Can You Invest Your Way to Plan Termination?

Some interesting dynamics have been developing in the retirement industry with respect to defined benefit pension plans.  Most plan sponsors that have maintained these plan types have either suspended or frozen them.  This has been an effort to reduce/control their liabilities and funding obligations and to better respond to a younger workforce by replacing defined benefit plans with defined contribution plans.

For many sponsors, the strategy was to simply look to positive investment returns to “close the gap,” expecting that assets would grow faster than liabilities, creating a positive scenario that would reduce the cash contribution requirements and lead to eventual plan termination.  Unfortunately, this has not happened.

The Financial Burden of Defined Benefit Plans

Defined benefit plans were the predominant retirement plan at the time the Employee Retirement Income Security Act (ERISA) was introduced in 1974. Many hospitals and other healthcare provider organizations in New York State had defined benefit pension plans. In a defined benefit plan, the total financial obligation falls strictly on the sponsor. The amount of benefit is stipulated and the funding of that benefit is the responsibility of the sponsor. As time went on, defined benefit plans became more onerous to maintain, more difficult to sponsor, and more expensive.

The Revenue Act of 1978 included a provision under which employees were not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments, thus making 401(k) plans possible. The emergence of defined contribution plans began a transition away from the plan sponsor offering and managing the retirement benefits, to participants having the ability to directly manage their retirement savings.

Changing Times: Impact of the shift in types of retirement plans

The days are gone when a typical employee works for the same employer for 30 or 40 years and then collects a check every month for the rest of his or her life. Although the majority of employees had little understanding of how a defined benefit plan worked, they knew exactly how much they would get each month at retirement. Together with what they would earn from Social Security, it was relatively easy to plan for the future.

8 Questions Plan Sponsors Should Ask about 457(b) and 457(f) Plans

Background:

457(f) and 457(b) plans are non-qualified deferred compensation plans for eligible highly-compensated employees. A non-qualified plan is a type of tax-deferred, employer-sponsored retirement plan that is not subject to Employee Retirement Income Security Act (ERISA) guidelines. Non-governmental 457 plans are not required to file Form 5500 since they are not subject to ERISA, but they are required within 120 days of the plan’s existence to file a one-time notification (“top hat letter”) with the Department of Labor. These plans are exempt from the non-discrimination testing that is required for qualified plans.

In 1986, Section 457 was added to the Internal Revenue Code (IRC) to specifically address the unique needs of the not-for-profit sector. The rules address governmental plans sponsored by state or local governments and non-governmental plans sponsored by tax-exempt organizations under Section 501(c). This frequently-asked question (FAQ) document will specifically address questions regarding non-governmental 457(b) and 457(f) plans.

Remedial Amendment Period for §403(b) Plans

Sponsors of 403(b) plans, both those subject to the Employee Retirement Income Security Act (ERISA) and non-ERISA plans, were required (with few exceptions) to have in place a written plan document by December 31, 2009. Sponsors who did so will be able to restate their plans to adopt one of the prototype plans or volume submitter plans when they become available.

The Internal Revenue Service (IRS) issued Revenue Procedure 2013-22 in March 2013, which provided guidelines for issuing opinion and advisory letters for §403(b) prototype plans and volume submitter plans. The Revenue Procedure stated that a remedial amendment period would be available whereby eligible employers could retroactively correct defects in the form of written 403(b) plans.

8 Questions Plan Sponsors Should Ask About Adding a Roth Feature

1. What is a Roth?

According to the 2015 PLANSPONSOR Defined Contribution Survey, 62% of all defined contribution plans, across multiple industries now offer a Roth feature. Among 403(b) plans, 54.7% have adopted this popular design feature. A Roth is not a separate retirement plan, but simply an additional source of contributions accepted by the plan and record-kept separately so the rules applicable to Roth contributions can be followed. Once adopted, plan sponsors must give participants an opportunity at least once per plan year to make designated Roth contributions.

The basic difference between a traditional 401(k) or 403(b) and a Roth is when a participant pays taxes. Within a traditional 401(k) or 403(b), participants make contributions with pre-tax dollars, and receive a tax break up front, effectively lowering their current income tax bill. Their contributions and earnings grow tax-deferred until they take a distribution. At that time, withdrawals are considered to be ordinary income and participants pay taxes based upon their effective tax rate at the time of the distribution. They’ll also be required to pay a 10% early withdrawal penalty unless they’re over 59 ½ years of age.

Investment Policy Statements

An investment policy statement (IPS) defines the processes that a company has adopted to make investment-related decisions with respect to the assets of a ERISA 403(b) and 401(k) plan. The IPS identifies the investment goals and objectives of the plan, establishes how decisions will be made regarding the selection of investments and specifies the procedures for measuring investment performance. While the law does not require that a plan adopt an IPS, it may be the single most important task that a fiduciary performs for the following reasons:

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. If your non-profit still operates a non-ERISA plan, you may want to give some thought to changing over.

Qualified Default Investment Alternatives

Approximately one-third of eligible workers do not participate in their employer-sponsored defined contribution plans, such as ERISA 403(b) and 401(k) plans. Research suggests that almost all of these workers would choose to remain participants if they were automatically enrolled. The increased savings would significantly improve their retirement security and may result in improved workplace satisfaction.

IRS Provides Guidance on In-Plan Roth Rollovers

The American Taxpayer Relief Act of 2012 amends the requirement that employees wait until a distributable event (i.e., age 59½, termination, death or disability) for an in-plan Roth conversion. With the release of Notice 2013-74, the Internal Revenue Service (IRS) provides additional guidance on in-plan Roth conversions.

The Small Business Jobs Act of 2010 permitted retirement plans that provided for Roth contributions to allow employees to roll over amounts (other than designated Roth contributions) from their retirement plans to their Roth account in the plan. However, the amounts that could be rolled over were limited to amounts that were otherwise distributable under the plan. Thus, unless an employee had met a distributable event, a rollover was not possible. Section 902 of the American Taxpayer Relief Act of 2012 expanded the type of amounts that are eligible for an in-plan Roth rollover. 

IRS Initiates Compliance Check of 457(b) Top Hat Plans

Earlier this year, the Internal Revenue Service (IRS) announced that its Employee Plans Compliance Unit (EPCU) would begin a compliance check of certain 457(b) plans maintained by non-governmental, tax-exempt entities. These plans, commonly referred to as “Top Hat” plans, are frequently offered by tax-exempt organizations in addition to other qualified retirement plans.

The good news is that the extent of the compliance check is fairly limited. Letters and a questionnaire will be sent to 200 tax-exempt organizations in fiscal year 2013, and another 200 will be sent in fiscal year 2014. Employers will be selected for review based on information contained on 2011 Form W-2 and Form 990.

IRS Establishes Program for Pre-Approved §403(b) Retirement Plan Documents

What Plan Sponsors Need to Know

The Internal Revenue Service (IRS) issued regulations governing §403(b) retirement plans in 2007 that generally became effective January 1, 2009, requiring that all such plans, whether subject to the Employee Retirement Income Security Act (ERISA) or not, be maintained pursuant to a written plan. However, with few exceptions, plan sponsors could not be sure that their plan document met the §403(b) requirements.

Target Date Retirement Funds - TIPS for ERISA Plan Fiduciaries

The Plan Sponsor Council of America (PSCA) recently released the 2013 403(b) Plan Survey. The survey showed that 73.6% of plans offer target date funds (TDF) as an investment option. Similar findings were noted for 401(k) plans. Additionally, many plan sponsors have identified TDFs as their plan’s qualified default investment alternative (QDIA). Target date funds can be an attractive investment option for employees who do not want to actively manage their retirement portfolio. The inflow of monies into TDFs in recent years reflects the growing popularity of these types of investments.

Fee Disclosures

Annual Disclosure to Plan Participants

• This is the plan sponsor’s obligation, not the record keeper’s obligation. 
• Distributed to all eligible employees whether they are participating in a plan or not; covers administrative expenses and fees that apply on an individual basis (loans, qualified domestic relation orders, brokerage windows, etc.). 
• Includes the investment-related disclosures, such as performance data and benchmarks.

In-plan Roth Conversions:

A Low-cost Enhancement with Significant Tax Advantages

In-plan Roth 401(k), 403(b), and governmental 457(b) conversions were originally established by the Small Business Jobs Act of 2010. However, under this law, employees have been unable to convert account balances to a Roth inside the retirement plan without a distributable event (i.e., age 59½, termination, death or disability).

Now, they can.