwide - Articles

Insider: Valuing Stock Options: Is It Time to Reconsider Binomial Lattice Models?

Valuation models were the subject of intense debate during the drafting of �Statement of Financial Accounting Standards (SFAS) No. 123(R) � Share-Based Payment.� The exposure draft would have required companies to use a binomial lattice model (or something similar) to value employee stock option awards, but the final standard has allowed companies to use either a binomial lattice or a closed-form model, such as Black-Scholes, without preference.

Insider: The Future of DB Plan Funding Under PPA and Relief Legislation and Proposals

The overlay of the dramatic decline in asset values of the last few months on the incipient tougher funding requirements of the Pension Protection Act of 2006 (PPA) has prompted widespread concern about the magnitude of the required contributions to single-employer defined benefit (DB) plans in 2009 and 2010. In this analysis, Watson Wyatt estimates contribution amounts using a comprehensive and realistic model of plan funding under four scenarios: PPA; provisions in the Worker, Retiree, and Employer Recovery Act of 2008 (H.R. 7327) (signed into law by President Bush on December 23); and two other major relief proposals, individually and in combination. Our calculations are based on market conditions as of Dec. 12, 2008 (see appendix for further details).

Insider: Fiduciary Responsibility and ETIs: A Conflict?

The U.S. Department of Labor (DOL) recently issued Interpretive Bulletin 08-1, which warns plan fiduciaries against selecting investments to promote public policy preferences. The notice specifically addresses economically targeted investments (ETIs), which create economic benefits apart from their investment return. The bulletin replaces Interpretive Bulletin 94-1 and clarifies and formalizes the DOL�s position.

Insider: Many Older Workers Unaware of Retirement Distribution Options

As workers approach retirement, they must make decisions that will affect their long-term financial futures. One of these is choosing the form of distribution from their defined benefit (DB) plan and defined contribution (DC) account. While there might be several distribution options, for many DB plan participants it comes down to a choice between a life annuity and a lump sum. But how many older workers know enough to make an informed decision?

Insider: DOL Finalizes Fiduciary Safe Harbor for Selection of DC Plan Annuity Providers

The U.S. Department of Labor (DOL) has finalized regulations establishing a safe harbor for the selection of an annuity provider and purchase of annuity contracts for defined contribution (DC) plans. The final regulations simplify the safe harbor proposed in September 2007 and clarify that the safe harbor is an optional means of satisfying the fiduciary standards of the Employee Retirement Income Security Act (ERISA). The regulations took effect Dec. 8, 2008.

Insider: IRS Proposes Regulations on Consequences of Failing to Defer for DB and DC Plans

The IRS has proposed regulations that would require plan sponsors to include more information in the participant notices explaining the consequences of failing to defer a distribution. The regulations also would extend from 90 days to 180 days the election period for waiving the Qualified Joint and Survivor Annuity (QJSA) and the period for distribution of notices addressing rollover eligibility and the tax treatment of distributions.

Strategy At Work: Keep Your Eye on the Ball: Sales Effectiveness and Compensation in 2009

When experts discuss the best path out of an economic downturn, they typically describe a back-to-basics approach. Recent statements by U.S. Federal Reserve Chairman Ben Bernanke, investment guru Warren Buffett and British Prime Minister Gordon Brown focus on the fundamentals of corporate value, market structure and investment theory.

Strategy At Work: Performance Metrics
Balancing the Needs of Creditors and Shareholders

The events of the past 12 months tell us at least one thing: Credit and shareholder value are interrelated. While the effects of deteriorating credit markets were first felt in the financial sector in the United States, there have been broader consequences across many nonfinancial sectors. The cost of borrowing has increased, and lenders are more selective when extending credit. The capital markets are skeptical of loans to even the largest, most creditworthy companies.

Insider: The Magnitude of Pension Deficits Compared With Firm Value Likely to Increase by Year-End

Plan sponsors and others are concerned about the business risks posed by pension plans, particularly in today�s unpredictable market conditions. In this case, �risk� refers to a company�s exposure arising from pension deficits. At the end of 2007, the ratio of pension plan deficits to market capitalizations (current risk) for FORTUNE 1000 firms was small due to the rise in funding levels.

Insider: IRS Releases Benefit Limits for 2009

The IRS has announced the annual cost-of-living and statutory adjustments of various dollar limits for employee benefit plans.

Insider: House Prices, Financial Markets, Government Intervention and the U.S. Economic Outlook

When he made his urgent request on Sept. 19 to Congress for the federal government to buy distressed assets, Treasury Secretary Henry Paulson stated that �[t]he underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. � These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them.�

Strategy At Work: Retirement Investment Strategies in a Time of Financial Crisis

What is the best strategy for retirement plan sponsors to ride out the current storm? Three Watson Wyatt experts discuss the implications of the financial crisis on investment and risk, and smart strategies for institutional investors.

Insider: Year-End Pension Accounting Declines Might Be Milder Than Expected

Unsurprisingly, the value of pension plan assets has dropped sharply so far this year, and under Financial Accounting Standard (FAS) 158, funded status for 2008 will decline for most pension plans. However, today�s higher discount rates will soften the drop considerably. Despite the dramatic drops in the stock market during early October, we project only a moderate decline in average funding status � from 96 percent in 2007 to 88 percent in 2008.

Insider: Claims Denial Faces Stricter Review Because Sponsor Failed to Meet DOL Electronic Delivery Requirements

A ruling by the 9th U.S. Circuit Court of Appeals emphasizes the importance of compliance with the U.S. Department of Labor�s regulations on delivering plan documents electronically. In Gertjejansen v. Kemper Insurance Companies, Inc., the court applied a stricter standard of review to a claims denial because the employer�s delivery of the summary plan description (SPD) did not meet DOL requirements.

Insider: Employers May Allow Qualified Reservist Distributions of Unused Amounts From Health FSAs

In Notice 2008-82, the IRS clarifies a new rule under which employers may allow reservists to cash out unused funds from their health flexible spending arrangements (FSAs) after being called to active military duty. The new rule is part of the Heroes Earnings Assistance and Relief Tax Act of 2008, which was enacted June 17. Ordinarily, distributions from health FSAs are allowed only to reimburse substantiated medical expenses, and the participant forfeits any funds remaining at the end of the plan year.

Insider: Emergency Economic Stabilization Act Has Broad Reach

On Oct. 3, President Bush signed the Emergency Economic Stabilization Act (EESA) of 2008 into law. The act is aimed at stabilizing the nation�s turbulent financial and credit markets by authorizing the secretary of the Treasury to purchase troubled mortgages, mortgage-backed securities and other assets from financial institutions, including pension plans.

Insider: Mental Health Parity Law Passes on Coattails Of Economic Stabilization Act

After more than a decade of discussion, Congress has finally enacted legislation to mandate full parity for mental health and substance abuse benefits. The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act became law on October 3 when President Bush signed the Emergency Economic Stabilization Act, a broad bill aimed at stabilizing U.S. financial markets.

Insider: Appeals Court Rules ERISA Does Not Preempt San Francisco�s Health Care Mandate

On Sept. 30, the U.S. Court of Appeals for the 9th Circuit ruled that ERISA does not preempt San Francisco�s Health Care Security Ordinance, which requires employers to help pay for the city�s universal health care program. The Golden Gate Restaurant Association (GGRA) challenged the employer spending requirement, claiming ERISA preemption. The appeals court disagreed.

Insider: DOL Adds to Enforcement Policy for Gifts, Entertainment and Educational Expense Reimbursement

The U.S. Department of Labor (DOL) recently added a new section to its enforcement manual concerning gifts and entertainment provided to plan fiduciaries. The section directs DOL investigators to determine whether gifts, meals and entertainment (including expenses associated with educational conferences) violate ERISA�s fiduciary standards.

Insider: Surplus Assets Transferred to 401(k) Plan Cannot Fund Matching Contributions

Two recent IRS private letter rulings indicate that sponsors cannot use surplus assets from a terminating defined benefit plan for matching contributions under a defined contribution replacement plan. The surplus assets can be allocated only as a nonelective contribution.

Insider: Court Rules Immediate Lump Sum Distributions Do Not Violate Consent Requirements

The 7th U.S. Circuit Court of Appeals recently ruled that the American Family Insurance defined benefit plan did not violate participant consent requirements by giving terminating workers a choice between immediate lump sum distributions and immediate or delayed annuities. Participants claimed that offering lump sums on an immediate-only basis imposed a significant detriment on participants who turned down the immediate distribution. The court disagreed.

Insider: Social Security in Mexico: Employer Plans Could Plug Gaps in Future Retirement Security of Workers

Mexico is subject to the same demographic winds that have driven pension reforms around the world. In 1997, Mexico established mandatory individual accounts to (eventually) replace its traditional social security program. Under the new system, private-sector workers choose an investment vehicle from funds offered by approved investment vendors. Contributions are automatically deducted from their paychecks.

Insider: Is the Bailout Package a Template for Future Executive Compensation Regulation?

In the world of executive compensation, Congress has an inglorious history of passing laws to restrict compensation that achieve the opposite effect. Commentators often cite the million-dollar pay cap (in tax code section 162(m)) and the �golden parachute� excise tax (in section 280G) to prove the point. Rather than reduce executive compensation, companies simply shifted to stock option compensation in the 1990s (which is not subject to the million-dollar pay cap), and significant golden parachute payments (many that include tax gross-ups) remain very common.

Insider: EESA Allows Bicycle Commuter Fringe Benefits

In an effort to encourage fuel-free commuting, the recently enacted Emergency Economic Stabilization Act (EESA) includes a provision allowing fringe benefits for bicycle commuters. Under the act, employers may provide tax-free reimbursement of up to $20 a month to employees for qualified bicycle commuting expenses.

Insider: New Law Helps Sick Students Keep Health Coverage

President Bush signed �Michelle�s Law� on Oct. 9. Under the new law, health plans must allow college students who take a leave of absence or reduce their class load because of illness to retain their dependent status under their parents� health plan for up to one year. The act takes effect for medically necessary leaves of absence that begin in plan years beginning on or after Oct. 9, 2009 (Jan. 1, 2010, for calendar-year plans).

Insider: Adoption Act Amends Tax Code Definition of Qualifying Child

On Oct. 7, President Bush signed the Fostering Connections to Success and Increasing Adoptions Act of 2008 (H.R.6893). The act focuses primarily on promoting adoption, but it also amends the definition of a qualifying child in the Internal Revenue Code. The definition is used to determine eligibility for certain tax benefits, such as the dependency exemption, the child tax credit, the earned income tax credit and the dependent care tax credit. In addition, it is referenced by many employer-sponsored health care and dependent care plans.

Strategy At Work: Managing Retirement Plans in a Financial Crisis

What actions should retirement plan sponsors take in response to the financial crisis? In a new consultants� roundtable, Watson Wyatt experts from around the world discuss the key issues that defined benefit (DB) and defined contribution (DC) plan sponsors are facing and strategies to address them.

Strategy At Work: Communicating a Change in Your Retirement Plan

Companies provide retirement benefits for many reasons, including worker recruitment and retention. But if a defined benefit (DB) plan is no longer the appropriate solution, two significant questions arise: What should replace it? What�s the best way to inform employees?

Insider: IRS Addresses Tax-Dependent Status of Children of Divorced Parents

In Revenue Procedure 2008-48, the IRS announces some exceptions to its usual policy regarding children of divorced or separated parents.

Insider: Onsite Health Facilities: Watch Out for Regulatory Pitfalls

By 2009, roughly 30 percent of large employers will have an onsite health care facility, according to research performed jointly by Watson Wyatt and the National Business Group on Health. While these employer-provided onsite facilities serve a useful purpose, many employers and vendors are unaware of the welfare benefit implications they entail.

Insider: IRS Delays Effective Date for Smart Card Requirements

The IRS has delayed � again � the effective date of Revenue Ruling 2006-57, which confirmed that employers could use debit, credit or smart cards to deliver qualified transportation fringe benefits and outlined the required procedures for doing so. The ruling was supposed to take effect Jan. 1, 2008, but was delayed for a year to give transit systems more time to implement the required technology. Apparently some transit systems are still not ready. The revenue ruling is now slated to take effect Jan. 1, 2009, but employers and employees may rely on the ruling in the meantime.

Insider: SEC Proposes to Adopt International Accounting Standards

On Aug. 27, the Securities and Exchange Commission (SEC) voted unanimously to propose a road map for shifting U.S. companies from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS). The move to a global accounting language is intended to improve the comparability and transparency of financial reporting worldwide. It will also have important implications for U.S. employers in how they account for employee benefit and stock plans.

Insider: Tax Treaty Does Not Allow Rollover of Benefits From U.K. Scheme to U.S. Plan

U.S. tax law generally treats transfers from foreign pension schemes to U.S.-qualified plans as taxable distributions. Although some advisers had been claiming the U.S.-U.K. tax treaty altered that principle, an internal IRS memo sets the record straight: Rollovers from one plan to another are permitted only if both are U.S.-qualified plans. The memo has no legal force, but it represents internal IRS policy and thus is likely to guide IRS enforcement policy.

Insider: DOL Proposes New Disclosure Requirements for 401(k) Fees and Expenses

The U.S. Department of Labor (DOL) has proposed new disclosure rules, which are intended to help 401(k) plan participants make informed retirement savings decisions. Under the proposal, companies offering 401(k) and other participant-directed individual account plans would have to disclose summary information, including fee and expense information, for all investment options under the plan.

Insider: Congressional Hearings Set Stage for 2009 Health Care Debate

Congress and policy and industry experts are gearing up for next year�s health care reform debate. On Capitol Hill, lawmakers and key committees are holding hearings and listening to experts. A recent hearing conducted by the Senate Finance Committee focused on the tax treatment of health care benefits. Other recent hearings have looked at state reform � especially how ERISA preemption might be impeding reforms.

Insider: Presidential Campaign Proposals Suggest Changes Ahead for Employer Health Plans

During their months on the presidential campaign trail, Sens. Barack Obama (D-Ill.) and John McCain (R-Ariz.) have outlined competing visions for a reformed U.S. health care system. Both candidates aim to increase the number of Americans with health coverage, reduce costs and improve quality, but they take different approaches. Sen. Obama would create a new national plan, expand existing public programs and impose mandates. Sen. McCain opposes mandates and instead proposes tax changes and market reforms.

Insider: IRS Gives Plan Sponsors More Time to Self-Correct Errors

The IRS has updated the Employee Plans Compliance Resolution System (EPCRS), giving sponsors of defined benefit and defined contribution plans more time to self-correct operational errors. The new rules take effect Jan. 1, 2009, but sponsors may apply them after Sept. 2, 2008.

Insider: Pension Funding Improves for 2007

Pension funding has been much in the news during the last decade and over the last several years, most of the news has been positive. A Watson Wyatt analysis of defined benefit plan funding for the FORTUNE 1000 shows that plan funding improved again in 2007, and many pensions ended their fiscal year with significant surpluses. Funding received a boost from favorable asset returns and an increase in interest rates during 2007.

Insider: IRS Finalizes Mortality Tables for DB Plans

The IRS has finalized the regulations proposed in 2007 regarding the mortality assumptions used to determine present values for minimum funding purposes for defined benefit (DB) pension plans under the Pension Protection Act of 2006.

Insider: IRS Restricts �Pension Selling�

The IRS has ruled that transferring a qualified plan to an unrelated taxpayer for any purpose other than transferring assets, operations or employees violates the exclusive benefit rule. While the new ruling shuts down the prospect of being able to "sell" a company�s pension, the U.S. Department of the Treasury has suggested principles for doing so that could form the basis of future enabling legislation. However there has been little interest in such legislation so far from Capitol Hill.