Month: October 2019

Hiring the right advisor for your company’s 401(k) retirement plan is one of the most critical decisions you will ever make as a Plan Sponsor.

 

Contrary to popular view, the main purpose for hiring a retirement Plan Advisor is not to pick stocks and funds or chase the highest rate of returns. It is the knowledge of process by which investments are selected and fiduciary standards are put into practice that makes good 401(k) advisors indispensable.

 

You will be choosing your closest and most trusted ally to protect the best interests of your plan’s participants, and therefore, to manage your monumental fiduciary liability as a Plan Sponsor.

 

Minimize your risk

 

The right Plan Advisor candidate has the comprehensive background and team to minimize the risk of huge losses, including individual out-of-pocket penalties, arising from:

• Lawsuits.
• Accusations of mishandling.
• ERISA and Department of Labor audits and investigations.
• Penalties for noncompliance.

 

The top five reasons Plan Sponsors hire 401(k) Advisors

 

At the end of the day, what you want to assess is how well your advisor will help you:

• Offload or limit your fiduciary liabilities.
• Understand your fiduciary responsibilities.
• Help your plan participants understand their options, benefits and how to make changes.
• Help your plan stay updated and comply with government regulations
• Help you structure a solid plan and adhere to it, as mandated by law.

 

Highest fiduciary comfort zone – ERISA 3(38)

 

Your 401(k) Plan Advisor can be a broker or a registered investment adviser, but brokers are not on the hook to be a fiduciary to you unless their boss (the broker-dealer) allows them to accept that liability. The safest comfort zone for a Plan Sponsor is to bring in a registered investment manager qualified under ERISA regulations 3(38). Because 3(38) investment managers assume discretion and control of plan investments, they will assume nearly all fiduciary liability in this regard.

 

Get it in writing

 

In either case, you will want your potential advisors to spell out exactly their fiduciary levels, whether they will assume a 3(38) role, a co-fiduciary role, a fiduciary role under 3(21), either full-scope or limited-scope, or any combination, under an ERISA benefits plan.

 

Interview questions for potential 401(k) Retirement Advisors

 

Here is a checklist of some interview questions you might want to ask:

• How often do you hold regular meetings with Plan Sponsors?
• How would you help develop or review our Investment Policy Statement (IPS)?
• How often would you check that our investment options line up with our IPS?
• How will you provide investment education for plan participants?
• How would you help us meet new 408(b)(2) fee disclosure rules?
• How often do you review fees of the Plan’s fund managers?
• What process do you have for disclosing management fees to participants?
• What is your process for ensuring investment fees are “reasonable” as mandated?
• Who are your other service providers that would work with us?
• What would be the exact level of the provider fiduciary responsibilities/liabilities?
• What are your policies for handling rollovers brought by previous plan participants?
• What expertise do you or your providers have on ERISA and plan administration?
• There are so many fund share classes, how do you evaluate them for different plans?
• Would you bring in a Third Party Administrator (TPA)?
• Would the TPA provide mostly basic administrative services, or do they possess

more specific expertise, such as analyzing plan designs to save taxes for highly

compensated employees?

• Would the fees for the TPA’s services be fair and reasonable per mandates?

 

Evaluate your Advisor’s resources

 

The field of investments is full of licenses and certifications. Some advisors are simply insurance licensed, and some have passed the “Series 6” exam that is administered by FINRA (Financial Industry Regulatory Authority), which allows the individual to register as a limited representative, and sell mutual funds and variable annuities. Still others have passed FINRA’s “Series 7” exam for general securities, stocks and bonds. More experience financial advisors may obtain the CFP or Certified Financial Planner designation, the AIF, or Accredited Investment Fiduciary designation, or the QPFC, or Qualified Plan Financial Consultant designation. It is a rare and valuable asset to have financial expertise and knowledge of ERISA in the same advisor. That said, a good advisor does not have to be an expert in all things ERISA, as long as they are professionally respected by their peers and consulting long enough to have built relationships with or employ providers who are qualified experts.

 

It is invaluable when a conversation arises about how to handle your unique, more complex situations and your advisor can quickly and confidentially call on a trusted ERISA attorney, TPA or Auditor to weigh in for informed decision making.

 

Summary: Hiring the right 401(k) Plan Advisor helps plan sponsors sleep at night

 

Picking stocks is a valuable skill, but not the most crucial area for Plan Sponsors to evaluate a candidate for Advisor. There are many good tools and guides for prudent investing, and most employees today opt to choose their own investment mix within your plan’s options. It is the protection of all involved from potentially catastrophic fiduciary liability that should be the guiding light for finding the best 401(k) advisor for your company’s retirement plan.

 

For more information on how the right advisor will benefit you as a fiduciary and your responsibilities as a fiduciary of a retirement plan, read our recent articles, Are you a Fiduciary, (https://ejreynoldsinc.com/are-you-a-fiduciary/) Fiduciary Responsibilities for Benefit Plans Under ERISA (https://ejreynoldsinc.com/?s=Fiduciary+Responsibilities+for+Benefit+Plans+under+ERISA), and Types of ERISA Fiduciaries (https://ejreynoldsinc.com/types-of-erisa-fiduciaries/).

Missing participants in retirement plans can be a burden for plan sponsors. If actions are not taken to locate the participants and payout the benefits, potential (unintended) consequences can include:

• Increased plan administration costs
• Plan compliance issues, e.g. failure to follow the terms of the plan for mandatory distributions, required minimum distributions, death benefits, etc.
• Potential for small plan filers (generally, plans with less than 100 participants) to become large plan filers (generally, plans with 100 or more participants), subject to a costly annual plan audit requirement
• Complications with winding down a plan upon plan termination
• Potential fiduciary risks

What steps should plan sponsors follow to locate missing participants?

DOL guidance outlines the steps plan sponsors should take to locate missing participants. The guidance is specifically for terminating defined contribution plans; however, it would be reasonable to apply this guidance for active plans as well.

1. Certified Mail. Send notification to the participant or beneficiary via certified mail to the last known address.
2. Other Employer Records. Review other employer records, such as group health plans, for current contact information.
3. Participant’s Plan Beneficiary. Contact the participant’s beneficiary to request updated contact information (if there are privacy concerns, the DOL suggests the plan sponsor ask the beneficiary to forward a letter to the participant).
4. Free Electronic Search Tools. Use free electronic search tools to attempt to locate the participant such as those for public records (e.g. licenses, mortgages, real estate taxes), obituaries, and social media platforms (e.g. Facebook, Twitter, etc.).

If the plan sponsor follows the steps outlined above but is still unsuccessful in locating the missing participant, the plan sponsor must consider whether additional steps are necessary after considering the cost of the search option (if being paid from the participant’s account) as well as the size of the participant’s account balance. The DOL states further search efforts may include commercial locater services, credit reporting agencies, information brokers, investigation databases and similar services that involve a fee.

IMPORTANT: The DOL notes failure to take such steps would be a violation of the plan sponsor’s obligation of prudence and loyalty to plan participants and beneficiaries. Strictly speaking, the plan sponsor must follow these steps to locate missing participants – it is mandatory

What if the participant cannot be found after using all available search options?

For active plans, it may be possible to rollover the missing participant’s balance to an IRA if (1) provided for under the terms of the plan, (2) the participant’s balance is less than $5,000, and (3) the plan sponsor has sufficient information regarding the participant to be able to facilitate the rollover. If the participant’s balance is $5,000 or more, this generally is not an option.

Alternatively, if provided for under the terms of the plan document, it is permissible to forfeit a missing participant’s (or beneficiary’s) balance provided the balance will be restored in the event the participant (or beneficiary) is later located.

Both options discussed above are optional provisions, so it is important to review the terms of the plan document. If the plan doesn’t include either (or both) provisions, it generally would be permissible to amend the plan to include such features.

Note: Different rules apply to terminating plans since all plan assets must be distributed within a reasonable period following plan termination. For example, one of the available options is to roll the balance of a missing (or unresponsive) participant to an IRA, even if their balance exceeds $5,000.

Can’t we just withhold 100% in taxes and submit to the IRS?

No. The DOL specifically points out that, although this is a practice used by some plan sponsors, this is not acceptable because there is no guarantee the participant will receive their benefits.

To learn more about how to deal with missing participants in your retirement plan, let the experts at EJReynolds help you understand all of the options available to you or your company. For more information, please contact us today.

In general, the fees associated with on-going administration of a retirement plan may be paid from plan assets provided they are necessary and reasonable. Certain expenses known as “settlor” expenses, however, cannot be paid for from plan assets.

What is considered to be reasonable?

The Department of Labor (DOL) requires (1) the expense is reasonable in light of the services provided; (2) the service is necessary; (3) the arrangement can be terminated without penalty (this doesn’t mean there can be a termination fee, though); and (4) the service provider has provided certain required disclosures regarding their fees and services prior to entering into the arrangement.

What are “settlor” expenses?

These are expenses that must be paid for by the employer because they are associated with the employer’s functions as a settlor of the plan trust.

Is there a simple way to determine whether a particular expense is a settlor expense?

Not really. Unfortunately, the DOL has not issued comprehensive guidance on this front, but they have issued some guidance. That said, there are two basic questions that should be considered:

1. Is the expense necessary for the on-going administration of the plan?
2. Is the expense discretionary and who does it primarily benefit?

In other words, if the expense is reasonable and relates to the normal operation of the plan, the expense may be paid for by the plan. If, on the other hand, the expense is discretionary and primarily benefits the employer, it would generally be considered a settlor expense.

What are examples of expenses that can be paid for by a plan?

• Annual administration, recordkeeping, compliance testing, and Form 5500 preparation
• Annual plan audit fees (large plan filers)
• Investment management, advisory, trustee and custodial fees
• Participant education, enrollment materials and required notices and disclosures
• Required plan amendments and restatements
• Fidelity bond
• IRS determination letter filing fee
• Participant distribution and loan fees
• QDRO review

What are examples of expenses that cannot be paid for by a plan?

• Plan design studies and projections (these primarily benefit the employer and are viewed as a settlor expense by the DOL)
• Initial plan document, discretionary amendments and discretionary restatements (the DOL appears to view these as settlor expenses, even though the plan document is required as a matter of plan qualification)
• Fees associated with the decision by an employer to terminate a plan
• Fees and expenses related to plan corrections made under available IRS and DOL programs
• Fees and expenses related to filing a late Form 5500 under the delinquent filer program

Are the rules different if the fee will be paid from the forfeiture account?

No. Amounts held in a plan forfeiture account are plan assets; the same rules apply.

Note: Some plans use “ERISA budget accounts” or “revenue holding accounts” to accept revenue sharing payments from plan investment providers and pay plan expenses. It is our view that these accounts generally should be treated in the same manner as any other plan asset.

How can eligible expenses be charged to plan participants?

Plan-level expenses may be charged (1) in proportion to participant account balances, (2) as a flat fee to participant accounts, or (3) some combination of both methods. In addition, certain plan fees may be paid for by the plan through the plan’s investment vehicles and are reflected as a reduction in investment returns.

Participant-level fees (e.g. distribution and loan fees) are typically charged directly to participant accounts.

Does the plan document need to provide that expenses can be paid for from the plan?

Generally, yes, and most plans do allow for eligible expenses to be paid for from plan assets. The plan should also state that fees may be paid for from the forfeiture account, if desired.

Does it make sense to charge eligible expenses to a plan?

It really depends on the plan and the goals and objectives of the plan sponsor. If the plan pays (whether directly or indirectly through plan investments), overall investment performance is reduced, and this can make a big difference over time. For plans of closely-held businesses, it often makes more sense for the employer to pay the expenses (they are deductible). It is much more common in large plans for the plan participants to bear most (if not all) of the related costs.

If eligible expenses are paid for by the plan, are there any required disclosures?

Yes. There are disclosure rules that apply for both plan service providers and plan participants (in participant-directed plans).

Note: Whether a particular fee or expense may be paid for by a plan is a fiduciary decision. Plan fiduciaries are charged to act prudently and in the best interest of plan participants. If a fee is charged improperly, the fiduciary(s) may be held liable so plan sponsors should exercise due care when determining whether it is appropriate for a plan to pay for a given expense.

 

For many years the IRS did not permit mid-year changes to Safe Harbor 401(k) plans except under very limited circumstances. In 2016, the IRS issued Notice 2016-16 relaxing the rules providing sponsors of Safe Harbor 401(k) plans with much greater flexibility throughout the year. The guidance does contain a short list of changes that are specifically prohibited, but many changes are permissible provided certain conditions are satisfied.

Which changes are permissible?

In general, most changes that would be permissible mid-year in a traditional 401(k) plan can be made in a Safe Harbor plan as long as the necessary requirements are met.

What are the requirements for amending a Safe Harbor plan mid-year?

If a permissible amendment results in a change to the information provided in the Safe Harbor notice, an updated notice must be provided within a reasonable period prior to the effective date of the change. For this purpose, the IRS considers the timing requirement to be satisfied if the updated notice is provided at least 30 (but no more than 90) days prior to the change.

In situations where it is not practical to provide the notice prior to effective date of the change (e.g. the plan is being amended retroactively as the first day of the plan year to provide for an additional match), the updated Safe Harbor notice must be provided as soon as possible but no later than 30 days after the date the amendment is adopted.

In either case, participants must also be provided the opportunity to change their deferral elections for a reasonable period of time following receipt of the updated Safe Harbor notice.

What if the change does not impact the information provided in the Safe Harbor notice?

If the change does not impact the information required to be provided in the Safe Harbor notice, there is no requirement to provide an updated notice or to provide participants with an opportunity to make changes to their deferral elections.

Keep in mind, however, the plan would generally be required to provide participants with either a Summary of Material Modifications or an updated Summary Plan Description.

Which changes are specifically prohibited mid-year?

• Any change that would reduce the number of participants who are currently eligible to receive Safe Harbor contributions
• Changing the type of Safe Harbor plan (e.g. changing from a traditional Safe Harbor plan to a qualified automatic contribution arrangement)
• Increasing the number of years required to become vested in Safe Harbor contributions under a qualified automatic contribution arrangement
• A mid-year change to add or modify the formula used to calculate matching contributions (or related plan compensation) or a mid-year change to permit discretionary matching contributions, unless certain additional conditions are satisfied

 

What are the conditions for making changes to matching contributions?

In order to increase Safe Harbor matching contributions (or to add or modify a fixed or discretionary matching contribution), the amendment must be adopted at least 3 months prior to the plan year, must be retroactive as of the first day of the plan year, and, the necessary notice and deferral opportunity requirements must be met.

Can a plan change from a Safe Harbor match to a 3% Safe Harbor nonelective contribution mid-year?

No. This is not permissible under the notice or regulations. This type of change could only be made as of the first day of the following plan year.

Did the IRS provide any example of permissible amendments?

Yes. IRS Notice 2016-16 provides several examples of permissible amendments including the following:

• An amendment to increase the Safe Harbor nonelective contribution from 3% to 4% for future contributions
• An amendment made prior to 3 months before the end of the plan year to increase the Safe Harbor matching contribution from 4% to 5% and to change the period for calculating match from a payroll period to plan year basis retroactively
• An amendment to add an age 59 ½ in-service distribution feature

Can a plan be amended to reduce or suspend Safe Harbor contributions mid-year?

It depends. This is addressed under the Safe Harbor regulations. A Safe Harbor plan may only be amended mid-year to reduce or suspend Safe Harbor contributions if (1) the employer is operating at an “economic loss”, or (2) the annual Safe Harbor notice included a statement indicating that the plan could be amended to remove or suspend Safe Harbor contributions during the plan year. Additional procedural requirements must also be satisfied, and the plan essentially reverts to a traditional 401(k) plan for the plan year.

Can a Safe Harbor plan be terminated mid-year?

Yes. This is also addressed under the regulations. In general, Safe Harbor contributions must be made through the date the plan is terminated, and other conditions must be satisfied. Unless the plan termination is due to a “substantial business hardship”, or as a result of a company merger or acquisition transaction, the plan would lose its Safe Harbor status for the final plan year (i.e. the plan would be subject to ADP/ACP testing, top heavy requirements, etc.)

What changes can only be made as of the beginning of a plan year?

While many changes can be made mid-year, certain changes can only be made as of the first day of the following plan year, and the amendment must be adopted prior to the first day of the plan year. Examples of such amendments include:

• Adding a Safe Harbor provision to an existing traditional 401(k) plan
• Changing the plan’s Safe Harbor formula from a Safe Harbor nonelective contribution to a Safe Harbor match

How can I learn more?

Please call EJReynolds at 954.431.1774 or visit ejreynoldsinc.com