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.
Governance
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.
Investments
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.
Education
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.
Conclusion
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.
