Hottest Retirement Plan Improvement in 2013?
Source: https://ebn.benefitnews.com
By Robert C. Lawton
Many employer plan sponsors are expressing a high level of interest in adding Roth 401(k) in-plan conversions as an option to their 401(k) plans in 2013. The recently passed Taxpayer Relief Act of 2012 made it possible for retirement plan participants to convert existing 401(k) plan balances to Roth 401(k) balances, whether or not the participant is distribution eligible.
The benefits? All contributions and earnings that have been in the plan five years after the Roth clock starts are distributable tax free (assuming they are distributed due to an eligible event).
The cost? It is necessary to pay taxes on any 401(k) balances converted into Roth 401(k) balances in the year of conversion.
The logic of executing a Roth 401(k) in-plan conversion lies in a belief that tax rates are low now and will be higher in the future. If a participant believes that is true, it may make sense to pay taxes now on retirement plan balances.
Younger individuals just starting their careers may find this option valuable. Imagine building a nest egg over a 40-year career and having your entire 401(k) account balance available tax-free at your retirement! This option may also appeal to higher balance, older individuals who may be involved in tax planning, or individuals who are looking for additional taxable income in a particular year (e.g.: due to the realization of a loss).
There appears to be no downside associated with adding this option to a 401(k) plan. It will not cost anything additional to administer each year and is a nice option to have available for employees to elect.
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What do cars and retirement plans have in common?
I think it’s a safe bet to say we’ve all paid a lot more attention to retirement plan fees in the wake of the new Department of Labor disclosure requirements. This is true for 401(k)/403(b) plans and beyond. Fortunately (or unfortunately) we can’t avoid the topic!
It’s likely no one pays more attention than the plan fiduciary. After all it’s their job to work with the service provider and financial professional to make sure the fees paid by the plan are “reasonable.” But what exactly does “reasonable” mean?
While vague terms like this can seem to add to a plan fiduciary’s challenge, it’s actually pretty simple to understand. “Reasonable” doesn’t mean as low as possible. “Reasonable” means fees should be based on the services received in return.
To help gauge this, consider the services needed to help meet plan goals and objectives. Services for 401(k)/403(b) plans range from simple to highly complex. Simple, or low touch service from a service provider, should generally correlate with lower fees. More complex arrangements probably come with higher fees. But fees are just one part of the equation, and low cost isn’t always the best choice.
So … what does all this have to do with cars?
Start by thinking about what services may be appropriate to receive for a given fee. For comparison purposes, it’s actually a lot like buying a new car. Are you content with an economy model knowing it has the basic functions? Or, is it important to you to have all the conveniences available on the market and you’ll pay a premium to get them?
The financial professional can help determine which model best meets the needs of the plan, the plan sponsor and their participants:
1. The economy (low touch)
You’ve got everything you need to keep an annuity or mutual fund account running, but few bells and whistles. Typically includes:
- Processing plan contributions, transfers and distributions
- Generating automated reporting to the plan sponsor, including Form 5500 preparation
- Meeting with the plan sponsor to conduct a periodic review, and providing additional phone support to answer administrative questions
- Providing cookie cutter participant communications aimed toward saving and distribution, with additional support often offered through an 800 number
2. The mid-sized sedan (moderate touch)
A step up from the economy, your mid-sized sedan offers some conveniences generally for a little bit more money.
Typically includes everything the economy does, plus:
- Additional personalized plan sponsor meetings and support tailored to the needs of the plan sponsor
- More extensive participant education resources, including help with planning (but no individualized approach)
- Phone support available to help with questions beyond administrative and processing
3. The luxury model (high touch)
This model comes with all the bells and whistles, generally at the highest price.
Typically includes everything listed above, plus:
- Detailed plan design consulting tailored to the needs of the plan sponsor and participants
- Detailed plan analysis, including plan utilization reports and progress reports to help ensure objectives are being met.
- Individualized participant support with a focus on becoming more “retirement ready”
- More extensive administrative support, including audit preparation
Making sense of it all
It’s important that the plan fiduciary and financial professional work together to determine which model best helps meet the plan needs, whether the model is functioning to their satisfaction (e.g., are the services being provided competently?), and if the fees are reasonable in light of the model and functionality.
The car model analogy provides a simple framework to help start that conversation.
In addition, this checklist can help serve as a guide for how to establish a documented monitoring process to fit the specific needs of a plan.
Failure to Timely Allocate Forfeitures
by: Chadron J. Patton
Sponsors of 401(k) plans often fail to timely use or allocate forfeitures, thereby potentially disqualifying the plan. Recent IRS audits have revealed a renewed focus on the proper use of forfeitures – making compliance a top priority for plan sponsors.
Forfeitures are generally created when a participant leaves employment before completing the period of service needed to become fully vested in matching or other employer contributions. The non-vested portion of the participant’s account may then be forfeited. (In practice, many plans specify that the forfeiture occurs only after the participant has incurred five consecutive oneyear breaks in service.) Some plan sponsors or third party administrators (TPAs) then place the forfeited amounts into a plan’s suspense account, allowing the forfeitures to accumulate over a period of several years. This practice is impermissible.
The IRS requires that forfeitures be used or allocated for the plan year in which they arise or, in appropriate circumstances, the following plan year. Forfeitures may be used 5 to (1) pay a plan’s reasonable administrative expenses, (2) reduce employer contributions, (3) restore previously forfeited participant accounts, or (4) provide additional contributions to participants. The plan document must clearly define how and when forfeitures will be used. (Note: The IRS has recently taken the position that forfeitures cannot be used to fund 401(k) safe harbor contributions, because those contributions must be 100% vested when made to the plan. Future guidance is expected on this issue, however.)
Among the most common reasons for failing to timely allocate forfeitures are the following:
- A plan sponsor or TPA fails to monitor the plan's forfeiture account to ensure that forfeitures generated during a plan year are used according to the plan's terms.
- A plan sponsor and TPA both assume that the other party will be taking care of the forfeitures - and neither does so.
- A plan sponsor erroneously assumes that it has discretion over how and when forfeitures held in a suspense account are to be applied.
- A plan's terms are vague in describing how forfeitures are to be handled.
- A plan sponsor elects not to make a discretionary contribution for a plan year and, because there are no contributions to offset with forfeited amounts, the sponsor fails to allocate the forfeitures.
- A plan sponsor pays administrative expenses directly or through revenue sharing, without thinking to use forfeitures to pay those expenses.
This common plan mistake may be corrected by reallocating all forfeitures in the plan’s forfeiture suspense account to any participants who should have received them had the forfeitures been allocated on a timely basis. Depending on the plan’s terms, or on the facts and circumstances of a particular situation, it may also be appropriate to apply forfeitures from prior years as an employer contribution for the current year.
Plan sponsors may correct this mistake under the IRS’s Employee Plans Compliance Resolution System (EPCRS). Under the EPCRS’s Self-Correction Program, the mistake must generally be corrected within two years following the close of the plan year in which it occurred (unless the failure can be classified as insignificant). The Voluntary Correction Program (VCP) must then be used after this two-year period. VCP must also be used if the plan’s terms are defective and must be retroactively corrected through a plan amendment.
Finally, here are some suggestions for plan sponsors looking to avoid this common plan mistake:
- Review your plan document to ensure that there are clear procedures in place for the timing and use of forfeitures - and follow those procedures. If there are no procedures, or if they are vague, amend the plan document to add or clarify them.
- Review the forfeiture suspense account at least annually to verify that forfeitures are actually being used or allocated.
- Communicate with your TPA or record keeper to avoid any uncertainty as to whose responsibility it is to handle forfeitures.
401(k) Fee Disclosure Befuddles Small Companies
By Jessica Toonkel
Source: https://ebn.benefitnews.com
A recent rule that requires companies that service 401(k) plans to disclose what they are charging employers for their services is leaving many small business owners with more questions than answers, according to a new study.
As of July, 401(k) plan providers, which include financial advisers, fund companies and plan record keepers, had to provide employers with documentation of all the fees they charged.
The goal of the fee disclosure, which was mandated by the U.S. Department of Labor, was to help employers better understand the fees they pay.
But a new study scheduled released this week shows that 83% of small business owners, or those with 100 employees or fewer, have more questions about what the fee disclosures mean.
Sixty-three percent of companies surveyed said they were not prepared to answer employees’ questions about 401(k) fees. Under the rules, employers were required to begin disclosing plan fees to employees in August.
Specifically, small business owners do not understand if the fees they are paying are appropriate or too high. Forty-five percent of the 500 respondents said they thought 4.00% was a reasonable fee to pay for a 401(k) plan, according to the study, which was sponsored by ShareBuilder 401k, which provides plans to more than 3,500 small employers. The average all-in 401(k) fees paid by plans with less than $1 million in assets is between 0.99% and 1.83%, according to a 2011 study conducted by Deloitte and the Investment Company Institute.
“It really surprised me that these businesses think that 4% is an acceptable amount,” said Stuart Robertson, president of ShareBuilder 401k.
While the fee disclosure statements are helpful for those employers that take the time to delve into them, they are lacking in that they do not provide any guidance on how much employers should be paying, employers said.
“There should be some kind of industry average or benchmark,” said Steve Hazelton, chief executive officer of Newton Software, a San Francisco-based software company with 12 employees. “That would really be helpful.”
But even with more information, many employers may remain in the dark about the fees they are paying because they have not read the documentation.
Only 50% of the small business owners surveyed by ShareBuilder said they recall receiving the new documents at all.
Top 6 Tips for Educating your Benefits Department about 401(k) Plan Fees
BY PAULA AVEN GLADYCH
Source: benefitspro.com
Benefits departments need to come up with a set plan on how to respond to plan participants when they ask about their 401(k) plan’s fees, according to Osler, Hoskin & Harcourt LLP.
According to the business law firm, fee disclosure regulations, which have now gone out to both plan sponsors and 401(k) plan participants, have caused some people to challenge their benefits departments. To meet these challenges, plan fiduciaries need to follow six simple rules for how they respond to participant questions about their fees.
1. They need to educate themselves about the different types of 401(k) plan fees, including investment costs, trustee or custodial expenses, transaction costs such as commissions and administrative and record-keeping fees.
2. The law firm also recommends companies compare their plan against other plans of the same size so they can respond to questions asking why the plan is so expensive.
3. Companies should take this opportunity to review their investment line up for performance relative to the fees they are paying. If the fees are too high, now is the time to go shopping. Keep in mind that some plans pay extra for better service, like access to a financial advisor.
4. Diversification is key. Make sure your menu includes retail, index and institutional class shares to lower investment costs.
5. The law firm also recommends that plan sponsors examine their revenue sharing arrangements with a critical eye. Many don’t realize that expenses paid through revenue sharing are actually being paid by the participants. Make sure you have picked the best investments for them, not the funds that pay the most revenue sharing and therefore limit your plan sponsor responsibility for fees.
6. Also, Osler, Hoskin & Harcourt recommend that companies look into new vendors. Put out a request for proposals to see if better alternatives are available.
The cold, hard truth of 401(k) fee disclosure
By Andy Stonehouse
Source: Benefitspro.com
For the better part of the last eight months, I've been hearing about - and writing about - the great expectations attached to the DOL-mandated 401(k) fee disclosures. They created minor mainstream headlines for an industry that, despite its huge resources and massive financial holdings for so many American workers, doesn't get a lot of mainstream media coverage.
And now the day has come, the Aug. 30 deadline for the first component of participant fee disclosures, and what should arrive in my mail box but my own actual fee disclosure overview, part of my company's 401(k) plan.
Rather than being the phone book-sized pile of impenetrable paper many hinted might be a reality - prompting the still somewhat unresolved tug-of-war with the Labor Department regarding the eco-friendly notion of all-electronic disclosure statements - it's a pretty simple document.
Painfully simple, in fact. I know the new-and-improved quarterly statements, officially due Nov. 14, might carry more heft and depth, but this new annual overview left me - after eight months of anxious anticipation - a little underwhelmed.
As you've probably found in your own recent drive toward the deadline, the necessary information shouldn't come as a big shock to any participants who have even a vague interest in the management of their retirement funds.
Which, as has been previously noted, seems to make up the larger percentage of set-it-and-forget-it or "why am I even contributing to this any more if I continue to lose money" participants, nationwide.
Nonetheless, my own personal hard, cold facts - the general plan information, the potential general administrative fees and expenses and the potential individual administrative fees and expenses are pretty concisely laid out.
Nothing's hidden - not to say that it was before - and the general details are there in a form that's much easier to wade through than the 900 page disclosures attached to my annual credit card or bank fee statements.
The biggest section of the whole eight-page disclosure is the investment information, a concise chart of the various stocks, bonds and TDFs (who knew I had so many TDFs?) and their performance.
The one-year and five-year rates of return are, as we've discussed to death, not great, but the 10-year averages are more positive.
And that's that for the paperwork. So I called my representative to ask for an interpretation, and a dollar amount. He was pleasant enough, and after a brief recap of the details, he laid it on the line: My fees, for my fund, total $1.06. About the price, with tax, of a Sausage McMuffin at McDonalds.
Really? Yes, really. Not some outlandish and exorbitant price tag that was going to send me screaming to divest and put everything in gold funds, or pharmaceuticals, or Chinese cigarette companies? Yep. A buck and change.
He also had some good news about the account, overall: "You're not doing too badly. There have been some ups and downs this year but you're actually on track to make some money."
Is it time to double down and put more in the fund, I asked?
"Sure," he said. "It's up to you."
And so the moment came and went, as will for the millions who get their statements in the mail, though the vast majority will ignore them like another mailing from their car insurance company or an online gift basket catalog.
Those who do pay attention may now have a more vested interest in consulting with an expert, and that's where you come in. So I would encourage you to take advantage of that opportunity.
Summer Bump
Participants in 401(k) plans tend to take out more loans during the summer months, according to an analysis by Charles Schwab. Generally, requests for loans increase about 16 percent in those months, the report said. While the economy might seem like a likely culprit, Catherine Golladay, a vice president of participant services for Schwab, said a big reason that participants dig into their 401(k)s is the need for college funding for their children.
Cash Balance Bounce
Cash balance plans increased by 21 percent in 2010 (the latest data available), nearly doubling 2009's jump of 11 percent, according to the 2012 National Cash Balance Research Report by Kravitz. Cash balance plans are growing faster than all other retirement plans, including 401(k)s, which logged a 1 percent decline over the same period.
401(k) participants don't try to understand disclosures
By Paula Aven Gladych
Source: Benefits Pro
Although defined contribution plan participants should receive fee disclosures from their plan sponsors by Aug. 30, a new study by LIMRA shows that the vast majority of those people only spend about five minutes looking at them and most just skim them to “see if they reveal something ‘important.’”
One in five people said they rarely or never read disclosures that are sent to them.
In “Consumers’ Retirement Perspectives” for the third quarter of 2012, LIMRA found that men are more likely than women to read disclosures and younger participants are slightly more likely than older participants to read them.
The length and technical nature of disclosures are the most frequently cited reasons for not reading them, the report found. When participants want plan information, they have better luck going to their provider’s website. Younger participants are more likely to go to their employer for more information.
While 51 percent of plan participants said they have not taken action as a result of a disclosure, almost one in five reported that they changed contribution allocation or increased their contribution level. Seventeen percent said they contacted their account provider.
Participants had the highest levels of understanding of their contribution limits when it came to retirement account features. Companies took the opportunity to educate participants on investment options, fees and the taxation of withdrawals. Twenty-four percent said they did not understand these features very well or not at all.
Men were most likely to indicate they understand their account features “very well,” the report found.
The Silver Lining of 401(k) Fee Disclosures
By Jonathan Anderson
Source: benefitspro.com
In all of the recent – and perhaps herculean - efforts to develop and distribute fee disclosures, a proverbial “silver lining” actually exists.
Service providers have spent much time, effort, and expense (sometimes great) in complying with the Department of Labor’s service provider fee disclosures, effective July 1, 2012.
I also realize that service providers and employers, now focused on providing participants with the participant fee disclosures, generally effective August 30, 2012, are expending similar time, effort, and money it took for the service provider disclosures.
I further recognize the disclosures contain some additional fiduciary obligations that could be challenging (e.g. reporting to the DOL any service providers with deficient disclosures; possibly being penalized and/or sued for breaches of fiduciary duty; et cetera).
However, there is a silver lining surrounding the valuable and critical benefits resulting from the disclosures.
Service Provider Disclosures:
One of the first benefits is that plan fiduciaries now have a more compact and precise tool to help determine the actual services provided by a vendor, and the reasonableness of the fees for such, to a plan.
Since determining the reasonableness of the services and fees under a service provider arrangement has always been a requirement of the fiduciaries (to avoid a prohibited transaction), the disclosures should simplify what had been a complex process for most fiduciaries. For other fiduciaries, perhaps this will be the first time a formal determination of an arrangement’s reasonableness has actually been made.
With the new disclosure, the determination process has been made easier for the plan fiduciaries, and can allow them to make more informed decisions.
The same benefit applies with respect to documenting the process of determining of an arrangement’s reasonableness. By having a disclosure describing and summarizing the services, fees, and the parties providing the services and receiving the fees, the fiduciaries’ documentation process has been simplified. In addition, documenting the process could aid the plan sponsor/plan fiduciaries defend any legal claim that the services and fees were not reasonable.
Another benefit is that the disclosures allow fiduciaries to use more of an “apples-to-apples” comparison of one service provider’s services and fees to another service provider’s services and fees. Comparisons may be used to further justify staying with the current service provider, or to explore whether switching to a different provider might be better.
Yet another benefit is the disclosures allow fiduciaries to help identify whether any changes to the current arrangement should be explored and/or made. For instance, after reviewing the disclosures made about the investment alternatives in the required summary chart format, perhaps the plan fiduciaries may decide to add or modify the investment alternatives from which a participant may choose to invest his/her account balances.