Saturday, January 11, 2014

403(b) Fiduciary and Compliance Requirements

Nicholas Zaiko, CIMA®
Investment Consultant
Bridgebay Financial, Inc.

The Employee Retirement Income Security Act (ERISA) of 1974, enforced by the Department of Labor (DoL),  established fiduciary responsibilities for plan sponsors.   Although some retirement plans may not be subject to ERISA, it is still best practice to follow those high fiduciary standards when managing non-ERISA plans.  All ERISA and non-ERISA plans must also comply with IRS regulations.

IRS regulations, effective 2009, changed 403(b) plans from essentially employee-controlled and directed, tax-sheltered accounts to integrated, full-service retirement plans whereby the plan sponsor now has fiduciary responsibility and liability for the prudent operation of the plan for the benefit of the participants.

Plan Document
Since 2009, both ERISA and the IRS have required a written plan document for the 403(b) plan that includes detailed information on plan eligibility, benefits, contribution limits and distributions.  The plan document should be reviewed and updated periodically and be consistent with the operation of the plan.   The plan document is then communicated to participants through an updated summary plan description (SPD).

The plan's legal counsel should review the documentation and amend the plan document periodically as regulations change.  Plan sponsors can retain plan document services for creating, modifying or updating plan documents and remaining compliant with IRS and Department of Labor regulations.

Universal Availability
Employer-funded 403(b) plans must meet statutory universal availability requirements and pass nondiscrimination tests, including new rules for control groups.  The IRS requirements were established to ensure that all eligible employees have access to the plan and receive an equitable distribution of plan benefits without favoring highly compensated employees versus rank and file participants.

Reporting Requirements
ERISA 403(b) plans became subject to IRS Form 5500 (Annual Return/Report of Employee Benefit Plan) filing requirements.  403(b) plans with over 100 eligible participants at the beginning of the plan year, generally, must have their financial statements audited by an independent auditor.

Monitor Plan Transactions
Plan sponsors with multiple vendors should establish a process to ensure that contributions, distributions and other participant transactions meet their the IRS limits.  They should monitor participant transactions such as loans and hardship withdrawals across vendors to ensure they comply with IRS and DOL regulations.

Information sharing of transactions and participant-directed asset transfers are generally  limited to authorized fund providers that share information with the plan sponsor. Transaction monitoring helps the plan sponsor comply with IRS rules and ensures employee contributions and distributions are correct.

Plan sponsors can retain compliance monitoring services provided by recordkeepers to help minimize risk and ensure plan compliance in such areas as loan and hardship withdrawals, contribution limits, nondiscrimination and universal availability.

Sponsors should implement a process for notifying employees, as required, about plan eligibility, enrollment readiness, contribution limits, QDIAs and other information.

Noncompliance is Serious
Noncompliance can subject the plan sponsor and the participants to a range of adverse outcomes.  Depending on the severity of the violation, failing to comply with regulations may result in significant fines against the plan sponsor or even  disqualification of the entire plan, making all plan assets taxable.   

If the plan sponsor does not monitor or limit plan contributions or distributions, there may be penalties and taxes due for participants that exceed the IRS limits.

Every plan sponsor should strive to implement best practices in the administration and oversight of the 403(b) plan by establishing a comprehensive set of policies and procedures that are consistently followed.  Adherence to these procedures should support a well-thought out process that reduces fiduciary risk for plan sponsors.

Prudent oversight should encompass plan governance, rational plan design, consistent oversight and compliance.

Plan governance should be documented with policies that specify fiduciary responsibilities, accountability, roles, and procedures. For compliance purposes, specific roles should be clarified, documented and accountability established for varying responsibilities.

All designated fiduciaries should understand their status, duties and potential personal liability for any fiduciary breach.  The plan should have an Investment Committee that oversees the investments. An Administrative Committee would make decisions on plan design, benefits, and employer contributions.

Plan Design
Plan sponsors should review periodically the plan design to incorporate new features as regulations change, plan demographics evolve, and new services become available to the plan.  They should consider the impact of automatic enrollment, automatic deferral, re-enrollment and  automatic deferral increases as provided for under the Pension Protection Act of 2006 (PPA). 

Another design feature is to add a Qualified Default Investment Alternative (QDIA) to ensure that participant balances are properly invested when they do not make an investment selection for their contributions.

An investment policy statement establishes the guidelines for selecting and monitoring plan investments, 404 (c) compliance, plan fees and monitoring service providers. Fiduciaries should consider using experts such as independent retirement plan investment consultants that serve as fiduciaries to develop investment policy guidelines, assist with investment menu design and conduct annual investment reviews.

The investment options available to participants should ensure broad diversification to help balance risk and return for all investor types.

By following a prudent and consistent process to demonstrate how each investment was selected for the plan to benefit its participants, plan sponsors can meet their fiduciary obligations.  Once selected, investments should be monitored for performance against relevant benchmarks and fees.

A well-diversified fund menu should address the needs of different types of participants.  An investment line-up should include a variety of investment options, each with different objectives, benefits and risk profiles to serve a wide range of participant needs.  A good line-up would include a range of investment vehicles that enable the participant to create a unique asset allocation.  Asset allocation options are well-suited for participants that prefer to have their investment decision managed professionally.  Finally, guaranteed income options that are designed to provide retirement income may be an effective way to provide participants nearing retirement with a steady stream of income.

Plan sponsors can provide education and advice for participants using a full range of educational programs that offer individual objective advice, webinars, publications, online tools and educational resources.  The quality, impartiality, and effectiveness of these programs should be monitored by the plan sponsor.

Annual Review
An annual plan review can identify areas for improvement and ensure that the plan is being operated effectively.  Reviews should cover areas such as plan participation, asset flows, service quality, cost, transaction activity, participant satisfaction, education, fees and investment performance. By consolidating multiple providers to a single provider, plan sponsors gain greater control, flexibility and cost-efficiency.  Plan sponsors’ role in meeting fiduciary and compliance requirements through an efficient and optimal plan design will produce better retirement outcomes for their participants.

The plan sponsor’s role as a fiduciary should focus on strategies that mitigate risks associated with fiduciary responsibilities and compliance issues.  The risk of not operating a 403(b) retirement plans in a compliant manner have increased as regulations continue to change and evolve.

Bridgebay, an independent retirement plan consultant is dedicated to advising plan sponsors and assisting plan sponsors in meeting their fiduciary and compliance obligations, offering plan design solutions with proven results and providing access to objective advice and guidance for employees.  Bridgebay serves as co-fiduciary to its plan sponsor clients.

Friday, January 3, 2014

2014 Outlook for Regulatory Updates for Employer Retirement Plans

Barbara Williams, CFA,
Managing Director
Bridgebay Financial, Inc.

The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) is expected to issue a full range of guidance and regulations in 2014, some of which have long been under evaluation. 

Section 408(b)(2) of ERISA Amendment
EBSA is expected to amend the disclosure provisions requiring covered service providers to provide a guide that helps fiduciaries to understand the terminology used in the disclosures, contracts or arrangements.  The guidance is intended to clarify any potential conflicts of interest, identify the true costs and understand the disclosures to determine the reasonableness of covered service provider costs.  Often the disclosures are provided in complex terms and disclosed in complicated documents.   EBSA’s notice and amendment to Section 408(b)(2) of ERISA is expected in January, 2014.

QDIA Amendment
The DOL’s qualified default investment alternative (QDIA) regulation is expected to be amended. Fiduciaries are provided certain fiduciary protection for participant-directed defined contribution plans whereby the participant does not select investments to be defaulted to the plan’s QDIA with the appropriate notices. 

EBSA is expected to issue a final rule in March 2014 that amends and increases the level of investment information that must be disclosed in the required notice to participants and beneficiaries.

The proposed rule-making will amend the participant-level disclosure regulation under ERISA Section 404a-5 for information on the QDIA plan option.  The most widely used QDIAs in defined contribution plans include target date and asset allocation funds.  The EBSA issued a proposed rule in November 2010 and plans to issue its final rule on the increased participant disclosures in March, 2014.

Defined Benefit Plan Funding Notices
EBSA is expected to finalize rules for annual funding notices for DB plans.  It will also address summary annual reports for defined benefit plans. The funding rule was originally proposed in 2010 with the comment period ending in January 2011.   EBSA plans to issue a final rule in March, 2014.

Brokerage Window
EBSA is expected to review the use of brokerage window-only options by participants in ERISA-covered defined contribution plans.  Most participant-directed plans offer a specific number of investment choices or menu of investments that are selected by the plan sponsor through a due diligence process.  In contrast, some plans offer a brokerage window-only as the investment option.  In the case of a brokerage window, the plan sponsor cannot and does not conduct a due diligence review of all of the potential investments the participant may choose.  A brokerage window may include an inordinate number of mutual funds, ETFs, stocks and bonds.    

EBSA intends to determine and potentially issue regulatory guidance and establish fiduciary requirements for plan sponsors that offer the brokerage window-only investment option.  The review of this issue will be initiated through the issuance of a Request for Information from the Industry and plan sponsors in April, 2014.

Lifetime Income Illustrations
EBSA plans to issue guidelines for lifetime income illustrations on participants’ retirement account statements in late August, 2014.

EBSA is expected to issue new definitions for fiduciary and identifying conflicts of interest.  The revised definitions have been under review for a few years.  The proposed “conflict of interest rule is now expected September, 2014.   

Safe Harbor for Selecting Annuity Providers
The DOL and Department of the Treasury recently issued a Request for Information (RFI) to elicit information on Lifetime Income Options for Participants and Beneficiaries in Retirement Plans.  The purpose of the RFI is to elicit information from the financial industry and plan sponsors to determine the practicality of inducing defined contribution plans to offer a lifetime income stream throughout retirement through a third party annuity provider or another contractual arrangement.   

In 2008 the DOL had issued a regulation that established a safe harbor for plan sponsors that met their fiduciary responsibilities in their selection of an annuity provider.

EBSA is now considering amending the annuity selection safe harbor based on the RFI responses and may issue a revision in October, 2014.