Category

Retirement Plan – Sponsors

How and When to Pay Plan Expenses with Plan Assets

Tom Bastin, JD, LLM, AIF, CEBS, Managing Director, Southeast Region

Some retirement plan expenses can be paid for with plan assets — but many can’t. Which are the “reasonable and necessary” retirement plan expenses that can be paid out of plan assets?

Generally, services required to maintain the plan’s compliance and administration can be paid from plan assets. Obvious examples include the annual nondiscrimination testing and preparation of the annual Form 5500. Another example is a plan amendment or restatement that is required because of a legislative change.

Optional services generally cannot be paid out of plan assets. One clear example is costs for projections that are optional and benefit the company, not the plan participants.

Some service fees may not be easy to classify. Fees for resolving plan corrections — such as delinquent deferral remittances or contributions determined with a definition of compensation not supported in your plan document. In the event of an incorrect test result, regardless of who was at fault, the law ultimately holds the plan sponsor responsible for the proper maintenance of the plan. As a result, the plan sponsor cannot shift the financial burden for the corrections to the plan.

All in all, it’s perfectly acceptable and common to charge reasonable and necessary transaction-based and recordkeeper administrative fees to participants. However, it is critical to ensure that similarly situated participants are treated the same. It would be discriminatory and, therefore not allowed, for non-highly compensated employees to pay administrative fees while highly compensated employees did not.

If you are unsure whether a specific fee can be paid from plan assets, please contact your advisor. We’ll happily talk through the particulars of your situation to help you arrive at an appropriate decision.

About the Author, Tom Bastin 
Tom uses his expertise in plan design, administration, recordkeeping, compliance, investment analysis, fee analysis, vendor benchmarking, fiduciary governance and participant education to help plan sponsors and participants reach their retirement goals. PlanAdvisor ranked Tom one of the “Top 100 Retirement Plan Advisers” in 2013 and 2015. Financial Times ranked him one of the “Top 401 Retirement Advisers” in 2015. Tom earned a Bachelor of Arts at Purdue University, a Juris Doctor at Nova University and an LL.M. in Taxation Law from the University of Miami.

Exchange Your Old Retirement Solutions for New Ones

What is an Exchange?

An exchange is a turnkey solution for businesses that allows you to provide the benefit of a retirement plan while offloading much of the administrative and fiduciary responsibilities at a potential cost reduction. A team of professionals work together on your behalf, so you can focus on running your business, not your retirement plan.

Retirement Readiness

An exchange is a great way to help your employees reach retirement readiness by providing them with a savings vehicle like a 401(k) plan, but with less administrative burden and by transferring certain risks.

Fiduciary Risk Mitigation

The fiduciary has a legal obligation to carry out its plan responsibilities with prudence, good faith, honesty, integrity, service and undivided loyalty to beneficiary interests – in this case, retirement plan participants. When joining an exchange, a fair amount of fiduciary responsibility is taken off your hands.

Administrative Relief

Employers oftentimes don’t have the resources to effectively manage the complex requirement of administering a qualified retirement plan. With an exchange all plan administrative duties can be outsourced – a benefit typically only available to very large companies.

Cost Effectiveness

There’s strength in numbers. By teaming up with other businesses in an exchange, you can benefit from economies of scale and seamless processing that help reduce the costs associated with operating and maintaining a retirement plan.

For more information on exchanges, please contact your plan adviser.

About the Author, Jonathan Coombs
Jonathan provides guidance to plan sponsors across the country on retirement best practices regarding fee benchmarking, investment analysis, plan design, fiduciary compliance and participant outcomes. As an asset allocation specialist, Jonathan project manages key business development initiatives in the custom solution arena. He also serves as a fixed income analyst. Jonathan attended The Julliard School, where he obtained a Bachelor of Science in music and a Master of Music.

Are You Prepared for an IRS Audit?

The Internal Revenue Service’s (IRS’s) Employee Benefit Audit Program is used to audit and enforce. The IRS’s emphasis, with respect to defined contribution plans is on compliance with the requirements of the Internal Revenue Code (the Code), the plan’s tax qualification and administration of all plan documents. In the event of noncompliance with regulations, the IRS can impose taxes, penalties and interest.

Most IRS audits are selected at random, but certain audit triggers exist that plan sponsors should be aware of. If the IRS suspects noncompliance, the chances of an audit will increase substantially. Answers to certain questions on the Form 5500 may also trigger an audit.

The IRS audit process is initiated with an Information Request Letter to the plan sponsor. The Information Request Letter identifies the date the auditor plans to visit, the documents they plan to review and possibly will list individuals they intend to speak with who handle plan administration. The letter requests specific information to have available for the auditor to review. If you receive one and have questions regarding items requested, or require additional time to collect the requested data, it is best to be proactive and explain your concerns and circumstances.

It is essential to be prepared for an audit by having all requested documents readily available and being familiar with these documents. Preparation should begin upon receipt of the audit letter. Being prepared, informed and helpful to the auditor should reflect positively on the audit experience. Be sure to be available during the audit in the event you are asked to respond to follow-up questions or produce additional documents.

The auditor may want to speak with other plan fiduciaries, your ERISA attorney, plan advisor, administrator, investment advisor and trustee. If you anticipate more potentially concerning issues may be discussed, you may want to consider having your legal counsel assist during the audit process.

While it is important to be prepared, understand that auditors are looking for specific information, so provide only information that is requested. It is not a good idea to lead an auditor to your plan files and let them search. Allowing access to more information than is requested can often be counterproductive. Be patient with the audit process and project confidence.

The IRS will focus on compliance with the plan document, regulations and tax-related issues. Compliance with all plan documents in terms of operation and administration are the most frequent cause of compliance deficiencies. Also, compliance with newer regulations is likely to be reviewed.

The most common issues the IRS finds in its audits of retirement plans are:

  • Plan document is not up to date
  • Untimely participant deferral deposits
  • Plan operation doesn’t follow the plan document
  • Plan definition of compensation not followed
  • Matching contributions not made to all eligible employees
  • Plan definition of eligibility to participate or for employer match not followed
  • Improper administration of participant loans (including defaults), hardships, QDROs, etc.
  • Delinquent filing of Form 5500
  • ADP/ACP test errors
  • Deferral limits exceeded
  • Top-heavy requirements ignored

Once the audit is complete, the auditor will follow up with a phone call to verbally convey the audit findings; the phone call is followed by a written audit findings letter. The letter may show no further actions are necessary and that the audit file is closed. If errors are found, then certain corrective actions may be necessary through the IRS’s Audit Closing Agreement Program, the main intent of which is to make the plan and its participants whole. This may include a corrective contribution plus interest to plan participant accounts, excise taxes required, and potentially other fees and penalties payable to the IRS. If you disagree with the audit conclusions in some way, there is an appeals program that enables another review of the audit findings and your position.

Plan administration is complex and plan documents are not always simple to interpret, as a result it is not uncommon for plan sponsors to have correction issues at some point. Many errors that occur and corrections that need to be made arise out of a triggering event, such as payroll staff turnover, system changes, one-off processing events, annual limits or business reorganizations. If you’ve had or have this type of event, you may want to conduct a self-audit to ensure your plan’s operation continues to be consistent with plan documents and all laws. Performing regular self-audits will give you greater protection against compliance breaches. If you identify a problem during the self-audit of plan operations, you can voluntarily correct these problems.

Depending upon the nature and extent of the issue, you may be able to self-correct your plan, document the corrections for the file and move forward without a formal filing with the IRS or the DOL. More significant issues, such as failing to amend the plan timely or not depositing employee deferrals timely, generally require filing for and obtaining approval of the self-correction methodology.

About the Author, Michael Viljak, Manager of Advisor Development, Retirement Plan Advising Group

Michael has over 30 years of experience in the pension field, on both the wholesale and retail levels, focusing on 401(k) plans ever since their inception in 1981. Michael was part of the team that created RPAG’s proprietary Fiduciary Fitness Program™.  He authors many of RPAG’s newsletter articles, communication pieces and training modules. Prior to RPAG, Michael worked for Great-West Retirement Services for more than 25 years in various sales and management positions.

Know Your Retirement Plan Beneficiaries

According to a recent Wall Street Journal article, retirement plans and IRAs account for about 60 percent of the assets of U.S. households investing at least $100,000.¹ Both state and federal laws govern the disposition of these assets, and the results can be complicated, especially when the owner of the account has been divorced and remarried. Therefore, it is important for plan fiduciaries of qualified retirement plans to understand their role regarding beneficiary designations and the regulations that dictate.

Under ERISA and the Internal Revenue Code, in the case of a defined contribution plan that is not subject to the qualified joint and survivor annuity rules², if a participant is married at the time of death, the participant’s spouse is automatically the beneficiary of the participant’s entire account balance under the plan. A participant may designate someone other than his or her spouse as the beneficiary only with the spouse’s notarized consent.

If the owner of a retirement plan account is single when he or she dies, the assets go to the participant’s designated beneficiary, no matter what his or her will states. In addition, the assets will be distributed to the designated beneficiary regardless of any other agreements including even court orders. If the participant fails to designate a beneficiary, the terms of the plan document govern the disposition of the participant’s account. Some plan documents provide that in the absence of a beneficiary designation the participant’s estate is the beneficiary, while others provide for a hierarchy of relatives who are the beneficiaries. Because of the variances in plan documents, it is important that fiduciaries review the terms of their plan document when faced with determining who the beneficiary is in the absence of the participant’s designation.

The beneficiary determination can become complicated when a retirement plan participant divorces. Where retirement benefits are concerned, both the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code contain provisions requiring plans to follow the orders of state courts overseeing domestic disputes that meet certain requirements. These orders are referred to as “qualified domestic relations orders” (QDROs).

Until recently, the federal courts have failed to adopt a reliable and uniform set of rules for adjudicating disputes among beneficiaries with competing claims. Some courts, adopting a strict reading of ERISA, simply pay the benefit based on the express terms of the plan; while others, with a nod to such concepts of “federal common law,” look to documents extraneous to the plan (e.g., the divorce decree, a waiver, or some other document) to make the call. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, the U.S. Supreme Court settled the matter, coming down squarely on the side of the plan document.

The facts in Kennedy are straightforward: A plan participant married and designated his wife as his beneficiary.  The plan participant and his wife subsequently divorced. Under the terms of the divorce decree, the participant’s spouse surrendered her claim to any portion of the benefits under the participant’s retirement plan. As sometimes happens, the participant neglected to change his beneficiary designation under the plan to reflect the terms of the divorce. As a result, his ex-spouse remained designated as his retirement plan beneficiary. Upon the death of the participant, the plan administrator, following the terms of the plan document and the beneficiary designation, paid the participant’s account to the ex-spouse. Predictably, the participant’s heir (his daughter in this instance) sued on behalf of the estate. The Supreme Court ruled that under the terms of the plan document, the designated beneficiary receives the participant’s death benefits, and in this case, the ex-wife was the designated beneficiary entitled to the participant’s account.

Another common example occurs following a divorce, when a plan participant designates his or her children as beneficiaries. If the participant later remarries, and dies while married to the second spouse, the second spouse is automatically the participant’s beneficiary unless he or she consents to the participant’s children being designated as the beneficiaries.

There are steps that plans can take to make the beneficiary process less prone to error. For example, a plan document can provide that divorce automatically revokes beneficiary designations with respect to a divorced spouse. It also behooves plans to review their communications materials to help ensure that participants are made aware of the rules that apply to the designation of beneficiaries.

Many plans that have had to deal with issues like these have decided to take inventory of their current beneficiary designations on file and attempt to remediate any deficiencies directly with the participants. Some have also requested their recordkeeper to insert a note in participants’ quarterly statements reminding them to confirm their beneficiary designation is current and accurate. Both are good ideas.

As a plan sponsor you have the best wishes of your participants in mind and helping ensure their beneficiary designations are in order is another way to protect them and help ensure their intentions are carried out. Consider distributing this month’s accompanying participant memo that reminds participants of the importance of keeping their beneficiary designations up to date.

About the Author, Michael Viljak, Senior Plan Consultant

Michael Viljak joined RPAG in 2002 and has over 30 years of experience in the pension field, on both the wholesale and retail levels, focusing on retirement plans ever since their inception in 1981. Michael has an interest in fiduciary related topics and was part of the team that created RPAG’s proprietary Fiduciary Fitness Program™.  He also authors many of the firm’s newsletter articles, communication pieces and training modules.

The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. (c) 2017. Retirement Plan Advisory Group.

¹Family Feuds: The Battles Over Retirement Accounts

²This commentary addresses only plans that are not subject to the qualified joint survivor annuity (QJSA) rules. Typically, retirement plans are designed not to be subject to the QJSA rules by meeting the following requirements: (1) upon death, 100 percent of the participant’s vested account balance is payable to the surviving spouse; (2) the participant does not elect a life annuity; and (3) the participant’s account balance does not include any assets subject to the QJSA rules, such as a transfer from a money purchase pension plan. Please contact your consultant for questions related to defined benefit pension plans and money purchase pension plans subject to the QJSA rules.

Qualified Versus Nonqualified Plans

For most employees, qualified retirement plans are a critical component of their retirement savings strategy. For others, qualified plans place restrictions on their utilization of such plans, so they have to look for other ways to save. That’s why employers often offer both qualified and nonqualified plans.

Why are there two classes of plans, and how do they differ?

In the simplest of terms, qualified plans qualify for favorable tax treatment if they meet specific requirements set forth in Internal Revenue Code (IRC) 401a and ERISA. Nonqualified plans comply with IRC 409A and are exempt from most parts of ERISA. Therefore, such plans don’t qualify for the same favorable tax treatment as qualified plans.

Qualified Retirement Plans

Qualified plans are broad-based employee retirement plans, meaning all employees who meet participation requirements are permitted to join the plan. The term “qualified plan” refers to two plan types: defined contribution and defined benefit. Examples of such plans are 401(k), 403(b), profit-sharing plans, pension plans, individual retirement accounts (IRAs), 457 plans and other retirement plans. The tax advantages of these plans to participants are that:

  • Contributions are deducted from taxable wages in the year in which they’re made
  • Accumulated earnings on those contributions are tax deferred
  • Account balances may be rolled over into a new employer’s plan or to an IRA upon termination of employment

Employers may also deduct contributions as wages in the year in which they’re made, and there are no taxable consequences to the employer on plan earnings.

Highly compensated employees are most often the senior leaders/executives in the organization. All employees who aren’t determined to be highly compensated (as defined by the IRC) may enjoy the full benefits offered by their plans. For 401(k) plans, the broad base of employees may contribute up to the IRC contribution maximum ($18,000 for 2017). However, those who are defined as highly compensated are often restricted from contributing the maximum. Their deferral percentages are limited to an amount based on plan tests, such as the Average Deferral Percentage (ADP)/Average Contribution Percentage (ACP). These tests are used to ensure that all participants are benefiting equally from the plan and to determine that participants are not exceeding the IRC contribution limits.

Nonqualified Deferred Compensation Plans

Nonqualified plans are for a select group of management and/or highly compensated employees. They don’t qualify for the same favorable tax treatments as qualified plans and are exempt from many IRC and ERISA requirements (including testing) because they aren’t broad-based employee retirement plans.

Examples of nonqualified plans are deferred compensation plans, supplemental executive retirement plans, split-dollar arrangements and other similar arrangements.

Contributions to a deferred compensation plan will reduce an employee’s gross income, but there’s no rollover option upon termination of employment. Contributions into a nonqualified plan aren’t deductible as wages by the employer until distribution of the amounts in the participant’s account. Nonqualified plans are established for a number of reasons, such as to help restore retirement parity (due to testing and contribution limits as described above). The plans also provide a means to recruit senior leadership and reward/incentivize strong performance.

Though nonqualified plans are not broad-based employee benefit plans, they still must comply with IRC 409A. This is a section of the code that provides guidance regarding the timing of deferrals and distributions. The amounts deferred into these plans aren’t segregated assets as in a qualified plan; instead, they’re held as general assets of the organization. Thus, there’s risk of forfeiture to the highly compensated employee in the event of bankruptcy. This is one of the main reasons a nonqualified plan is not available as a broad-based employee retirement option.

Another notable difference is the crediting of interest/earnings to a nonqualified plan. These plans are informally funded, which means that assets aren’t set aside from the general assets and also aren’t within the control of participants. Most organizations end up investing in mutual funds or corporate-owned life insurance (COLI) to help them offset the growing account balances. However, any interest or realized gains in a mutual fund are taxable to the organization. These plans should be designed with the financial impact to the organization in mind while balancing that with the needs of the participants.

The Bottom Line 

Both qualified and nonqualified plans are key components in an employer-sponsored retirement package. While both plan types should be reviewed regularly for legal and accounting compliance, they should also both have their funding (qualified plans) and corporate financing (nonqualified plans) options reviewed. As plans grow, more investment options become available for qualified plans, and the corporate tax liability on nonqualified plans should be more actively managed. With the help of an experienced advisor, organizations can structure a retirement package that can meet the needs of all employees without being costly and inefficient at the corporate level.

 
This article is an excerpt from the “Retirement Times,” a monthly publication by Retirement Plan Advisory Group’s marketing team.” The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.
(c) 2017. Retirement Plan Advisory Group.
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

Should You Rock Alternative in Your Lineup?

 

The term “alternative investments” may conjure images of classic automobiles, fine wine, rare art and valuable jewels. Some may think about the Honus Wagner baseball card that sold for $3.12 million at auction in 2016.  Or about the 1962 Ferrari 250 GTO that sold at auction for a whopping $34.65 million in 2014. Or maybe they set their sights even higher and think about the Hope Diamond, with an estimated value of $200-$250 million.

While these treasures are fun to picture, they would not be permissible or practical investments within a retirement plan.  So what exactly is an alternative investment in this context? A simple way to comprehend these investments is right in their name—alternative—they are not conventional investment types, e.g. stocks, bonds and cash.  Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.

Alternative investments, like REITs (real estate investment trusts) and Commodities, have their place in a well-managed portfolio within proper asset allocation parameters and with regular oversight. The danger is when participants misuse and/or don’t fully understand this asset class.  Alternative investments can be difficult to valuate and can be subject to enhanced volatility.  Consider the most recent financial crisis.  In the aftermath of global equity markets plummeting, some investors sought safe haven in gold which buoyed its price to record levels.  As a result, some plan participants observed this phenomenon and were swayed to reallocate some, or even all, of their retirement plan assets there. 

Subsequently, along with the meteoric rise in the price of gold, came a decline. Gold peaked at $1,920.70 in August 23, 2011 and fell to $1,048.30 by December 17, 2015.¹ An investor who bought at the high and sold at the low, realized a loss of 45.4 percent over this time period. A $100,000 investment would have fallen to $54,579.  Let’s contrast that with a diversified portfolio with its foundation in core asset classes and only a portion allocated to alternatives. Consider a hypothetical portfolio allocated as follows: 40% U.S. Equity, 10% International Equity, 40% Core Fixed Income, 5% Commodities, and 5% Global REITs.¹ Over the same time period, this portfolio achieved a positive return of 46.48 percent.  So a $100,000 investment would have grown to $146,480.

A broader stand-alone Commodities fund would have proven just as dangerous.  Commodities (as measured by the Bloomberg Commodity Index) produced a negative return every year between 2011 and 2015, for five consecutive years.  Annualized five-year returns in Commodities were negative 10.27 percent.¹ This means a $100,000 investment would have fallen to $58,169 during this time period. Again, if an investor instead used a diversified portfolio during this time period they would have achieved annualized returns of 7.62 percent, turning the original investment into $144,366. Again resulting in a much better outcome in the diversified portfolio. 

Under both scenarios, participants would have been disappointed had they invested their retirement plan assets exclusively in alternative investments. As seen in the examples above, if these were just portions of a well-diversified portfolio, the effects could have been minimal. Some exposure could have been helpful in 2016, with Commodities finally turning the corner and returning almost 12 percent and Gold up almost 8 percent.¹

While alternative investments can perform well and occasionally produce great returns, you may want to think twice about using them as stand-alone investment options in a retirement plan. Risk/reward optimization can be maximized within the confines of a well-constructed asset allocation, such as a target date fund. These funds are professionally managed, rebalanced and enjoy constant oversight to appropriate asset allocation across various asset classes.

¹All return data derived from MPI Stylus and Morningstar Direct. Hypothetical diversified portfolio is comprised of U.S. Equity (S&P500), International Equity (MSCI EAFE), Core Fixed Income (Barclays Aggregate), Commodities (Bloomberg Commodity), and Global REIT (S&P Global REIT).
 

Fiduciary Risk when Using Industry Average Reports to Determine Fee Reasonableness

 

This is a very important and often misunderstood issue. Industry average fee data can serve as a good general “second opinion” of fee reasonableness. The industry recognizes that fees can be very plan-centric in nature.  National averages may not capture the nuances of plans that drive cost (both in a positive and negative manner). Thus a more tailored approach (such as what is provided in a live-bid environment, like usage of the B3 Provider Analysis™) may not only be best practice, but can be more determinative of what a plan’s actual value on the open market is at any one point in time.  The detail of the B3 Analysis can be more determinative of fee reasonableness as it is based on what other providers would actually charge to provide the same services for the specific plan. It is a direct apples-to-apples comparison.

Moreover, benchmarking fees in a vacuum can paint an incomplete picture.  In addition to providing benchmarking of fees, the B3 incorporates benchmarking of services and investment opportunities.  All three of these elements must be viewed in conjunction with one another to fully vet “reasonableness” of an engagement.  Also, the B3 Analysis serves as an educational tool for fiduciaries in addressing the various components of plan fees including revenue sharing.

Based on Department of Labor (DOL) expressed intent and related fee litigation, use of averages and estimates have not been considered sufficient for determining fee reasonableness as they likely do not reflect the specific plan considerations which may impact pricing. The DOL has stated that plans should solicit live bids on a pro-active basis.  Only a periodic (every 3-4 years) robust live-bid process, like the B3 Analysis, is most likely to be considered a sufficient and prudent process for determining fee reasonableness by plan fiduciaries.

A related recent case in point involves fee reasonableness litigation against City National where the court found that in City National’s determination of fee reasonableness by use of “…averages and estimates,” rather than directly tracked expenses was not satisfactory.

 

The B3 Provider Analysis™, RPAG’s proprietary retirement plan fee benchmarking and request for proposal (RFP) system, utilizes live-bid benchmarking to provide a comprehensive benchmarking of a plan’s fees, services and investments in one robust report. 

Are You Ready for an Audit?

Several events can trigger a DOL or IRS audit, such as employee complaints or self-reporting under the annual submission of the Form 5500. Often times an audit is a random event, which is why you should always be prepared. Listed below are several key items typically requested in an initial letter sent by the IRS or the DOL in connection with a retirement plan audit. These items should be readily accessible by the plan administrator at all times the plan is in operation:

  • Plan document and all amendments
  • Summary plan description
  • Investment policy statement
  • Copy of the most recent determination letter
  • Copies of Forms 5500 and all schedules
  • Plan’s correspondence files (including meeting minutes)
  • Plan’s investment analyses
  • ADP and ACP testing results
  • Most recent account statements for participants and beneficiaries
  • Contribution summary reports (i.e., evidence of receipt of these monies by the plan’s trust)
  • Loan application, amortization/repayment schedule (for all loans)

 

If you have questions about preparing for an audit, or need plan design review assistance, please contact us.

 

The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.  © 2016. Retirement Plan Advisory Group.

2017 Tax Saver’s Credit

Participants may be eligible for a valuable incentive, which could reduce their federal income tax liability, for contributing to your company’s retirement plan. If they qualify, they may receive a Tax Saver’s Credit of up to $2,000 ($4,000 for married couples filing jointly) if they made eligible contributions to an employer sponsored retirement savings plan. The deduction is claimed in the form of a non-refundable tax credit, ranging from 10 percent to 50 percent of their annual contribution.

When participants contribute a portion of each paycheck into the plan on a pre-tax basis, they are reducing the amount of their income subject to federal taxation. And, those assets grow tax-deferred until they receive a distribution. If they qualify for the Tax Saver’s Credit, they may even further reduce their taxes.

Participants’ eligibility depends on their adjusted gross income (AGI), tax filing status and retirement contributions. To qualify for the credit, a participant must be age 18 or older and cannot be a full-time student or claimed as a dependent on someone else’s tax return.

The chart below can be used to calculate the credit for the tax year 2017. First, participants must determine their AGI –total income minus all qualified deductions. Then they can refer to the chart below to see how much they can claim as a tax credit if they qualify.

Filing Status/Adjusted Gross Income for 2017
Amount of CreditJointHead of HouseholdSingle/Others
50% of amount deferred$0 to $37,000$0 to $27,750$0 to $18,500
20% of amount deferred$37,001 to $40,000$27,751 to $30,000$18,501 to $20,000
10% of amount deferred$40,001 to $62,000$30,001 to $46,500$20,001 to $31,000
Source: IRS Form 8880

 

For example:

  • A single employee whose AGI is $17,000 defers $2,000 to their retirement plan will qualify for a tax credit equal to 50 percent of their total contribution. That’s a tax savings of $1,000.
  • A married couple, filing jointly, with a combined AGI of $38,000 each contributes $1,000 to their respective company plans, for a total contribution of $2,000. They will receive a 20 percent credit reducing their tax bill by $400.

 

With the Tax Saver’s Credit, participants may owe less in federal taxes the next time they file by contributing to their retirement plan. See our accompanying 2017 Tax Saver’s Credit post.

 
This illustration is hypothetical and there is no guarantee that similar results can be achieved.  If fees had been reflected, the return would have been less. The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.  © 2016. Retirement Plan Advisory Group.

“Conflict of Interest” or “Fiduciary” Rule: A Plan Sponsor’s Q&A – Part II

Last edition we featured the first part of our Fiduciary Rule Q&A series. Now enjoy the final five questions and wrap-up. After years of proposed regulation issuance, comment periods, drafting and anticipation, the Department of Labor (DOL) finally published final guidance regarding the definition of “fiduciary” on April 8, 2016. It is important for plan sponsors to understand the reasoning behind, and the scope of, the final rules. The Q&A is meant to assist you in understanding the regulations and how they pertain to you, your plan and your participants.

Q: The proposed rules seemed to have a heavy impact on participant education. Did that carryover to the final rules?

A: The new rules explicitly state that plan sponsors and service providers may provide general plan information, general financial, investment and retirement information, notional asset allocation models and interactive investment tools without becoming a fiduciary. The proposed rules prohibited use of specific investments in plans being used in models or interactive tools if the provider wished to avoid fiduciary status. The new final rules allow for identification of specific investments if the following conditions are met:

  • The models/tools only identify designated investment alternatives (DIAs) in the plan that are monitored by fiduciaries that are independent from the individual/organization that developed/marketed the investment alternative;
  • Other DIAs, with similar risk/return characteristics, that are not used in the model/tool are identified;
  • A statement that those other DIAs are similar; and
  • Identification of where participants/beneficiaries can get additional information regarding those similar DIAs.

Q: Are my employees (employees of the plan sponsor) considered fiduciaries under these rules?

A: Typically, no. If the employees aren’t receiving a fee (not considering their wages) for providing either of the below-listed recommendations, they will not be considered a fiduciary under the rules.

  1. Work in Human Resources or Finance departments and provide recommendations to the plan committee; or
  2. Communicate information regarding the plan and/or distribution options to participants.

Q: When will a plan’s service provider be considered a fiduciary under the new rules?

A: The new rules sweep additional individuals and organizations within the definition of fiduciary due to the types of activities that will now be considered recommendations leading to “investment advice.” Under the new rules, many sales and marketing actions will be considered fiduciary in nature. That said, there are a few common instances where communication between the sponsor and the service provider will not be fiduciary in nature. These include (but are not limited to):

  • Requests for Proposals (RFPs) – Service providers may provide investment lineups if they are responding to an RFP for services. This is common with RFPs for recordkeeping services, and occasionally with RFPs for advisory services. The proposed investment lineup may be based on plan size, or the plan’s current investment menu. However, for this type of communication to avoid straying into the fiduciary realm the service provider must disclose any financial interest it may have (if any) in any of the investments. This is common if the recordkeeper is also a fund company with proprietary offerings.
  • Independent Plan Fiduciaries – Service provider recommendations that are made to plan fiduciaries, independent of the advisor, may also not give rise to fiduciary status. In this instance, the independent fiduciary must possess “financial expertise” which is considered present if they are a registered investment advisor, or holds/manages/controls (in the aggregate) at least $50 million in assets. In these instances the advisor must make certain determinations regarding the independent fiduciary, in addition to the fact that they possess financial expertise.
  • Marketing – As long as a service provider does not market an investment platform as meeting individualized needs of a plan, and the provider states that it is not providing impartial advice/acting in a fiduciary capacity, the marketing of the platform is not a fiduciary action.

Q: Will the new rules impact my (plan sponsor) relationship with my plan’s service providers?

A: The answer depends upon the service providers’ current engagements with the plan and plan sponsor. For service providers presently serving in a capacity role, little may change. It is possible that they move from a broker-dealer engagement to a registered investment advisory relationship to make the engagement cleaner and more transparent. But that likely will not impact the services, compensation, or fiduciary nature of the engagement.

Service providers receiving “conflicted,” or uneven compensation (such as commissions, revenue sharing and 12b-1 fees) must decide if they wish to continue under that design, and meet the BIC Exemption rules, in which case you will receive a great deal more disclosure and the advisor will have to meet more arduous requirements (duties of prudence and loyalty, disclose their conflict of interest policies, etc.) than those to which they are accustomed. Or they may alter their engagement by entering into a fee-for-service RIA engagement.  In such an engagement the fees (either a flat dollar fee or a flat percentage of assets based fee) will not vary depending upon the investments recommended/selected.

Q: I’ve heard about co-fiduciary status. Am I responsible for all these new co-fiduciaries on the plan?

A: Recently representatives of the DOL at an industry conference made informal comments that they believed that co-fiduciary responsibilities would likely extend to individuals/organizations that become fiduciaries by way of tripping the new rules. One such statement intimated that a plan sponsor may even have to monitor service provider participant calls in order to best meet their fiduciary responsibilities. The full implementation of the new rules is still in its infancy and these were informal comments, so it bears watching to see just how far plan sponsor co-fiduciary responsibility will extend.

In Conclusion

The retirement landscape evolved greatly over past decades. Plan type, services offered, investments made available, and fiduciary concerns shifted considerably since the inception of ERISA in 1974. The new rules issued by the DOL have been expected, reviewed and debated for well over five years. In fact, in June Congress passed resolutions to nullify the rules (with Presidential veto expected) and nine organizations filed suit against the DOL and the Secretary of the DOL arguing the rules are overbroad and unconstitutional. The rules will become effective in stages (April of 2017 and January of 2018), and it bears watching to see how additional guidance from the DOL will impact the responsibilities of plan sponsors. Regardless, these rules will have a profound impact on plan fiduciaries, plans and participants. They are intended to, and should, result in a higher level of responsibility being placed on those individuals and organizations positioned to impact or influence participant ability to save for their retirement. As a result, your mission is to keep abreast of any additional guidance and developments. If you have further questions, please contact your plan consultant.

The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.
(c) 2016. Retirement Plan Advisory Group.
ACR#207478 09/16