Is it Time for a Plan Refresh?
The duty to provide participants with sufficient information to make consistently informed retirement investment decisions is a basic fiduciary responsibility under ERISA Section 404(a). However, there could be some plan committees who feel their participants are not consistently making prudent decisions.
According to a 2016 JP Morgan survey¹, nearly 75 percent of participants say they are not confident with selecting investments. It is no surprise they found that 80 percent of participants surveyed have portfolios that do not match their stated risk tolerance. Also, according to an Investment Company Institute (ICI) research report², only six percent of participants changed their asset allocation in 2016. This percentage has been similar since 2007, including during the 2008 market crash. No rebalancing after violent market movement? This does not look like “consistently informed investment decisions” as per ERISA.
Plan refresh is a process by which participants are notified that all existing assets and future contributions will be invested in the plan’s target date fund (TDF) (Qualified Default Investment Alternative (QDIA)) based on each participant’s date of birth, unless the participant notifies the plan otherwise. This is the same process as for other QDIA default actions.
The primary motivation for a plan refresh should be to improve participant investing. Assuming an appropriate TDF is offered as QDIA, why not affirm to participants that this is typically where they should invest, as opposed to giving them an array of mutual funds and anticipating that they will choose prudently? Surveys show that employees look to their employers for messaging which they assume to be in their interest.3 For many employers, it seems this messaging may not be working and often results in participant confusion and imprudent investment selection, thereby diluting retirement readiness. A plan refresh could help solve this problem and also can have significant fiduciary liability mitigation benefits.
Benefits of Investment Refresh
For participants this can help: 1) Improve asset allocation*; 2) solve for legacy assets (prior default no longer appropriate); 3) solve for employees who asked HR what may be a suitable investment option; 4) solve for inertia; and 5) solve for rebalancing investments.
We find that refresh is frequently used at the point of a recordkeeper change or menu reconstruction. Assuming that doing a refresh makes sense and yields the type of results you want to see, why wait for a recordkeeper change?
Unfortunately, there is a pervasive misperception that participants may push back, as was anticipated when auto enrollment was first introduced. Let’s look at the data:
- According to JP Morgan Plan Participant Research in 2016, one in two participants would rather push the easy button.
- 75 percent of participants are not confident they know how to best allocate contributions.
- 82 percent of participants support employers conducting a re-enrollment.
Often, many re-enrolled participants stick with the default investment long term. With good communication, pushback can be often non-existent, as with original auto enrollment.
Another misperception is that participants will opt out. Vanguard noted that the percentage of participants who fully opt out of refresh remains low. In fact, after one year, QDIA was held by 92 percent of participants and captured 81 percent of plan assets. A small group, seven percent of participants, held what Vanguard described as “extreme” positions, a group that it said was comprised predominantly of participants who fully opted out of the target date default fund and constructed their own portfolios. This is exactly how refresh is supposed to work.⁴
We’ve covered the symptoms, diagnosis, prognosis, prescription and implementation. Can you recall a business decision that appears so clearly beneficial for plans, their participants and fiduciaries? Ask yourself if you were faced with making a decision that impacted the productivity or profitability of your company that is so clearly documented and supported... would you not act on it or wait?
*Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk.
1. J.P. Morgan Plan Participant Research 2016. https://am.jpmorgan.com/gi/getdoc/1383355101755
2. ICI report. https://www.ici.org/pdf/ppr_16_rec_survey_q4.pdf
3. NYU Law Review. “The Behavior of Defined Contribution Plan Participants.” 2002. www.nyulawreview.org
4. Vanguard. Reenrollment: One year later. 2017. https://institutional.vanguard.com/iam/pdf/REEROLL.pdf?cbdForceDomain=false
Beware of the IRS and DOL: Four Red Flags They Seek on Form 5500
The Form 5500 is an ERISA requirement for retirement plans to report and disclose operating procedures. Advisors use this to confirm that plans are managed according to ERISA standards. The form also allows individuals access to information, protecting the rights and benefits of the plan participants and beneficiaries covered under the plan.
Make sure you are compliant. Be aware of red flags that the IRS and DOL look for on Form 5500 filings:
- Not making participant deferral remittances “as soon as administratively possible” is considered a fiduciary breach and can make the plan subject to penalties and potentially disqualification. Delinquent remittances are considered to be loans of plan assets to the sponsoring company.
- An ERISA fidelity bond (not to be confused with fiduciary insurance) is a requirement. This bond protects participant assets from being mishandled, and every person who may handle plan assets or deferrals must be covered.
- Loans in default for participants not continuing loan repayments, or loans that are 90 days in arrears, are a fiduciary breach that can make the plan subject to penalties and disqualification.
- Corrective distributions, return of excess deferrals and excess contributions, along with any gains attributed, must be distributed in a timely manner (typically two and a half months after the plan year ends). In some cases, these fiduciary breaches can be self-corrected if done within the same plan year in which they occurred and may be considered additional breaches if they extend beyond the current plan year.
How and When to Pay Plan Expenses with Plan Assets
Some retirement plan expenses can be paid for with plan assets — but many can’t. Which are the “reasonable and necessary” retirement plan expenses that can be paid out of plan assets?
Generally, services required to maintain the plan’s compliance and administration can be paid from plan assets. Obvious examples include the annual nondiscrimination testing and preparation of the annual Form 5500. Another example is a plan amendment or restatement that is required because of a legislative change.
Optional services generally cannot be paid out of plan assets. One clear example is costs for projections that are optional and benefit the company, not the plan participants. Some service fees may not be easy to classify. Fees for resolving plan corrections — such as delinquent deferral remittances or contributions determined with a definition of compensation not supported in your plan document. In the event of an incorrect test result, regardless of who was at fault, the law ultimately holds the plan sponsor responsible for the proper maintenance of the plan. As a result, the plan sponsor cannot shift the financial burden for the corrections to the plan.
All in all, it’s perfectly acceptable and common to charge reasonable and necessary transaction-based and recordkeeper administrative fees to participants. However, it is critical to ensure that similarly situated participants are treated the same. It would be discriminatory and, therefore not allowed, for non-highly compensated employees to pay administrative fees while highly compensated employees did not.
If you are unsure whether a specific fee can be paid from plan assets, please contact your plan advisor.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with Higginbotham.
The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. (c) 2018. Retirement Plan Advisory Group.