Defined Contribution Plans – Page 5

DOL Finalizes Regulations and Related Exemptions on ERISA Fiduciary Definition and Conflicts of Interest in Investment Advice

The Department of Labor (DOL) has adopted its long-awaited final rule defining who is a fiduciary investment adviser, and has issued accompanying prohibited transaction class exemptions that allow certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation, as long as they adhere to standards aimed at ensuring that their advice is impartial and in the best interest of their customers.

Going forward, individuals and firms that provide investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries and IRAs and IRA owners must either avoid payments that create conflicts of interest or comply with the protective terms of an exemption issued by the DOL.

Under new exemptions adopted with the rule, firms will be obligated to acknowledge their status and the status of their individual advisers as “fiduciaries.” Firms and advisers will be required to:

make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer;
charge only reasonable compensation; and
make no misrepresentations to their customers regarding recommended investments.

I. What Is Covered Investment Advice Under the Rule?

Covered investment advice is generally defined as a recommendation to a plan, plan fiduciary, plan participant and beneficiary and IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA.

A “recommendation” is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.

II. What Is Not Covered Investment Advice Under the Rule?

The final rule includes some specific examples of communications that would not rise to the level of a recommendation and therefore would not constitute a fiduciary investment advice communication, including:

Education about retirement savings and general financial and investment information. For example, education can include specific investment alternatives as examples in presenting hypothetical asset allocation models or in interactive investment materials intended to educate participants and beneficiaries as to what investment options are available under the plan, as long as they are designated investment alternatives selected or monitored by an independent plan fiduciary and other conditions are met. In contrast, because there is no similar independent fiduciary in the IRA context, the investment education provision in the rule does not treat asset allocation models and interactive investment materials with references to specific investment alternatives as merely “education.”
General communications that a reasonable person would not view as an investment recommendation
Simply making available a platform of investment alternatives without regard to the individualized needs of the plan, its participants, or beneficiaries if the plan fiduciary is independent of such service provider
Transactions with Independent Plan Fiduciaries with Financial Expertise. ERISA fiduciary obligations are not imposed on advisers when communicating with independent plan fiduciaries if the adviser knows or reasonably believes that the independent fiduciary is a licensed and regulated provider of financial services (banks, insurance companies, registered investment advisers, broker-dealers) or those that have responsibility for the management of $50 million in assets, and other conditions are met.
Employees working in a company’s payroll, accounting, human resources, and financial departments who routinely develop reports and recommendations for the company and other named fiduciaries of the sponsors’ plans are not investment advice fiduciaries if the employees receive no fee or other compensation in connection with any such recommendations beyond their normal compensation for work performed for their employer

III. Best Interest Contract Exemption

The Best Interest Contract Exemption permits firms to continue to rely on many current compensation and fee practices, as long as they meet specific conditions intended to ensure that financial institutions mitigate conflicts of interest and that they, and their individual advisers, provide investment advice that is in the best interests of their customers. Specifically, in order to align the adviser’s interests with those of the plan or IRA customer, the exemption requires the financial institution to:

acknowledge fiduciary status for itself and its advisers
adhere to basic standards of impartial conduct, including giving prudent advice that is in the customer’s best interest, avoiding making misleading statements, and receiving no more than reasonable compensation.
have policies and procedures designed to mitigate harmful impacts of conflicts of interest and
disclose basic information about their conflicts of interest, including descriptions of material conflicts of interest, fees or charges paid by the retirement investor, and a statement of the types of compensation the firm expects to receive from third parties in connection with recommended investments.
Investors also have the right to obtain specific disclosure of costs, fees, and other compensation upon request.
In addition, a website must be maintained and updated regularly that includes information about the financial institution’s business model and associated material conflicts of interest, a written description of the financial institution’s policies and procedures that mitigate conflicts of interest, and disclosure of compensation and incentive arrangements with advisers, among other information.

IV. Additional Exemptive Relief

In addition to the Best Interest Contract Exemption, the DOL issued a Principal Transactions Exemption, which permits investment advice fiduciaries to sell or purchase certain recommended debt securities and other investments out of their own inventories to or from plans and IRAs. As with the Best Interest Contract Exemption, this requires, among other things, that investment advice fiduciaries adhere to certain impartial conduct standards, including obligations to act in the customer’s best interest, avoid misleading statements, and seek to obtain the best execution reasonably available under the circumstances for the transaction.

V. Effective Date

Compliance with the new rule is required as of April 2017. The exemptions will generally become available upon the applicability date of the rule. However, the DOL has adopted a “phased” implementation approach for the Best Interest Contract Exemption and the Principal Transactions Exemption. Both exemptions provide for a transition period, from the April 2017 applicability date to January 1, 2018, under which fewer conditions apply. This period is intended to give financial institutions and advisers time to prepare for compliance with all the conditions of the exemptions while safeguarding the interests of retirement investors.

During this transition period, firms and advisers must adhere to the impartial conduct standards, provide a notice to retirement investors that, among other things, acknowledges their fiduciary status and describes their material conflicts of interest, and designate a person responsible for addressing material conflicts of interest and monitoring advisers’ adherence to the impartial conduct standards. Full compliance with the exemption will be required as of January 1, 2018.

VI. More…

Regulations and Related Exemptions

DOL Fact Sheet

DOL FAQs

IRS Gives Individually Designed Plans an Additional Year to Convert to Pre-Approved Plan Documents

IRS has announced in Notice 2016-03 that it will extend the deadline for an employer to restate an individually designed plan onto a current pre-approved defined contribution plan document (which is based on the 2010 Cumulative List), and to apply for a determination letter, if otherwise permissible, from April 30, 2016, to April 30, 2017. The extended deadline will also apply with respect to any defined contribution pre-approved plan that is first adopted on or after January 1, 2016. This extension will facilitate a plan sponsor’s ability to convert an existing individually designed plan into a current defined contribution pre-approved plan.

The extension does not apply for a plan that is adopted as a modification and restatement of a defined contribution pre-approved plan that was maintained by the employer prior to January 1, 2016. An employer that adopted a defined contribution pre-approved plan prior to January 1, 2016, continues to have until April 30, 2016 to adopt a modification and restatement of the defined contribution pre-approved plan within the current 6-year remedial amendment cycle for defined contribution plans and to apply for a determination letter, if permissible.

Notice 2016-03

2010 Cumulative List of Changes in Plan Qualification Requirements

IRS Updated Plan Limits for 2016

IRS has announced the retirement plan and employee benefits limits for 2016. Most of the limits are unchanged. The exception is the HSA Maximum Contribution for Family increased $100 to $6,750. Here is a chart showing the limits for 2014 through 2016:

Type of Limitation	2016	2015	2014
415 Defined Benefit Plans	$210,000	$210,000	$210,000
415 Defined Contribution Plans	$53,000	$53,000	$52,000
401(k) Elective Deferrals, 457(b) and 457(c)(1)	$18,000	$18,000	$17,500
401(k) Catch-Up Deferrals	$6,000	$6,000	$5,500
SIMPLE Employee Deferrals	$12,500	$12,500	$12,000
SIMPLE Catch-Up Deferrals	$3,000	$3,000	$2,500
Annual Compensation Limit	$265,000	$265,000	$260,000
SEP Minimum Compensation	$600	$600	$550
SEP Annual Compensation Limit	$265,000	$265,000	$260,000
Highly Compensated	$120,000	$120,000	$115,000
Key Employee (Officer)	$170,000	$170,000	$170,000
Income Subject To Social Security Tax (FICA)	$118,500	$118,500	$117,000
Social Security (FICA) Tax For ER & EE (each pays)	6.20%	6.20%	6.20%
Social Security (Med. HI) Tax For ERs & EEs (each pays)	1.45%	1.45%	1.45%
SECA (FICA Portion) for Self-Employed	12.40%	12.40%	12.40%
SECA (Med. HI Portion) For Self-Employed	2.9%	2.90%	2.90%
IRA Contribution	$5,500	$5,500	$5,500
IRA catch-up Contribution	$1,000	$1,000	$1,000
HSA Max Single/Family	$3,350/6,750	$3,350/6,650	$3,300/6,550
HSA Catchup	$1,000	$1,000	$1,000
HSA Min. Annual Deductible Single/Family	$1,300/2,600	$1,300/2,600	$1,250/2,500

IRS Announces Significant Reduction in Determination Letter Program

On July 21, 2015, the IRS announced changes to the favorable determination letter program for qualified retirement plans. Employers that sponsor individually designed plans should take a close look at whether they can state their plans on a pre-approved plan document, particularly a volume submitter document, for the reasons explained in this post.

Most significantly, the IRS will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans as of January 2017. This means that, effective as of January 1, 2017, sponsors of individually designed plans will only be permitted to submit a determination letter application for qualification in two circumstances:

upon initial plan adoption; and
upon plan termination.

In addition, effective immediately, the IRS will no longer accept determination letter applications for individually designed plans that are submitted off-cycle, except for new plans and for terminating plans.

Implications for Plan Sponsors

These changes to the determination letter program increase the risk that document failures may get into, and remain for a long period of time in, plan sponsor’s qualified retirement plans. For example, a failure to adopt a required amendment to the plan document, which ordinarily would have been discovered and corrected in connection with the staggered 5-year determination letter remedial amendment cycle, could now persist for years or even decades before being discovered. Plan terminations will likely become more difficult, time consuming and costly if such errors are not discovered until the Plan submits for a favorable determination upon termination.

Plans that are stated on a pre-approved document (such as a volume submitter or prototype plan document) will continue to receive IRS opinion letters on the language in those plans. In addition, plan sponsors who adopt a volume submitter plan and make limited modifications to the approved specimen plan, which does not create an individually designed plan, will still be able to get a favorable determination on their plans every six years. These plans will thereby avoid the above risks.

For this reason, employers that sponsor individually designed plans should closely evaluate whether they can convert their plans to a pre-approved plan document, with a goal of completing the transition by January 1, 2017. Many individually designed plans may be able to fit onto a volume submitter plan with minor modifications, which will allow those sponsors to continue receiving a favorable determination lettre on their plan every six years.

Additional Guidance Expected from the IRS

The IRS has asked for comments, and expects to issue further guidance, regarding how it can assist plan sponsors that wish to convert individually designed plans to pre-approved plans.

We should also expect some changes to the IRS’s EPCRS correction program, to help correct errors that inevitably will increase as a result of this curtailment in the favorable determination letter program.

In addition, the IRS is considering ways to make it easier for plan sponsors that continue to sponsor individually designed plans to comply with the qualified plan document requirements, including:

providing model amendments,
not requiring certain plan provisions or amendments to be adopted if and for so long as they are not relevant to a particular plan (for example, because of the type of plan, employer, or benefits offered),
or expanding plan sponsors’ options to document qualification requirements through incorporation by reference.

IRS Announcement 2015-19

IRS Expands Pre-Approved Plan Document Program to Include Cash Balance Plans and ESOPs

On June 8, 2015, the IRS issued Revenue Procedure 2015-36, which announces the IRS expansion of its pre-approved plan program to include cash balance plans and employee stock ownership plans (ESOPs). With this expansion, master & prototype and volume submitter plan providers can apply for opinion and advisory letters for cash balance plans by October 30, 2015, and for ESOPS during the defined contribution application period beginning February 1, 2017.

While this presents opportunities for ESOP sponsors to streamline their plan documentation, it is not without risks. As Cindy Shupe warned back in 2013, use of pre-approved documents can increase the risk of non-compliance if plan sponsors assume that use of a pre-approved document will ensure compliance with the complicated ESOP financing and prohibited transactions rules. Therefore, while we encourage ESOP sponsors to consider adopting a pre-approved plan document in the next cycle, we also encourage early conversations with ERISA counsel to evaluate the viability and implications of doing so. In addition to the above compliance issues, Employers currently maintaining individually designed ESOPS that intend to adopt a pre-approved plan (when available) will need to complete Form 8905, Certification of Intent To Adopt a Pre-approved Plan, before the end of their plan’s current 5-year remedial amendment cycle.

DOL Provides Timing Relief for Fee Disclosures in Participant-Directed Individual Account Plans

On March 19, 2015 the Department of Labor issued final rules that give retirement plan administrators a two-month window in which to provide annual fee disclosures to plan participants. Under existing regulations, plan administrators must provide fee disclosures to participants in plans with individually directed accounts at “at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis”. This 12-month rule presents some administrative difficulty because Plans that provide the disclosures in the same month every year could easily run afoul of the regulatory language if their disclosures are not done on the exact same day of the month each year.

The new rule replaces “12-month period” with “14-month period”, giving plan administrators a two month window each year in which to make the disclosures The new rules will become effective on June 17, 2015 (unless the DOL gets significant adverse comments on the rule, which is not expected). In the meantime, the DOL indicates that for enforcement purposes plan administrators can rely on the new rule immediately.

Final Rule

DOL to Propose New Fiduciary Rules

The White House today announced that in the coming months, the Department of Labor will propose a new fiduciary rule that, according to the announcement, will:

Expand the types of retirement investment advice subject to ERISA’s fiduciary standards.
Continue to allow private firms to set their own compensation practices by proposing a new type of exemption from limits on payments creating conflicts of interest that is more principles-based than the current rules. The exemption will still permit many common forms of compensation, such as commissions and revenue sharing, whether paid by the client or the investment firm.
Allow advisers to continue to provide general education on retirement saving across employer-sponsored plans and IRAs without triggering fiduciary duties.

The DOL will issue a Notice of Proposed Rulemaking (NPRM) in the coming months. Then there will be a comment period before the final rule is issued.

FACT SHEET: Middle Class Economics: Strengthening Retirement Security by Cracking Down on Backdoor Payments and Hidden Fees | The White House.