The Rosenbaum Law Firm P.C. Blog

A few years back, an Internal Revenue Service (IRS) official opined that the IRS would not look favorably on safe harbor 401(k) plan making any amendments mid-year except in some circumstances such changing a trustee, changing a plan vendor., loosening  eligibility requirements, and changing a plan year as long as the safe harbor plan year was not affected. There was no guidance on the matter and the people who attended the conference where that official said it were very concerned with the statement. Many read too much into the statement.

While I usually have a Justice Scalia interpretation of the Code, ERISA, and the regulations, some statement by an IRS official at a regional ASPPA conference doesn’t hold much weight with me. I took the position that I would allow amendments to a safe harbor 401(k) mid-year as long as it does not impact the safe harbor formula in place (except as previously allowed by other guidance) or that would restrict the ability to get a safe harbor contribution or increase or implement a discretionary matching contribution. Many third party administrators (TPAs) too a very stringent reading of the IRS official’s statement and stated they wouldn’t even allow a change of the profit sharing contribution formula or even add an in-service distribution at age 59 ½ mid-year. I think it was absolutely preposterous and was hoping for some actual, reasonable IRS guidance.

Common sense came 3 ½ years later in the form of Notice 2016-16 which states which amendments mid-year would not be allowed and safe harbor notice changes that must be made to alert plan participants of any amendments to the safe harbor notice.

Participants need a reasonable time to be alerted to any mid-year changes to the Plan within 30-90 days of the change as well as an opportunity to change their deferral elections before the change is made.

The notice banned these types of mid-year changes:

1)   a change to increase the years of service required to fully vest in safe harbor contributions under a Qualified Automatic Contribution Arrangements (QACA) .

2)   a change to further restrict the group of employees eligible to receive safe harbor contributions. However, eligibility changes with respect to employees who are not already eligible to receive safe harbor contributions under the plan are allowed (such as loosening eligibility requirements).

3)   a change to the type of safe harbor plan.

4)   a change to modify (or add) a formula used to determine matching contributions if the change increases the amount of matching contributions. This includes discretionary matching contributions. A limited exception does apply if at least 3 months prior to the end of the plan year, the change is adopted and the updated safe harbor notice and election opportunity are provided, and if the change is made retroactively effective for the entire plan year.

I always say that as bad as 401(k) plans may be, 403(b) plans are in much worse shape. It didn’t help that the Internal Revenue Service only issued regulations that governed them only 30 years too late, back in 2008. It also doesn’t help that still many 403(b) plans (such as those that offer deferral contributions only) and governmental plans aren’t subject to the Department of Labor’s oversight under ERISA.

While many like the idea of retirement plans not subject to the provisions under ERISA, it’s needed. Good retirement plan regulation by the Internal Revenue Service and the Department of Labor have helped the rights of plan participants, as well as lowering plan expenses.

403(b) plans not subject to ERISA are governmental plans and plans where the non-profit employer has absolutely no fiduciary control of the Plan. From experience, plans not subject to ERISA are costlier and are poorly run. Heck, up until those regulations, they didn’t need to have a written plan document.

One of the biggest problems with non-ERISA 403(b) plans where there are multiple plan providers. For example, a school district may offer 5-6 different plan custodians who maybe an expensive insurance company or a low fee mutual fund company. The problem is that while everyone loves choice, too much choice drives up cost because a plan custodian/ investment provider isn’t going to offer the best pricing if they have to compete against other providers in each school district. I know because I worked for a union that wanted to offer its own 403(b) option to plan members, but the low fee plan providers exited stage left when they discovered they had to compete against 5-6 providers in every school district in a state with over 750 school districts.403(b) plans that are not subject to ERISA are like the old days of the Wild, Wild West because where there are no rules, outlaws run rampant and the outlaws in the 403(b) space are plan providers charging 200 too 300 basis points in an environment that allows it.

My two cents is that 403(b) plan would be in better shape if they were all subject to ERISA and Department of Labor (DOL) oversight.  I won’t be surprised if the DOL will try to regulate this characters from the Wild, Wild, West.

My latest newsletter geared towards advisors and retirement plan providers can be found here.

My latest JDSupra.com article can be found here.

The fixation and discussion about plan expenses usually flares up when the stock market isn’t doing well. Two major corrections within a 10-year period (2000-2010) made fee disclosure regulations inevitable.  With the way the market is going in 2016, we maybe headed toward another correction.

While the discussion about fees has had a positive effect on the retirement plan industry, it’s still not the greatest issue that has been left unresolved. While fees have gone down since the regulations have been implemented and plan sponsors have become cognizant of their need to pay only reasonable plan expenses, the biggest issue is still not talked about.

The issue? The fact that most participants in a participant directed 401(k) plan don’t have the requisite knowledge and background in order to make informed investment decisions.  Too many 401(k) plans don’t offer plan participants enough investment education to make informed decisions and only a small amount of plans offer investment advice.

Giving plan participants the choice of investments to make and having an investment policy statement with a regular review of investment options is only half the battle to limit liability under ERISA §404(c).

Financial advisors along with plan sponsors need to make sure that plan participants have the right tools to make informed decisions. With apologies to my old law firm’s h.r. director, handing out a bunch of Moriningstar profiles isn’t going to do it. Plan participants at the very least, need some investment education that talks about the general rules of investing. The ideal approach is to make sure plan participants get investment advice, whether provided by the financial advisor (by abiding with the investment advice regulations) or provided by a third party (such as rj20.com).

While this industry had done a decent job with lowering and disclosing plan expenses, it needs to do more to make sure that plan participants get enough information to make informed investment decisions.

My latest newsletter can be found here.

My latest JDSupra.com article can be found here.

Multiple employer plans (MEPs) are a topic that many plan providers talk about, but don’t really know what’s allowed and what’s not.

A multiple employer plan is a plan where unrelated employers adopt a plan and it should be treated as one plan for purposes of filing a Form 5500.

There was something called an open MEP where the employers were unrelated to each other. Then there was something called a closed MEP, where there was a connection or nexus between all of the adopting employers, such as members of a trade group.

In 2012, an Open MEP unwisely sought guidance from the DOL on whether their MEP qualified as a single plan for purposes of Form 5500. The DOL said it did not because there was no connection between adopting employers and the Open MEP plan sponsor wasn’t an employer, it was just a company created by the financial advisor to sponsor a MEP. The DOL stated that all of the adopting employers needed to file a Form 5500, which defeated one of the most important features of a MEP.

People thought this was the death of Open MEPs. It was in the sense that there is no more Open and Closed MEPs, there are just MEPs that will qualify as a single plan and MEPs that won’t. Most importantly, the DOL never provided any further guidance on MEPs  which means that the advisory opinion issued in that Open MEP case was only applicable to that Open MEP in question. It gave the DOL’s thinking on MEPs and a blueprint for MEP operators to develop a MEP that could be considered a single plan for 5500 purposes.

Three years later, there is still no guidance and there are plan providers who are spreading stories about MEPs on what qualifies as a single plan and what does not. In the end, it’s just opinion without real DOL guidance.

Congress and the White House support the idea of MEPs. Thanks to some cajoling from President Obama, the DOL is considering allowing individual states to operate MEPs and prepare guidance that will allow them to operate MEPs that will likely be considered a single plan for purposes of a Form 5500. What does this all mean? While states may or may not want to be in the MEP business, I believe that this will actually allow Open MEPs again to be considered a single plan again. Why? I don’t think court scrutiny would allow the DOL to allow what is essentially an Open MEP operated by states and not allow Open MEPs by plan providers with the experience in knowing how these plans run. Maybe I’m off base, but I think the DOL will have no choice but to allow Open MEPs to breathe again if they are allowing states the same opportunity in running them because having adopting employers all from the state isn’t a sufficient connection/nexus as outline in that 3-year-old advisory opinion.  What’s good for the state should be good for plan providers. That’s just my opinion, but you heard it here first.

My latest JDSupra.com article can be found here.

Add Great West under their Empower Retirement brand name as the latest bundled provider being sued. Great West is being sued for revenue sharing fees from mutual funds as part of their program.

Great West is being sued by a participant from the TPS Parking Management LLC 401(k) plan and the suit seeks class action status.  Why class action? Well it seems TPS Marketing has $7 million in assets and Empower covers 32,000 plans, 7 million participants, and administers more than $416 billion in assets. Even if you learned common core math, you can figure it out.

I love the term “kickback” being thrown around in the complaint to describe revenue sharing because I often labeled revenue sharing payment as a “kickback”, “pay to play”, or “payola” years before it became popular.

While I don’t care for revenue sharing and it inadvertently exposes plan sponsors to liability, I think this lawsuit is going to get tossed because I think it’s going to be hard to treat Great West as a fiduciary unless they did something overt to make them a fiduciary. Great West is only going to be on the hook if they are treated as a fiduciary and Great West has a smart team of lawyers that try to make sure that Great West’s contracts and policies avoid them becoming fiduciaries.

While we often hear about the headlines of some of these big settlement ERISA cases, I’m sure many of you don’t realize that providers like Principal, American United Life, and John Hancock heave beaten back lawsuits that have tried to place them on the hook for investment selection because they were not considered fiduciaries.

The lesson here is that even if Great West wins their case like the others, litigation is costly and that’s the cost of using revenue sharing whether you win the case or lose.  So is using revenue sharing funds worth the headache? I think revenue sharing is  a dying practice and we’ll shake our heads within 10 years and remember that this silly practice once existed.