Experts in Personalized Retirement Plan Design & Administration Newsletter 12.31.14

“Choice” Architecture for 401k Plan Sponsors Over the years, a lot of thought has gone into plan design features — choice architecture — that can help participants make better decisions (or, in some cases to make better decisions on their behalf). But policymakers and regulators, and the academics who sometimes advise them, tend to forget that the employer’s decision to keep, and to offer these programs in the first place, is also a choice. A choice that the rules, regulations and limits bounding these programs don’t always encourage. Source:

How Small Business 401k Plans Will Look in 10 Years Change will come about because the fundamental balance of power between plan provider and plan participant will shift to the participant. Technology has already caused some shifts. Look for these changes to accelerate. Millennials will drive these changes, as their values begin to shape financial markets. Source:

Seven Reasons to Avoid 401k Loans The flexibility offered by allowing loans is often touted as one of the good features of the 401k. However taking a loan from your 401k also carries some downsides. Here are seven reasons to avoid 401k loans. Source:

MEP Reform: Is it Necessary? A Rebuke Author takes issue with a recent article that claims the promotion of MEP’s is “a conspiracy of Wall Street to hoist unnecessary and expensive financial products on small plans, as a way to further promote mutual fund interests.” Source:

The Conduct Code for Retirement Plan Sponsors Ary Rosenbaum suggests that no one ever tells plan sponsor that their conduct or inaction can have some bad consequences. He wrote this article as a plan sponsor conduct code, so they can follow it and turn their retirement plan from something that can be a liability pitfall into something that can be used as a tool to recruit and retain treasured employees. Source:

Looking to Hit the Bullseye: Annuities in Target-Date Plans Recent federal guidance will make target-date fund annuity plans more amenable to plan sponsors, but it’s still unclear whether plan sponsors will start offering the target-date annuity investment. Marrying annuities to the very popular target-date fund might spur interest, but it will take time and more products on the shelf for plan sponsors to consider. Source:

Eight Resolutions for Retirement Plan Sponsors and Participants 2015 is the year of the sheep according to the Chinese calendar. Here are eight resolutions from Buck Consultants that plan sponsors can adopt if they prefer not to follow the herd when it comes to retirement programs. Also eight resolutions plan participants should consider. Source:

Thinking of a Retirement Account Rollover? Think Twice A rollover can make sense if you’re in a 401k plan with bad investment choices or high fees, or if you want to take advantage of the tax features of a Roth. But staying in the 401k is usually an option, and often a good one. Source:

403(b) Plans

PSCA Releases Research on 403(b) Plans Most not-for-profit organizations believe they have a responsibility to encourage their employees to save for retirement, but only 10.6 percent of those organizations are able to measure potential participant outcomes as part of their retirement plans, according to a new survey of 403(b) plan sponsors from the Plan Sponsor Council of America. Source:

Seven Questions to Ask Non-Profit Plan Sponsors “Whether it’s seven administrative sins, seven deadly sins, or the seven words you can’t say on television, there doesn’t seem to be a lot of lists showing seven positive things. I will therefore take it upon myself to list seven positive questions that should be asked of non-profit retirement plan sponsors,” writes Aaron Friedman, National Practice Leader – Tax-Exempt, at the Principal Financial Group. Source:

Using the Saver’s Tax Credit to Increase 403(b) Plan Participation The saver’s credit is one way to providing meaningful opportunity for employees to participate in a 403(b) plan. Ellie Lowder discusses how the saver’s tax credit works and provides a crib sheet of sorts from the IRS. Source:

Teacher Retirement Plans: Case Studies Indicate Value of Pensions This report examines the retirement benefit elections of teachers in two states when new teachers have a choice between a defined pension plan or a plan that combines a defined contribution individual account with a DB pension. The analysis finds that since 2008, teachers in both states show a preference for the stand-alone DB pension. Source: (PDF File)

Fiduciary and Plan Governance Material

Mercer Identifies 10 Steps DC Plan Sponsors Should Take in 2015 In this piece, Mercer has defined ten steps that DC plan sponsors should take in 2015 to mitigate fiduciary risks and provide participants with access to solutions that meet their long-term retirement needs. Source:

Too Hot to Handle? The Truth About Retirement Plan Audits With the recently enacted ERISA fee disclosure rule, the DOL has increased its vigilance on plan sponsors, resulting in increased numbers of DOL audits and enforcement actions for retirement plans of all sizes. This article presents a discussion of key trends, common questions, and red flags to help retirement plan fiduciaries better prepare for a DOL audit. Source: (PDF File)

Ten Tips for Retirement Plan Executives and Managers This article examines ten proven actions that all executives can follow to significantly and quickly improve their organizations’ ERISA-related risk management programs. Source: (PDF File)

Four Tips for Plan Sponsors in 2015 If your company’s 401k plan is on auto-pilot, it’s time to take control. There are several timely things you should look into in order to improve the plan for the company and your employees in 2015. Here are four of the most important. Source:

How to Settle an ERISA Breach of Fiduciary Duty Case: A Checklist for Plan Trustees to Consider Settling fiduciary breach claims is often viewed by trustees as a bitter pill to swallow, as it requires them to abandon their right to defend themselves when they feel they have done nothing wrong. But prudence dictates that, before any case is settled, the trustees pursue all practical means, with the aid of their counsel, to reduce this risk to the barest minimum. Article reviews some strategies to consider. Source:

The Importance of Hiring a Skilled Plan Auditor For plan sponsors with more than 100 participants, one the most important fiduciary duties is to ensure the plan receives a quality and independent annual financial review. A report from AICPA reminds plan sponsors at mid- and large companies of the importance of their duty to hire a qualified independent auditor to examine the plan each year. Source:

Bumpy 2015 for Money Market Funds? Retirement plans that have money market funds (MMF) should be alert that those MMF may be headed for a downgrade. Moody’s Investors Service has revised its outlook for the money market fund industry to negative from stable, saying the number of funds rated “Aaa” was likely to decrease in 2015. Source:

Insight: Studies, Research and White Papers

Top 30 401k Plans of 2014, BrightScope BrightScope announced their sixth year-end ranking of the top 30 401k plans to recognize companies with the best 401k plans containing more than $1 billion in assets. Source:

The Australian Retirement Income System: Comparisons With and Lessons for the United States Paper briefly compare the Australian and US economies and demographics, and then describes the Australian arrangements and assess its econ efficiency and efficacy in delivering retirement support. Concludes by considering insights for the evolution of the US pension reform debate as demographic change unfolds. Source:

401k Plan Asset Allocation, Account Balances, and Loan Activity in 2013 This comprehensive 56 page report is an update of EBRI and ICI’s ongoing research into 401k plan participants’ activity through year-end 2013.The report is divided into four sections: the first describes the EBRI/ICI 401k database; the second presents a snapshot of participant account balances at year-end 2013; the third looks at participants’ asset allocations, including analysis of 401k participants’ use of target-date, or life-cycle, funds; and the fourth focuses on participants’ 401k loan activity. Source: (PDF File)

Majority of New 401k Participants Rely on Balanced and Target-Date Funds, EBRI The evolution of 401k plan designs has resulted in a significant increase in the use of balanced funds, including target-date funds, by recently hired 401k plan participants in 2013 compared with recently hired participants 15 years ago, according to a newly updated annual report by the Employee Benefit Research Institute (EBRI). Source: (PDF File)

Baby Boomers Are Revolutionizing Retirement, Are Employers Ready? The nonprofit Transamerica Center for Retirement Studies just released a new report, Baby Boomer Workers are Revolutionizing Retirement: Are They and Their Employers Ready?, which examines the retirement vision among Baby Boomer workers (born between 1946 and 1964) and the level of involvement among employers to facilitate their transitioning into retirement. Report details included in article. Source:

Plan Participants Share Advisor Selection Criteria Are the advisors 401k plan participants use associated with their retirement plan, or do they use an outside advisor? What reasons were involved in making these decisions? For nearly nine-in-ten (89 percent) of retirement plan participants, honesty and trustworthiness are the most important criteria in choosing a financial advisor. Source:

Countdown to a Better DC Plan Citing results from Callan’s annual DC Trends Survey, paper explores plan sponsor adoption of PPA provisions to see how they have benefited, where they have met challenges, and where they could do more. Organizes around seven takeaways to help sponsors better position their plans in 2015. Source: (PDF File)

One in Five Investors Have Tapped Into 401k Prematurely The majority of non-retired investors in the U.S. say their employer offers a 401k plan, and of these, 89% say they participate in it. Yet 21% of those who participate in such a plan say they have either taken out a 401k loan or even taken an early withdrawal from the plan in the last five years. Source:

Greater Protections Needed for 401k Forced Transfers and Inactive Accounts Millions of employees change jobs each year and some leave their savings in their former employers’ 401k plans. If their accounts are small enough and they do not instruct the plan to do otherwise, plans can transfer their savings into an IRA without their consent. In this report, the GAO examines the implications for plan participants of being forced out of plans and into these IRAs. Source:

DC Participants Seek Certainty The desire of plan sponsors and participants to increase the certainty of reaching retirement objectives increases the focus on retirement income as the expected destination; yet neither group is fully grasping the trade-offs between the expectation for performance/return and the probability of success. PIMCO’s Philip Chao discusses the DC plan design process, suggesting that plan sponsors start with setting the plan’s objective and defining how to measure success. Source: (PDF File)

Retirement Readiness: A Broader Perspective This paper creates an awareness of significant obstacles that employees face as they enter retirement. Specifically, this paper highlights debt risk in retirement, cognitive risk in retirement, and healthcare issues in retirement. Source:

Items of Special Interest to Service Providers

The Adviser’s Duty of Loyalty Fred Reish and Joan Neri co-authored this article discussing the duty of loyalty of a fiduciary adviser under ERISA. Specifically, the article explains that the legal duty of a fiduciary adviser runs directly to the participants and this duty overrides any duty the fiduciary adviser may have to the plan sponsor. Source:

DCIO Distribution Staffs to Grow in 2015, Survey Defined Contribution Investment-Only (DCIO) providers, those asset managers who offer investment products separately from recordkeeping services, will continue expanding their distribution staffs in 2015. A survey of DCIO organizations found that 79% of them plan to increase staffing further in at least one distribution-related role, according to new research from Ignites Retirement Research. Source:

Cerulli Numbers Buttress the RIAs-Supplant-Brokers Theorem The market share of the RIA channel will grow 40% over the next four years and wirehouses will lose 5% of their towering market share, according to a new report from Cerulli Associates of Boston. But not all experts agree. Source:

The Future of Technology and Services for Retirement Plans Many retirement plan service providers are investing in technology to link and leverage data from banks, insurers and other places where participants hold assets outside their retirement accounts. “I’m expecting differentiation in the coming years that will see leading plan provider Internet sites become highly responsive and customizable for the individual participant,” says Gary Josephs, managing principal at Retirement Benefits Group. Source:

Center for Due Diligence Shuts Down; Phil Chiricotti Retires On Christmas morning, the retirement plan advisory industry was greeted with the news that the Center for Due Diligence (CFDD) was shutting down. Phil Chiricotti, President of CFDD, is retiring at the age of 71. In an email to us, he said, “It is time.” Source:

ERISA Issues for Solicitor’s Fees Not much has been written about ERISA considerations for referring investment managers to retirement plans and the receipt of solicitor’s fees for a referral. However, there are a host of legal issues and the purpose of this article is to alert people about the issues and risks. Source:

Regulators Can’t Keep up With Change Despite the inability of the SEC to act on what would be the most significant fiduciary rule-making action of the millennium, some big changes in the broader regulatory and competitive environment have been under way. Source: (free registration may be required)

Key 401k Supreme Court Suit Will Shake up Retirement Plan Advisers Retirement plan experts are eyeing a key U.S. Supreme Court case that could shake up the way financial advisers work with their retirement plan clients. The case in question is the famed Glenn Tibble v. Edison International suit, which was filed in 2007 and was a pioneer among lawsuits brought by employees against their employers for excessive 401k fees. Source: (free registration may be required)

Grow Sales by Growing Relationships With Advisors TPAs and advisors are natural partners. Here are a few ideas to strengthen relationships and grow sales with advisors. Source:

Target-Date Funds

Understanding the DOL’s Suggested Process for Evaluating Target-Date Funds In this 3:14 minute video, J.P. Morgan’s Client Portfolio Manager, Lynn Avitabile, discusses the U.S. Department of Labor’s tips for evaluating target-date funds. Source:

Six Vital Questions to Keep a Retirement Glide Path on Course Target-date funds adjust each participant’s asset allocations as they move towards retirement. But does that glide path stay on course? Russell’s Josh Cohen and Rod Greenshields discuss the dynamics of retirement glide paths and the need to keep asset allocation assumptions in synch with market conditions and other variables. They layout six basic questions on the effectiveness of a target-date series glide path. Source:

Targeting Target-Date Take-Up Rates According to a recent update from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), TDFs now represent 35% of the account balances of those in their 20s (another 12.4% is invested in balanced funds), compared with 31.9% in equity funds. In contrast, just 13% of the balances of participants in their 60s are invested in TDFs. Even among participants in their 30s, target-date funds represent just under 23% of their balance (and balanced funds only 8.2%), while equity funds comprise nearly 45%. Source:

Issue of Lifetime Income

Pension Power for the 401k Companies want their employees to retire at a reasonably young age, like 65. The employees want the same. Increasingly, neither is getting their wish. New federal guidance could spur demand for guaranteed lifetime income products, which ideally can function similarly to pensions. Source:

Court, Legal, Legislative and Washington DC

Excessive Fee Case Against Lockheed Martin Goes to Trial — An Updated On Monday, December 15, 2014, the excessive fee lawsuit against Lockheed Martin goes to trial in the Southern District of Illinois after 8 years since the case was filed, two trips to the 7th Circuit and one failed cert petition to the Supreme Court. Source:

Nationwide Settles 13-Year-Old Revenue Sharing Suit After 13 years and a number of court opinions, all granting relief in the plaintiff’s favor, Nationwide has presented a motion to settle a lawsuit over its revenue-sharing practices. Source:

Lockheed Martin Case Puts 401k Plans on Trial A trial gets under way in St. Louis that could have a big impact on the way companies select 401k plans for their employees. Lockheed Martin is being sued for choosing retirement funds that shortchanged its employees and charged high fees. The case tests the limits of a company’s responsibilities to its employees at a time when 401k plans have become a central part of the nation’s retirement system. Source:

Lockheed Settles 401k Lawsuit Lockheed Martin Corp. agreed to settle a $1.3 billion lawsuit over claims the defense contractor shortchanged the 120,000 workers and retirees who participate in its pension plans as a trial was set to begin this week. Source:

The New Prudent Fee Fiduciary Standard The United States District Court for Southern District of New York has provided the long-anticipated introduction, or more specifically the judicial verification, of Vanguard’s funds’ fees as a comparative basis for assessing excessive of fund fees was established. While the case is not binding on other courts, the rationale used by the court is persuasive and will undoubtedly be referenced by plaintiffs’ attorneys in both 401k and other cases where breach of fiduciary issues involving fee issues are involved. Source: Prudent Investment Adviser Blog

Do Investment Policy Statements Qualify as Plan Documents? There is a mild conflict between the Circuits about whether a request for plan documents includes the obligation to provide a copy of the investment policy statement. A recent case out of the Fifth Circuit highlights the confusion. In Murphy v. Verizon Commc’ns, Inc., the Court of Appeals for the Fifth Circuit was asked specifically to consider whether plan investment guidelines must be provided upon request to plan participants and beneficiaries. Source:

Compliance and Regulatory Related

QDRO Distributions and the Age of 50 A defined contribution plan document generally may call for either waiting until the participant is age 50 or permit distribution of the designated amounts as soon as the order is otherwise deemed to a QDRO. If the document is silent on the issue, the alternate payee(s) must wait until the participant attains age 50 to receive a QDRO distribution. Source:

402(f) Notice Revised In Notice 2014-74, the IRS issued revisions to the IRS model ยง402(f) notice to address both Notice 2014-54 changes for distributions scheduled to go to multiple destinations when a participant has after-tax amounts or Roth amounts and other changes. Article reviews the changes and effective dates. Source:

Onerous New 5500 Requirement for MEPs; Other Developments Following are three recent developments affecting multiple employer 401k plans. The developments include (i) a requirement that Form 5500 filed on behalf of a multiple employer plan include an attachment identifying participating employers by name, (ii) a report that the DOL was asked to consider the application of the “open MEP” rules to a PEO MEP arrangement, and (iii) clarification from the IRS shutting down a distribution option for some MEPs. Source:

IRS Provides Reminder on Required Distributions From Retirement Plans and IRAs The IRS recently reminded taxpayers born before July 1, 1944, that they generally must receive payments from their IRAs and workplace retirement plans by Dec. 31st. The required distribution rules apply to owners of traditional IRAs and to participants in various workplace retirement plans, including 401k, 403(b) and 457(b) plans. Source:

Form 5500 Changes Coming Government regulators, hoping for a clearer picture on the condition of retirement plans, have announced changes to the Form 5500 and its short-form cousin that include estimates of an employer’s annual contributions to a plan. Source:

Information Copies of 2014 Forms 5500 and Schedules Available The DOL and IRS have jointly announced the release of the 2014 Form 5500, Annual Return/Report of Employee Benefit Plan, Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, and related filing schedules. Source:

ERISA Advisory Committee on Outsourcing Employee Benefit Plan Services The ERISA Advisory Council presented its recommendations on two retirement issues it studied in 2014: Facilitating Lifetime Plan Participation and Outsourcing Employee Benefit Plan Services. This article briefly reviews and evaluates its findings and recommendations with respect to outsourcing employee benefit plan services. Source:

ERISA Advisory Committee on Lifetime Plan Participation The ERISA Advisory Council presented its recommendations on two retirement issues it studied in 2014: Facilitating Lifetime Plan Participation and Outsourcing Employee Benefit Plan Services. This article discusses their recommendations on “lifetime plan participation” and how they may play out in regulatory or sponsor initiatives. Source:

IRS Amends Qualified Retirement Plan Rollover Safe Harbor Notices The IRS has recently updated its model safe harbor notices in Notice 2014-74. This notice is to be used by plan administrators of qualified retirement plans to satisfy this rollover tax notice requirement. The changes to the safe harbor notices reflect the IRS’s revised position regarding the allocation of after-tax rollover amounts where distributed to more than one destination and where the distribution consists of both pre-tax and after-tax amounts. Source:

DOL Releases Form 5500 and Form M-1 for 2014 Plan Year Those responsible for preparing and filing Forms 5500 and M-1 will want to familiarize themselves with the new requirements, and might consider allowing extra preparation time to gather the additional required information. Remember that these are informational copies of these Forms, which must be filed electronically. Source:

DOL 2014 Fall Regulatory Agenda The Department of Labor has released the 2014 Fall Regulatory Agenda. The updated agenda provides the anticipated publication dates for the next steps in the regulatory process for nearly a dozen ERISA items. This bulletin discusses the agenda for the retirement plan projects that we believe are most important to plan sponsors and service providers. Source:

Have You Had Your Retirement Plan Check-Up This Year? A retirement plan needs regular care to keep it operating properly. Your plan’s care should include a regular review of your plan’s basic operations. These one-page checklists from the IRS are a quick way to start your review. Source:

2015 Reporting & Disclosure Calendar for Benefit Plans This detailed 27 page Reporting & Disclosure Calendar for Benefit Plans is intended to indicate general reporting and disclosure requirements applicable to pension and health and welfare benefit plans on an annual basis. It does not cover all special requirements that may apply in a particular year due to an extraordinary event (e.g. plan termination) or that may apply only to a particular class of participants (e.g. highly compensated employees or nonresident aliens). Source: (PDF File)

IRS Announces Change to Retirement Plan Determination Letter Process The IRS has issued Announcement (Ann.) 2015-01, Changes to Employee Plans Determination Letter Processing, alerting retirement plan sponsors and administrators of procedural changes that will take effect February 1, 2015. While 2015-01 specifically addresses the application of these changes to individually designed defined contribution (DC) plans, the same changes will apply to pre-approved DC plans that seek an IRS determination letter regarding their qualified status. Source:

Year-End Compliance Testing Overview The end of the calendar year is upon us, which means the plan year end for many qualified plans. It will be time for plan sponsors to collect complete employee data to enable their service providers to perform the numerous compliance tests required to retain the plans tax qualified status. This article provides a brief description of the required defined contribution plan compliance tests as well as an overview of the census data collection process. Source:

Video: Plans Can’t Have Scrivener Errors Mistaken plan provisions are often referred to as “scrivener’s errors.” Such errors can occur when “extra” plan language is written into a document accidentally, or when necessary plan language is inadvertently omitted from the plan. In either case, the result can be a costly. Source:

New Mortality Tables Shine Spotlight on 401k Plans While there has been lots of discussion about the impact the new mortality tables will have on pension plans, there’s been far less talk about how longer life spans also affect defined contribution plan participants. Yet the average employee shares the same goal as any defined benefit plan: accumulate sufficient assets to provide a targeted percentage of preretirement income for their remaining lifespan. Source:

GAO Wants New Forced Transfer Rules A Government Accountability Office report found that billions in savings from forced transfers out of 401k plans are defaulted into costly, unproductive IRAs, most of which generate more in fees than returns. Based on data from one of the larger providers, the GAO estimated $1.5 billion in forced-transfers are made annually. Source:

Puerto Rico Treasury Announces Key Benefit Plan Limits for 2015 Here are Puerto Rico’s qualified retirement plan limits for 2015. Plan sponsors should ensure that documents and employee communications are updated to reflect the adjusted 2015 limits, and take steps to properly apply these limits in the administration of Puerto Rico qualified or dual-qualified retirement plans. Source: (PDF File)

Understanding the New IRA Rollover Rule After a recent court decision, the IRS has changed its policies regarding IRA rollovers. The new rules may limit your ability to make certain rollovers between IRAs. This document explains the new rules. Source:

IRS Provides More Clarity on New Rollover Rule The IRS has provided answers to questions received about the new single-distribution rule for rollovers from retirement plans. Source:

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