Experts in Personalized Retirement Plan Design & Administration Newsletter 03.12.14

Roth 401k Plans  This article provides an overview of Roth 401k plans, also known as designated Roth plans. It discusses the benefits of providing employees with a Roth option, the after-tax treatment of designated Roth contributions and Internal Revenue Code (IRC) requirements governing Roth 401k plans. This article also explains the optional in-plan rollover of distributions from traditional 401k accounts to Roth 401k accounts. Source: (PDF File)

Your 401k Plan and the Shape of the Earth  Last year, a Yale law professor publicized a study of 401k plan fees that suffered from a “world is flat” flaw; he used data from 2009 and seemed uninformed about the impact of subsequent developments have resulted in reductions in fees. However, much of the benefits community know that the increased attention on plan sponsor responsibilities that resulted from the “world is flat” Yale-study was a good thing. Source:

In-Plan Roth Rollovers: Do They Make Sense for Your 401k Plan?  This resource discusses whether plan sponsors of 401k plans should consider adding an in-plan Roth rollover to their plan. The in-plan Roth rollover permits participants to rollover their eligible non-Roth accounts to a Roth option within the same plan so that participants do not have to remove funds from their employer’s plan to participate in a Roth account. Source:

Learning From AOL’s 401k Missteps  When AOL CEO Tim Armstrong announced that the company would switch from matching employee 401k contributions each pay period to providing a lump-sum match at the end of each year, the way he framed the announcement could not have been worse. So what can other employers learn from AOL’s experience? Plenty. Source:

Retiring Within the Next 10 Years? 10 Things to Do Now  For all those out there looking to retire in the near future, here are some of the most important action steps you can take now to prepare for retirement. Source:

Savings, Not Investment Selection, Is the Key to Successful Retirement Plan Outcomes  Author writes, “While it sounds like a nice idea, advisers who can select retirement plan investments at their discretion cannot single-handedly solve the problem. In my opinion, this crisis has nothing to do with investment selection. It can only be addressed by 1) workers saving more money, 2) more effective participant communication, and 3) perhaps by plan design.” Source:

Time to Consider a Collective Trust?  CITs are investment vehicles in which assets from multiple plans can be commingled into one trust. Each CIT is managed professionally on behalf of those plans and not open to the public. For that reason, they’re only available as an investment option within employer-sponsored plans that have negotiated an agreement with the CIT provider. One retirement plan service provider says collective investment trusts can be a powerful answer to demand for customized target-date vehicles and less expensive investment strategies. Source:

Impact of Merger or Acquisition on Company Retirement Plans  Mergers and acquisitions of companies are usually driven by economic or strategic reasons. The benefits plans are an afterthought, but can wreak financial havoc if not planned for carefully before the transaction is complete. Source:

Fiduciary and Plan Governance Material

“Toxic” TPAs a 401k Plan Sponsor Should Avoid Hiring  While most of the news about 401k plan fiduciaries and their responsibilities is about plan expenses, plan investments, and participant education, there is very little topic about the one issue that is important that most plan sponsors don’t consider. That consideration is the selection of the plan’s third party administrator (TPA) because the difference between a good and bad TPA can make or break a plan sponsor’s required resolve to uphold their responsibility as a plan fiduciary. Source:

Hit, Miss or Backfire? Controversial Ayres/Curtis 401k Fee Paper Claims Broad-Based Fiduciary Breach  Last year, Ian Ayres, William K. Townsend Professor at the Yale Law School and University of Virginia School of Law associate professor Quinn Curtis teamed up and threatened to disclose 401k plan sponsors who breached their fiduciary duty. They promised to reveal a study to back up their contention. The industry struck back and Ayres and Curtis suddenly faded from the scene. But, they’re back. Source:

Concerning a Third-Party ERISA Section 3(38) Investment Manager  The receipt by the third-party 3(38) of compensation from the recordkeeper for rendering non-3(38) services to the recordkeeper calls into question the very independence of the third-party 3(38) and raises doubts about whether the 3(38) is free from constraining outside influences. Source:

Conducting an Effective Advisor RFP Process  Retirement plan advisors can help plan sponsors select and review retirement plan investment options, stay up to date with evolving regulations, and assist with fiduciary processes. They can also help provide clarity about provider service fees and expenses and deliver participant education or advice. These are all important roles, but how do you find the right advisor? How can you validate that your current advisor is providing state-of-the-art services at a competitive price? Source: (PDF File)

Insight: Studies, Research and White Papers

Defined Contribution Assets Skyrocket to Record $5.06 Trillion  Defined contribution record-keeping assets surged to a record $5.06 trillion for the 12 months ended Sept. 30, as tracked by Pensions & Investments’ annual survey of the largest recordkeepers. The latest results represent a 13.7% increase from the year-earlier $4.45 trillion. Source:

An Outcomes-Based Approach to DC Plan Design  The fundamental objective of a DC plan is to accumulate assets that will ultimately be withdrawn as a source of retirement income. Yet, the majority (96%) of plan sponsors do not know how much income their DC plan may be designed to yield. Moving forward, DC plans should be designed to target a percentage of an average earner’s final net pay as an income replacement goal. Plan design is critical to helping participants with the key levers that contribute to better long-term outcomes such as participation, savings rates, and age-appropriate asset allocation. Source: (PDF File)

Plan Sponsors Enhance Matching Contributions and Formulas  New analysis of historical survey results reveals that plan sponsors have enhanced key features of their retirement benefits over the last several years. Plan design features that saw aggregate improvements include employer matching contributions, formulas, schedules and vesting. Source:

Data Shows Gen X and Gen Y Serious About Saving for Retirement  Fourth quarter 2013 data for defined contribution (DC) plans administered by MassMutual shows that Gen X and Gen Y savers (born between 1965 and 1995) are serious about saving for retirement. According to MassMutual’s data, 58.4% of total DC participants are in the Gen X and Gen Y cohort, and are continuing to gain on numbers of Baby Boomers who now account for just 38.5% of participants on MassMutual’s platform. Source:

Ten States With the Greatest Percentage of Top 401k Plans  Judy Diamond Associates released an analysis of the best states in which to have a 401k plan. Those states with the highest concentration of top plans have higher participation rates and more employer generosity than their peers. Source:

Helping Participants Make Better Decisions  Behavioral finance studies have shed new light on how investors make decisions. Study results from 2013 have illustrated the concept of regret as it relates to decision making. Investors experience “action regret” when making a poor investment decision. In contrast, they experience “inaction regret” when choosing to do nothing when given an opportunity to make an investment that proves to be successful. Source:

Trends in Marriage, Work, and Pensions May Increase Vulnerability for Some Retirees  The decline in marriage, rise in women’s labor force participation, and transition away from defined benefit plans to defined contribution plans have resulted in changes in the types of retirement benefits households receive and increased vulnerabilities for some. Source:

How Many Will (Not) Run Short in Retirement?  It is a question in which policymakers, lawmakers, employers and individuals all have a stake: How many will have sufficient financial resources for retirement expenses? The answer depends on a number of variables, but according to an updated analysis of the EBRI Retirement Readiness Ratings, approximately 56.7 percent of Early Baby Boomers, 58.5 percent of Late Boomers, and just under 58 percent of Gen Xers are projected to not run short of money in retirement. Source: (PDF File)

Pilot Retirement Plan Survey Reveals Investing Behavior  A recent survey shows that pilots are focused on saving, engaged in planning to reach their retirement goals and looking to take full advantage of all their retirement plans have to offer. Like other well compensated, more sophisticated professionals, many pilots are good at putting money aside for retirement, allocating their assets and rebalancing their portfolios. Source:

Actionable Information Motivates Higher Retirement Savings  Four years after the launch of its Lifetime Income Analysis experience, participants in Putnam Investments-administered 401k plans continue to take significant steps forward in increasing their level of retirement preparedness. Source:

Items of Special Interest to Advisors

The Next Level of Retirement Plan Service: Fee Policy Statements for 401ks  The next level of retirement plan service and risk management is here: establishing fee policy statements for 401k plans. Forward-thinking advisers are looking at the fee policy statement — a document that spells out how fees ought to be allocated among all the players within a 401k plan — and helping their plan sponsor clients get the most out of it. Source: (free registration may be required)

Prepare Early for Regulatory Exams  Why bother getting ready for an exam? There are two reasons. First, despite the low odds, exams do happen. Second, if an adviser understands the modus operandi of examiners and prepares accordingly, the process will force the adviser to think deeply about how well the firm’s business model is defined and identify opportunities for the firm to improve its business. Source: (free registration may be required)

Innovations in 401k Plan Design  401k plan providers continue to innovate their offerings with more automated and customized features to accommodate the reluctant investor. Employers and advisers looking for a competitive edge should take note. Source:

Capturing Rollovers: A Changing Environment  Recent developments suggest that FINRA, the SEC and the DOL are working together — or, perhaps, have independently reached the same conclusions. These changes impact broker-dealers, RIAs and their representatives. Less obviously, they also impact the rollover services of recordkeepers. Bottom line — the rules are changing. Much more attention must be given to practices and disclosures in the distribution and rollover process. Source:

The Key Factor in Liability Risk Management  Investment advisers and other financial advisers who create asset allocation recommendations based solely upon the belief that a client’s time horizon is the most important investment factor should go ahead and call their E&O carriers and put them on notice. The argument commonly advance in favor of time horizon being the most important factor in asset allocation claim that time reduces risk. Various studies have shown that that simply is not true. Source: Prudent Investment Adviser

Court, Legal, Legislative and Washington DC

State’s Scrutiny of 401k Matches Misfires  The Massachusetts Securities Division targeted many of the wrong firms in questioning 401k recordkeepers about employers moving to an annual match instead of contributing each pay period. Source:

Senator Harkin’s USA Retirement Funds Proposal  On January 30, 2014 Senator Harkin (D-IA) introduced the USA Retirement Funds Act. The bill includes Senator Harkin’s USA Retirement Funds proposal and a variety of other proposals. This article focuses on two of the major parts of the Act: the USA Retirement Funds proposal itself and provisions on hybrid plans. It also summarize briefly other provisions of the Act. Source:

Fiduciary Breach Claims Barred by ERISA’s Six-Year Statute of Limitations  The Eleventh Circuit recently dismissed a participant’s fiduciary breach claims against SunTrust’s 401k plan fiduciary committee members on the ground that the claims for imprudently selecting certain investment options was time barred by ERISA’s six-year statute of limitations. Source:

Obama Budget Includes MyRAs, Auto IRAs, and Would Limit Retirement Savings Tax Breaks  President Barack Obama’s proposed $3.9 trillion fiscal year 2015 budget includes requirements that employers offer individual retirement accounts and provisions that would reduce tax benefits on certain retirement accounts for high-income earners. The tax provisions, part of the budget plan released March 4, would cap how much Americans could accumulate in tax-preferred retirement savings, putting a ceiling of about $200,000 on the annual retirement income that could be generated by such savings. Source:

Compliance and Regulatory Related

The Plan Sponsor’s Role in Form 5500 Reporting: You’re Not Just a Bystander  As with most aspects of running a plan, the ultimate responsibility and liability for filing annual 5500 returns is with the plan sponsor. You may have the most trusted and competent professionals working on your plan. But the old mantra from many years ago of “trust but verify” seems apt here. Source:

Elapsed-Time Eligibility  The elapsed-time method of determining eligibility is an alternative to the hours of service method. The elapsed-time method provides an administrative convenience that may be used by employers with workers in jobs where counting hours is not always easy or possible. How does the elapsed-time eligibility method work? Source:

Plan Termination Missing Participant Cash Out Rules  When terminating a defined contribution plan, may the plan cash out a participant who has a vested balance of over $5,000 who cannot be located? Source:

What the EBSA Will Ask for in a 401k Plan Audit: Documentation You Need  When clients get an audit request letter from the EBSA, they are usually surprised at the amount of information being requested. Sometimes, the requested documentation may not be available, which creates its own set of issues. For planning purposes, this article provides a list of required information you may be asked to produce. Source:

Consequences of the 401k Compliance Push  According to the Department of Labor, 401k plan sponsors aren’t complying with ERISA standards adequately. Of the plans audited by the DOL last year, 75 percent resulted in sponsors being fined, penalized or forced to make reimbursements for errors. But the question remains: will smaller businesses with limited resources find the prospect of compliance so onerous that they stray from plan sponsorship altogether? A culture of “compliance fear” could have far-reaching consequences. Source:

Comments on Additional Alternatives for Satisfying Nondiscrimination Testing on a Benefits Basis for a DB/DC Plan  On February 28, 2014, ASPPA and ACOPA submitted comments to IRS/Treasury in response to a request in Notice 2014-5 regarding possible alternatives to the current rules for DB/DC plans tested on the basis of equivalent benefits. Source: (PDF File)

Is It Dangerous to Combine Your Retirement Plan’s SPD and Prospectus?  If you are a public company and your qualified retirement plan offers company stock as an investment option or makes company matching in company stock, you may not want your plan’s summary plan description and prospectus to be combined into one document. Recent cases indicate that incorporating filings made with the Securities Exchange Commission into your plan’s SPD could raise the risk that you could face a breach of fiduciary duty claim under ERISA if SEC filings are later found to be misleading or inaccurate. Source:

404(c) in the Modern World  Section 404(c) follows the Section 404(a) “prudent man standard of care” requirements and offers a type of “safe harbor” for plan sponsors who allow participants to direct the investments of their accounts. However, plan sponsors must meet requirements for investment selection, plan administration, and plan and investment disclosures before they are exempt from any fiduciary liability for losses participants incur as a result of their direction of investments. Current regulations and the current plan administration landscape make it more likely plan sponsors are complying with Section 404(c). Source:

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