Experts in Personalized Retirement Plan Design & Administration Newsletter 07.16.14

Plan Sponsors Should Avoid Using Their Payroll Provider as Their 401k TPA While it may look good on paper to hire a payroll provider as a 401k TPA, the author of this paper thinks it’s actually a terrible idea and explains why in this article. Source:

An Eye on 401k Fees – Jerry Schlichter and Fee Litigation Ensuring reasonableness and transparency of fees in 401k plans has been a hot topic for the past number of years. Jerry Schlichter was the first attorney in the U.S. to challenge 401k fee reasonability directly at the source. This is a summary of a discussion with Mr. Schlichter. Source: (PDF File)

Infographic: Breakdown of Small Plan 401k Fees Here is a great Infographic from the 401k Averages Book offering a breakdown of small 401k retirement plan fees. Source:

Multiple Employer DC Plans: Safety in Numbers? Smaller US defined contribution plans face a host of fee difficulties simply because of the size of their plans. This has led to a growing interest in multiple employer plans as a potential cost-effective solution. But, MEPs do have an important regulatory issue. Source:

Designing a ‘Best Practices’ Participant Directed Retirement Plan Investment Menu Designing an industry “best practices” investment menu for a participant directed retirement plan requires a lot more thought than merely filling the Morningstar style boxes and calling it a day. Experience has shown that participants often frustrate the best intentioned expert who tries to build these investment line-ups. Understanding Behavioral Finance is key to overcoming many of the obstacles participants have when interacting with their plan’s investment menu. Source:

403(b) Plans

Pre-Approved 403(b) Document Program Furthers Uniformity 403(b) plan documents currently may be presented in a myriad of forms, but pre-approved prototype plans are coming, which will provide some uniformity, notes Barbara J. Webb of PenServ Plan Services, Inc. Source:

The Perils of a Non-ERISA 403(b) Plan Non-ERISA 403(b) plans seem to be dropping in popularity among non-profit organizations. Given regulatory guidelines that can be difficult to follow, many plan sponsors are finding it harder to maintain a fully compliant non-ERISA plan. This article offers tips to help plan sponsors change their non-ERISA 403(b) plan to an ERISA plan and reviews compliance issues you need to consider to make this change. Source:

Fiduciary and Plan Governance Material

Video: Importance of Trustee Minutes Keeping Board of Trustee minutes for major decisions affecting the plan makes all the sense in the world. Watch this video to learn what information that should be summarized in your plan committee minutes. Source:

Fiduciary Warranty: Marketing Gimmick or Fiduciary Protection? This paper reviews and analyzes the various types of fiduciary warranties. It exposes various warranty deficiencies and highlights genuine benefits. Details include: The evolution of fiduciary warranties; Three types of fiduciary warranties; and, Analysis of the liabilities and benefits of each type of warranty. Source: (free registration may be required)

Outsourced Fiduciary Services and the Evolution of Warranties Retirement plan service providers have continually created new and improved ways of helping plan sponsors with their fiduciary duties and liabilities, including the outsourcing of some duties. Seeking to reduce fiduciary liability, the fiduciary warranty was an early approach. Fiduciary warranties have continued to evolve and reviewed here. Source:

Fiduciary Reliance on Registered Investment Advisers Whether a plan sponsor is trying to minimize costs, monitor investments or improve administrative efficiencies, all plan sponsors fiduciaries must first understand their legal fiduciary responsibility under ERISA. If you are a plan fiduciary and you don’t believe you are able to meet your fiduciary responsibilities under the prudent man rule with your current resources, you should consider working with a RIA. Working with an RIA can help mitigate your fiduciary responsibilities regarding the investment options in the plan, as well as providing assistance in implementing best practices and strong governance processes. Source:

Retirement Plans Holding Employer Stock: What Now? Employers and plan fiduciaries should stay tuned as there should be more clarity and guidance forthcoming. In the meantime, they should: Review plans to ensure that employer stock is an authorized investment; Seek to limit liability by capping the amount that participants can invest in employer stock; and, Conduct risk assessments of the continued maintenance of employer stock funds. Source:

Peeling Back the Fiduciary Layers and Unscrambling the Fiduciary Confusion In seeking clarity about the “type” of 401k professional it has retained, plan sponsors often find the answers they are given to be incoherent with a slant in favor of the 401k industry instead of plan participants. The residual fuzziness plan sponsors are left feeling about this topic is a source of significant irritation to them. This comprehensive article attempts to peel back the fiduciary layers and unscramble the fiduciary fuzziness. Source:

What’s a Fiduciary to Do? Fiduciaries do need to deal with expanded liabilities from the changing regulatory and judicial landscape. Employers, plan administrators, HR staff and plan service providers should make sure that plan fiduciaries meet regularly to discuss plan business and document their deliberations. If you have any concerns about the prior conduct of plan fiduciaries, make sure you consult top notch plan service providers. Source:

Are the 401k Regulators Knocking? While 401k plans continue to grow in popularity, so has the immense scope of complexity surrounding compliance. Lately there’s more attention and scrutiny from regulators and lawyers, making it imperative for plan sponsors to understand their fiduciary roles, the overall process, and how to safeguard themselves before an examination. Source: (PDF File)

Insight: Studies, Research and White Papers

Worldwide Mutual Fund Assets Top $30 Trillion Mutual fund assets worldwide increased 2.7 percent to $30.84 trillion, an all-time high, at the end of the first quarter of 2014. The Investment Company Institute compiles worldwide statistics on behalf of the International Investment Funds Association, an organization of national mutual fund associations. The collection for the first quarter of 2014 contains statistics from 45 countries. Source:

Canadians Now Invest 14% of Their Income Rising stock markets are boosting investor confidence and leading Canadians to increase the share of income they invest, according to the latest TD Investor Insights Index. The annual survey finds that more than half of Canadian investors saw their investments improve over the past 12 months, and nearly as many expect continued gains in the year ahead. Source:

Managing Financial Risk in Retirement and Benefits Programs This 2014 survey focuses on finance executives’ increasing interest in pension de-risking strategies, explores the different options that companies are considering to enhance defined contribution plans, and reflects on how to achieve a better balance between retirement benefits and other employee benefit offerings. Twenty pages. Source: (PDF File)

New Analysis of 401k Plan Performance and Fees In the paper “Beyond Diversification: The Pervasive Problem of Excessive Fees and ‘Dominated Funds’ in 401k Plans,” by Professors Ayres and Curtis, the authors conclude that 401k plan participants suffer significant losses from (1) sponsor-fiduciary fund menu construction decisions, (2) participant asset allocation mistakes and (3) high fees on plan investment options. This article we review their paper in detail. Source:

Items of Special Interest to Service Providers

A 401k Advisor Shouldn’t Refer a TPA Just Because They’re Cheap When a retirement plan advisor is more concern with low cost than the quality of service, they are likely to get a TPA that under performs for both the plan sponsor and the advisor. This article is about why retirement plan advisors should avoid recommending a TPA just because they charge low fees. Source:

Are 401k Revenue-Sharing Deals on Their Way Out? New disclosure rules and the threat of fiduciary violation lawsuits have helped bring down investment management, recordkeeping and other fees in 401k and other retirement accounts. Now revenue-sharing is following suit. About 13% of plans had no form of revenue sharing whatsoever last year, a figure that most expect will grow. Source:

‘Aggressive’ Compliance Enforcement a Top Concern for Employers As reports of more auditors in the field from the U.S. Department of Labor circulate the industry, advisers are increasingly concerned about compliance for their employer clients. Research from the employment and labor law firm Littler Mendelson confirms another good reason that advisers should be offering compliance help: It’s a top concern for employers. Source:

Target-Date Funds

Essentials of Target-Date Design and Analysis This white paper provides a summary and analysis of essential factors that should be considered regarding target-date design and analysis, including: risk in the target-date fund space, active versus passive manager selection, and closed versus open-architecture approaches. Source: (PDF File)

Understanding the Hidden Risks of Target-Date Funds Despite their growing popularity, there are a number of misunderstandings about target-date funds. Some of these misunderstandings lead to bad decisions that can hurt plan participants and expose plan trustees to legal action. Paper reviews some of the misunderstandings around target-date funds. Source: (PDF File)

Court, Legal, Legislative and Washington DC

Future for ERISA Stock-Drop Litigation Is Unclear The Supreme Court’s decision in Dudenhoeffer is indeed a broad rebuke to the six appellate court decisions that established and have continued to recognize the Moench presumption. However, as discussed here, the precise impact of Dudenhoeffer on litigation relating to the acquisition and holding of company stock is yet to be determined. Indeed, while the Supreme Court’s repudiation of the Moench presumption may be welcome news to ERISA stock-drop plaintiffs. Source:

Seismic Shift for Employer Stock in ERISA Account Plans The Supreme Court’s rejection of a ‘presumption of prudence’ switches out the well-developed jurisprudence supporting the Moench presumption for defenses that will inevitably be tested and illuminated over time. Further, it will require plan sponsors and fiduciaries to redo their defensive paradigm for offering employer stock, which was constructed around this presumption. This article provides context for the decision and notes additional detail on the case, the key takeaways and practical next steps. Source:

New Case Tests the Retroactive Reach of Windsor Following a spate of district court cases in response to United States v. Windsor, some same-sex surviving spouses are asking retirement plan sponsors to review previously denied death benefit claims. Among them has emerged Passaro v. Bayer Corp. Pension Plan in which the key issue will be the retroactive application of Windsor to qualified retirement plans. Source:

Supreme Court Strikes Down Presumption of Prudence: What This Means for Retirement Plans With Employer Stock The Court emphasized that such claims will be very fact specific but left it up to the Sixth Circuit to determine whether the plaintiff’s complaint sufficiently pled a fiduciary breach. Based on these factors, it is pretty evident that while the employer-friendly presumption is no longer valid, plaintiff-participants may still have a hard time sufficiently alleging complaints. Source:

Compliance and Regulatory Related

New QLACs Establish Foundation for DC Annuitization The IRS took a substantial step in making these DC lifetime income efforts become a reality with its publication of the final regulations establishing the “Qualified Plan Longevity Annuity Contract,” or “QLAC.” In order to even publish this regulation, however, the IRS had to “clear the underbrush” and resolve a number of technical issues relating to the manner in which defined contribution plans could even provide lifetime income. Source:

IRS Opens Window for Pension Protection Act Restatements If you’re an employer who sponsors a 401k or profit sharing plan, it’s time to amend and restate your plan. Qualified retirement plans must operate in accordance with their plan documents. Ongoing legal and regulatory changes in retirement plan rules frequently require plan sponsors to amend and restate their plans to keep their documents compliant with the IRS. Source:

IRS Issues Final Regulations Simplifying Use of Annuities in Retirement Plans The Internal Revenue Service issued final regulations relating to the use of longevity annuity contracts in defined contribution plans. These regulations provide guidance necessary to comply with the required minimum distribution rules under Section 401(a)(9) of the Internal Revenue Code applicable to a plan that holds a longevity annuity contract. Source:

IRS Allows Longevity Annuities in Retirement Plans The IRS has published a final regulation that allows defined contribution plans to offer longevity annuities commencing as late as age 85. Although the final regulation is similar to the rule proposed in 2012, the IRS has made some welcome improvements in response to public comments. The final regulation is effective for annuities purchased after July 1, 2014. Source:

IRS Issues Final Regulations on Use of Qualified Longevity Annuity Contracts The Internal Revenue Service has issued final regulations which will allow participants in a qualified defined contribution plan to purchase and hold qualified longevity annuity contracts in their accounts. Here is an overview of the rules. Source:

GAO Recommends Changes to Form 5500 The Government Accountability Office is recommending that regulators consider modifying Form 5500 plan investment and service provider fee information. Stakeholders interviewed by the agency said the form’s information about service provider fees was misaligned with other required fee disclosures, and also cited various exceptions and gaps in current reporting requirements as major challenges. Source:

Targeted Revisions Could Improve Usefulness of Form 5500 Information In a two-phase online GAO survey, stakeholders identified problems with the usefulness, reliability, and comparability of data from the Form 5500. GAO recommends DOL, Treasury, and PBGC consider modifying Form 5500 plan investment and service provider fee information to address challenges, which are laid out in this report. Source:

Video: Negative Confirmations Sending “negative confirmations” to all participants receiving distributions during the year is an important part of a plan sponsors fiduciary processes. Watch this Sunscreen Moment to learn more. Source:

Delinquent Form 5500 Filers Must Also File With the IRS Due to the changes to the DOL’s electronic filing system, an electronic DFVCP filing does not include all of the information required by the IRS. Therefore, in order to benefit from the waiving any late filing penalties by the IRS, plan sponsors must now meet three requirements. Source:

IRS Rules on Tax Treatment of Insurance Payments From Qualified Plans The IRS issued final regulations that clarify the tax treatment of payments for accident or health insurance by qualified retirement plans. The final rules provide that amounts held in a qualified retirement plan used to pay accident or health insurance premiums are taxable distributions unless there is an exception. The final regulations include an additional exception, to already existing exceptions, under which payment of disability insurance premiums from a qualified plan are not taxable if certain requirements are satisfied. Source: (PDF File)

Why Canada Needs Just One Pension Regulator While the pensions of hundreds of millions of Americans can be protected by a single statute, ERISA, Canada apparently requires 11 statutes to achieve the same results. Pension regulation is one area where Canada could benefit by following the lead of its neighbors to the south. Source:

IRS on the Use of Longevity Annuities in DC Plans Inasmuch as an annuity contract held under a DC plan is treated as an IRA, the value of the annuity contract is included in the participant’s account balance and subject to the RMD rules. Acknowledging a need for deferred annuities commencing at an advanced age, the final regulations modify the RMD rules to provide that the value of a QLAC prior to annuitization is excluded from the participant’s account balance for purposes of determining the participant’s RMD, provided that certain requirements are met. Source:

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