Who pays 401(k) fees? Us or them?

By Jerry Kalish on Posted in 401(k) Plans, Fiduciary Matters

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That’s the question employers ask regarding who pays 401(k) fees. The “us” being, of course, the employer, and the “them” being the plan participants.

The number of “thems” has been increasing. According to Deloitte’s 2015 Annual Defined Contribution Benchmarking Survey, the number of employers completely covering the cost of fees declined again in 2015 to 36% compared to 40% in 2013-14 and 50% in 2012.

Whether you are an employer whose employees are already paying some or all of the plan costs, or are considering doing so, here are some important considerations to keep in mind.

The ERISA Basics

Plan assets can be used for two purposes: to pay benefits and pay the “reasonable” expenses of plan administration.

The decision to pay fees from the plan is a fiduciary decision subject to ERISA’s fiduciary rules. That is, the plan must be established and maintained by the employer for the “exclusive benefit” of the employees and beneficiaries.

That means that the plan cannot pay for expenses that are considered to be the responsibility of the employer. These are called “settlor” expenses and may include:

  • Legal or consulting services in connection with the formation of the plan
  • Plan design studies and cost projections to determine the financial impact of a plan change
  • Legal and consulting expenses incurred in connection with the decision to terminate a plan

On the other hand, expenses that relate to the fiduciary’s administration of the plan can be paid out of plan assets. These are called operational expenses and may include:

  • Drafting required plan amendments to maintain the tax-qualified status of the plan, e.g., Pension Protection Act restatement
  • Discrimination testing
  • Implementing a plan termination

It’s more complicated than this, of course. The Department of Labor (“DOL”) has published Guidance on Settlor vs. Plan Expenses that provides a set of six hypothetical fact patterns in which various plan expense issues are both presented and addressed.

Allocation of Expenses

What about those plan expenses that are not being charged to a specific participant’s account such as transaction fees? Those operational fees can be allocated to all plan participants on either a “pro rata”, done proportionately based on account balances; or “per capita”, each participant pays the same amount.

Here’s a example of how a fee of $1,000 would be allocated either pro rata or per capita:

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As you can see the participant with the largest account balance would pay the most fees under the pro rata method and the participant with the smallest account balance would pay the same fee as the others under the per capita method.

Which method is best? Once again, it’s based on fact and circumstances as to what is reasonable. The DOL has stated that it could be reasonable to treat terminated employees differently than active employees when it comes to the allocation of plan expenses.

Using Forfeitures to Pay Expenses

Forfeitures, those amounts arising from participants terminating whose accounts are not fully vested, can be used to pay expenses or reduce employer contributions. In the case of the latter, however, the type of employer contribution should be taken into account. For example, forfeitures from matching contribution should be used to reduce  matching contributions and forfeitures from employer contributions should be used to reduce profit sharing contributions.

Proper Documentation

As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.

As you know, ERISA compliance matters are based on individual facts and circumstance, and especially when paying expenses from plan assets. So use caution when doing so including discussing it with your legal advisor.

Tempus fugit: October 1 deadline to set up new 401(k) plan fast approaching

By Jerry Kalish on Posted in 401(k) Plans

tempus fuget uk 1As the sign under the clock pictured above says, tempus fugit, or ‘time flies’ translated from the Latin.

This being The Retirement Plan Blog there’s an ERISA connection, of course.  Much of  ERISA involves meeting deadlines. This one is about establishing a new retirement plan.

Before 401(k) plans were invented, an employer with a calendar year end could wait until year end to set up a new plan. The only requirements were a signed plan document and an initial contribution to set up a trust account. The plan could be effective retroactive to January 1, and a tax deduction could be taken as long as the contribution was made before the tax return was due.

Except if that new plan was a Safe Harbor plan in which case, it had to be established by October 1. (The same 3-month deadline also applies to adding a Safe Harbor provision to an existing profit sharing plan).

Meeting the deadline allows owners and other Highly Compensated Employees (HCEs) to maximize their contributions regardless of how much the Non-HCEs contribute. Under 2015 tax rules, the maximum is $18,000 plus an additional $6,000 for those over age 50, for a total of $24,000.

In return for which, the Safe Harbor rules require that an employer make one of two types of contributions:

  • 3% of compensation for all eligible employees, or
  • Matching contribution of 100% of the first 3% of an employee’s contribution, and 50% of the next 2% of an employee’s contribution. Thus, if an employee contributes the full 5%, it will cost the employer 4%.

These Safe Harbor contributions can be allocated to owners and HCEs, as well.

One more possible tax benefit: an employer adopting a new 401(k) plan may qualify for the retirement plan tax credit as discussed in our FAQs.

October 1 is fast approaching.

Image, via Flickr, The Bear Tavern, Bearwood, Birmingham City, England, Tim Ellis

 

 

 

 

 

 

 

ERISA Plans Do Have Their Limitations

By Jerry Kalish on Posted in 401(k) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Fiduciary Matters, Welfare Benefit Plans

expiration3That’s limitations as in “limitation periods”. A recent court case reminds ERISA plans to have such limitation periods and to communicate it to someone claiming a plan benefit.

Let’s start with the basics.

What’s a “limitation period”? In layman’s terms, it’s a law set forth in a State statute of limitations that sets time limits on how long a party has to file a civil lawsuit or how long the state has to prosecute someone for committing a crime. They are specific to each state and vary depending on the legal claim or crime involved.

The case referred to above is Mirza v. Insurance Administrator of America, Inc., which can be summarized as follows:

Facts: Dr. Neville Mirza, the Plaintiff, received an assignment to receive benefits from an ERISA welfare benefit plans for surgery expenses for a covered participant. The claim was denied but the denial letter failed to state that he had one year from the date of the final benefit denial to seek judicial review. Dr. Mirza sued 19 months after getting the denial letter.

Issue: Was Dr. Mirza barred from filing his suit because of the Plan’s limitation period?

And the not surprising answer is No.

Here’s what this ERISA consultant gleaned from the decision:

  1. The Plan substantially reduced the State statute of limitations from six years to one which the Court found reasonable as a matter of contract law.
  2. ERISA regulations require that “the administrator must disclose the plan’s applicable time limits.”
  3. The Court held that “‘When a letter terminating or denying Plan benefits does not explain the proper steps for pursuing review of the termination or denial, the Plan’s time bar for such a review is not triggered.”.”
  4.  The Court instead applied New Jersey’s six-year statute of limitations pertaining to breach of contract actions.

Decision

Dr. Mirza timely filed suit, even though he filed 19 months after the final denial of his claim for benefits.

Takeaways

This case provides us two takeaways.

The first one the Court provided:

One very simple solution, which imposes a trivial burden on plan administrators, is to require them to inform claimants of deadlines for judicial review in the documents claimants are most likely to actually read—adverse benefit determinations.

The second one would have the specific limitation period in a document that participants are required to have, the Summary Plan Description.

What’s Reasonable?

It starts with the Plan document, of course. Many Plan Sponsors use a three-year limitation period that recognizes the recent Supreme Court decision, Heimeshoff v. Hartford Life & Accident Ins. Co. The Supreme Court held that an ERISA disability plan’s three-year limitations period, running from the date of proof of loss, was enforceable even though the statute of limitations began to run before the participant’s cause of action accrued.

Considering that that there has been no guidance yet from the Internal Revenue Service or Department of Labor as to what’s “reasonable”, discussing the matter with legal counsel would seem like the prudent thing for Plan Sponsors to do.

Tax planning for 2014 isn’t over until it’s over

By Jerry Kalish on Posted in Individual Retirement Accounts

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If you are a business owner that didn’t quite get around to setting up a retirement plan for 2014, it may not be  over yet. It’s not exactly one of those it isn’t over until we say it’s over situations, but there is still time for a business owner to put money away for retirement and get a tax deduction for 2014.

I call it the “procrastinator’s pension plan,” but you probably heard of it under the name that Congress gave it: Simplified Employee Pension (SEP). It’s an IRA-based retirement plan that a business owner can adopt for a prior year. Here are a few of the details:

  • Any employer can set up one up using IRS Form 5305-SEP.
  • No filing fee is required.
  • It must be offered to all employees who are at least 21 years of age, employed by the employer for three of the last five years and had compensation of $550 for 2014 ($600 for 2015).
  • It must be based only on the first $260,000 of compensation ($265,000 for 2015).
  • Only employer contributions can be made in an amount not to exceed the smaller of $52,000 ($53,000 for 2015) or 25% of compensation.
  • Contributions must be immediately 100% vested.

As you can see, it’s not as nearly as flexible as a traditional profit sharing or 401(k) plan, but, hey, it can be done now.

“Now” means the business owner has to establish and fund his or her SEP by the due date of the 2014 business tax return, including extensions. For calendar year tax payers, the due date depends on the type of business organization:

  • Sole Proprietorship reporting on Schedule C of Form 1040: April 15, 2015 or October 15, 2015 if an extension is filed.
  • Partnership filing Form 1065: April 15, 2015 or September 15, 2015
  • Corporation filing Form 1120 or 1120S: March 15, 2015 or September 15, 2014 if an extension is filed

There are a lot more details, of course, and you should talk this over with your tax adviser now to see if you should set one up. That is, if you can get around to it.

U.S. Steel Freezes Pension Plans: Symbolic Recognition of End of Traditional Defined Benefit Plan Era

By Jerry Kalish on Posted in Cash Balance Plans, Defined Benefit Pension Plans

left the buildingIt was just a brief note on the Form 8-K filed on August 17, 2015 by U.S. Steel Corporation with the U.S. Securities and Exchange Commission.

As described above, on August 17, 2015, the Corporation enacted a hard freeze of benefits accrued under its DB Plan effective December 31, 2015. Participants of the DB Plan will be transitioned to a defined contribution retirement plan at that time. The Corporation will perform a remeasurement of the DB Plan, and will report these results in its quarterly report on Form 10-Q for the quarter ended September 30, 2015.

The usual course of action in situations such as these is to subsequently terminate the plan by paying out benefits.

Pension plan freezes and ultimate terminations is not a new phenomenon, or course. It’s symbolic of the transformation of this country’s workplace retirement programs from defined benefit plans to defined contributions plans, i.e., 401(k) plans that began in the 1980s. In everyday terms, it represents the change from guaranteed retirement benefits by the employer to retirement savings by the employees.

The U.S. Steel Corporation Pension Plan began in 1911 even before favorable tax legislation was enacted as noted by the Employee Benefit Research Institute:

  • 1921. The Revenue Act of 1921 exempted interest income on trusts for stock bonus or profit-sharing plans from current taxation. Trust income was taxed as it was distributed to employees only to the extent that it exceeded employees’ own contributions. The act did not authorize deductions for past service contributions.
  • 1926. The Revenue Act of 1926 exempted income of pension trusts from current taxation.
  • 1928. The Revenue Act of 1928 allowed employers to take tax deductions for reasonable amounts paid into a qualified trust in excess of the amounts required to fund current liabilities. The act changed the taxation of trust distributions that are attributable to employer contributions and earnings.

But defined benefit pension plans haven’t totally left the building at least for small business. They have taken on a different persona in the form of Cash Balance Pension Plans. Coincidentally, the Kravitz 2014 Cash Balance Research Report was published at about the same time as the U.S. Steel announcement with quite a different tone:

  • The Cash Balance Plan market surged 22% versus a 1% increase in number of 401(k) plans.
  • Cash Balance Plans grew 22%, surpassing industry projections of a 15% annual increase.
  • Cash Balance Plans now make up 25% of all defined benefit plans, up from 2.9% in 2001.

A different era beginning with 87% of the approximate 16,700 Cash Balance Plans adopted by small employers (those with less than 100 employees) with the highest growth for employers with 25 or fewer employees.

The difference? Large employers shedding liabilities and compliance obligations and small employers maximizing tax deductions and increased allocations to owners.

Employees contribute more to 401(k) plans, but number of new plans declines

By Jerry Kalish on Posted in 401(k) Plans

PrintEmployee Benefit Advisor, for whom I serve on the Editorial Advisory Board, recently reported that DC Plan Participation Rates, Account Balance Increase.

The reporter, Paula Aven Gladych cited the Deloitte 2015 Defined Contribution Benchmarking Survey that by focusing on “ease of use” retirement plan participation rates have increased from 2013 to 2014.

Such features include:

  • Auto-enrollment with stepped-up contributions
  • Easing of eligibility requirements and entry dates
  • 100% vesting of employer matches
  • Managed accounts
  • Automatic fund rebalancing
  • Managed accounts
  • Increased use of technology with smartphone and tablet apps

Good news, eh? Of course, but that’s what we have. We need, of course, is providing more access to retirement savings plans; and here the numbers don’t look so good.

According to the 2013 Government Accounting Office Report, Challenges and Prospects for Employees of Small Businesses, an estimated 51 to 71 percent of employees of small businesses lack access to such plans. (The difference in percentages is based on the different survey data used by the GAO).

So if we do the math, that means that of the approximately 42 million who work for small businesses with fewer than 100 employees, as many as  30 million employees could lack access to employer sponsored retirement plans.

That statistic in terms of new plan start-up isn’t very encouraging. A press release from Judy Diamond Associates said that their research indicated that there were substantially fewer new plans launched in 2013, the most recent year for which data is available, than in 2012.

Curious about years prior, I reached out to the public relations firm that represents ALM who were kind enough to provide me year-by-year numbers for new 401(k) plans over the past 10 years.

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As you can see, there was a huge decline from 2007 to 2009 during the financial crisis. New plans increased starting in 2011, but then started to decline again with about a 5% decline from 2012 to 2013. Not the trend that we need.

Are there lessons to be learned here from the retirement plan systems in countries like the in the U.K. and Australia?

Who do you trust: the institution or the individual?

By Jerry Kalish on Posted in Fiduciary Matters, Trust

Trust Filter

 

 

 

 

 

 

 

My social media role model, Kevin O’Keefe, blogged an interesting question yesterday, Individual lawyer or law firm blog, which is trusted more? Kevin is President and Founder of LexBlog, the pioneer in law firms and lawyers with blog (and non-lawyers such as yours truly).

Understandably Kevin puts the trust issue – and it is indeed an issue today – in the context of the legal profession. But I’m a business owner in the retirement plan business that sees trust with a different perspective: trust between retirement plan sponsors and employees and their service providers.

Trust in institutions is a big issue worldwide. For the past 15 years, the Edelman Annual TrustBarometer, has tracked trust in business, media, government, and non-government organizations. The 2015 edition tells a sad story.  There has been a global decline in trust over the last year, and the number of countries with trusted institutions has fallen to an all-time low among the informed public.

Bottom line (pun intended) from my vantage point is that people do not trust business. It’s never been more difficult and complex in recent years to build and maintain credibility. But the 2015 data shows that now more than ever, a company’s employees are one of the most trusted sources of information. Edelman calls it “tapping the internal trust surplus”.

So Kevin, based on the Edelman data and my own experience, I vote for the Individual Lawyer.

Image courtesy of Flickr by Mark Smiciklas.   

Employee financial stress and how employers can help

By Adam Turville on Posted in Financial Education

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The whimsical picture shown above belies the serious matter of many American workers suffering from financial problems. They are living paycheck-to-paycheck with budgets stretched thin affecting employees at all pay levels.

Dr. E. Thomas Garman, Professor Emeritus of West Virginia University, became concerned as far back as 2006 about workers struggling with their finances when his research showed that approximately 50% of American employees are facing financial diffculty and are trying to reduce their debt of which 25% struggle with serious financial stress.

That year Dr. Garman, Aimee Prawitz, Judith Cohart, and others established the Personal Financial Employee Education Foundation (PFEEF) of which I am now President. PFEEF is a 501(c)(3) organization whose mission is to promote and facilitate financial education in the workplace.

Employee financial stress spills over into the workplace negatively effecting direct employee costs of absenteeism, administration, lost productivity, and turnover. An employee’s low engagement or absenteeism can also have a negative impact on coworkers’ attitudes.

Today, more so that in 2006, employers recognize that workplace wellness programs should not only include health matters, but employee financial education. The market place now offers a wide array of resources and tools such as in-person counseling, on-line course, and our own Personal Finance Well-Being Scale™, a survey used to benchmark the financial health of employees and let the employees track their progress.

Now as to which delivery method is best? That’s a topic I’ll discuss in a future blog post.

About the Author

Adam Turville is President of the Personal Financial Employee Education Foundation (PFEEF), a 501(c)(3) organization whose mission is to promote and facilitate financial education in the workplace.

Image courtesy of Flickr by topgold.

Legal Advice on Your 401(k) Plan – Is It Confidential?

By Andrew S. Williams, Esq. on Posted in 401(k) Plans, Fiduciary Matters

ConfidentialLet’s say you have a concern about how your 401(k) plan is operating.  Maybe participant loans aren’t getting repaid or a service provider has neglected to allocate forfeitures on an annual bases.  So you consult a lawyer.  The lawyer writes a memo outlining the situation and advising on corrective steps.  You drop the memo in your 401(k) file.

Then the Department of Labor (“DOL”) comes calling and asks to look at your plan administrative documents.  You would like to withhold the lawyer’s memo as confidential “attorney–client” communications.  Can you do that? Or do you have to produce the memo – and give the DOL a roadmap on how to assert a claim against the Plan Administrator or other in-house fiduciaries?

The answer is that memo ­­­­actually has to be produced because legal advice about plan administration is likely to be subject to the “fiduciary exception” to the protection normally afforded by the attorney–client privilege.

The rationale is that the fiduciary seeking legal advice is doing so in a representative capacity on behalf of all plan participants.  As such, the fiduciary cannot conceal material information about fiduciary communications from participants and others acting on their behalf – like the DOL.  As summarized by one court:

[As] applied in the ERISA context, the fiduciary exception provides that an employer acting in the capacity of ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration.

Exceptions may apply in the case of legal advice to an employer concerning plan design issues and other “settlor” functions.  Also, legal advice to a plan fiduciary with respect to a pending benefit dispute with a plan participant may still be confidential on the basis of the attorney –client or work-product privilege.  But employers, most of whom act as both the plan sponsor (a non-fiduciary role) and plan administrator (a fiduciary role), need to proceed with care in seeking advice on plan-related matters.

Recommendations

If you have a problem and require outside advice, by all means get the help you need.  But consider how you want to proceed with legal advice.  Use of independent ERISA legal counsel may help sustain the attorney-client privilege.  Also bear in mind that by having your plan service providers (third party administrator or “bundled” provider) communicate through ERISA counsel, the attorney-client privilege can be extended to them and keep their work-product confidential from both aggrieved participants and government regulators.

About the Author

Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law.He maintains a website, Benefits Law Group of Chicago with additional updates, commentary and analysis on benefits and employment topics.

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

 

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