An Important IRS Deadline Is Looming, Different Types of Plan Documents

By: David I. Gensler, MSPA, MAAA, EA, AIF®

In 2006, Congress passed the Pension Protection Act of 2006 (PPA). As a result, every defined contribution plan, other than 403(b) plans, must be completely restated, so that they comply with PPA.  The “drop dead” date to sign and date the restated plan is April 30, 2016. So if you sponsor a 401(k) plan, a profit-sharing plan or any other sort of a defined contribution plan, the plan must be restated, signed and dated by that date. If your plan gets audited by the IRS, the very first thing that they will ask you for is a copy of the plan document. That is not the time to be wondering if you ever updated your plan or not.

There are basically three types of plans that a plan sponsor could adopt:

A Prototype Plan – This type of plan contains two elements: an adoption agreement and a separate trust document. Many of you are familiar with the adoption agreement, which generally contains various choices for eligibility, vesting, whether the plan will be a safe harbor plan or not, etc. You choose which provisions that your particular plan wants to operate under by checking the appropriate box in that section of the document. The IRS has pre-approved all of the various options, so you cannot pick anything that would be in conflict with the law.

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Pension Overpayments: Who’s At Fault? What’s The Deal?

By: David I. Gensler, Enrolled Actuary

An error is made and an employee’s monthly benefit is overstated. The employee relies on that information and decides to retire, rather than continue working. The error is uncovered. How does this get fixed (if indeed, it gets fixed at all)?

When a pension plan overpays an employee’s monthly benefit, many plans believe that as a matter of fiduciary duty, that they are required to seek repayment of those benefits, with interest. In a recent lawsuit (Lebahn v. Owens), the courts agreed, but not necessarily for the reasons that you might think.

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Automatic Enrollment and Automatic Escalation – The IRS and the Department of Labor Love Them – But Should You?

By: David I. Gensler, President

Both the IRS and the Department of Labor (DOL) love the concept of automatic enrollment and its sibling, automatic escalation of an employee’s salary deferrals. But just because the government is in love with the concept doesn’t mean that you need to be.  Or (more importantly) that you are administratively geared up to handle it.  So if you are thinking seriously about modifying your plan document to change your 401(k) plan to be an “auto enroll” 401(k) plan, there are some real potential administrative speed bumps that you need to be aware of.

The concept is fairly simple. You modify your plan document, via an amendment, to automatically enroll participants at some specified deferral percentage (the one that I have seen most often is 3%).  Some plans extend the concept to all participants, others have it impact only new participants.  Now, in order to stop the deferrals, rather than formally opting in, the participant must, in writing, opt out.

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Recent 401(k) Lawsuits – What’s Behind Them?

By: David I. Gensler, President

So the recent spate of 401(k) litigation continued as a law firm challenged the $19 billion dollar Chevron plan’s decision to offer participants the Vanguard Prime Money Market Fund rather than what they deemed to be a better-performing and lower-cost stable value fund. The suit claimed that Chevron failed to follow its own Investment Policy Statement (IPS) that required the plan Fiduciaries to “seek maximum current income… consistent with preservation of capital and liquidity.”  The stable value fund, as per the suit, would have offered participants “a high degree of safety and capital preservation.”

The lawsuit further alleges that Chevron could have (and should have) negotiated for a separate account version, or a collective trust rather than pay the higher mutual fund fees. The lawsuit also questions the plan’s use of revenue-sharing to pay the plan’s recordkeeping fees.  On this particular point, they challenge that by using revenue sharing to pay the recordkeeping fees, as the plan’s assets increased (from $13 billion to $16 billion and then to $19 billion) the revenue to record keeper went up, even though the record keeping services did not significantly increase.  The lawsuit further claims that Chevron failed to direct that a competitive bidding process for recordkeeping services be undertaken.

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Why does a 401(K) plan need a recordkeeping program?

There are still many companies that may be implementing a 401(k) plan for the first time. Still other companies have maintained a profit-sharing plan, where the plan’s assets were invested on a pooled basis that is adding a 401(k) feature for the first time. There are still other companies that sponsor a 401(k) plan but wonder why in the world they are told that they need a “recordkeeper” to track the assets in their 401(k) world. To many of these companies, the recordkeeper and their investment platform seems unnecessary and expensive. However, using a recordkeeping firm to track the assets in your 401(k) plan is a critical component in maintaining a successful 401(k) plan. In fact, there are many third party administrative (TPA) firms that will not take on the responsibility of providing TPA services without a recordkeeper being involved. Why is that?

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Business Owners: Find Your Best Retirement Plan—Part 2

By the Madison Pension Editorial Team

As we addressed in Part 1, your options for implementing a retirement plan for yourself and your employees extends beyond the typical 401(k) plan. Retirement plan sponsors should investigate popular retirement vehicles, even to supplement their 401(k) plans, to ensure they are maximizing benefits for participants based on the unique needs of their organizations.

In Part 1, we covered a defined benefit (DB)/defined contribution (DC) combo plan, which can help businesses lower their income taxes and make up for lost time in putting aside money for retirement. In this segment, we will highlight one particular DB plan known as a cash balance plan, which also contains many elements of a DC plan. A few of its elements also closely resemble those of a 401(k) plan. If this all sounds a bit confusing, read on to see how it all irons out.

While cash balance plans are the fastest-growing retirement plans in the country, only about 10,000 such plans exist in the United States, compared to about 500,000 401(k) plans.  Yet, cash balance plans grew in popularity by around 500 percent during the 2001-2011 decade. Why? These plans allow owners of small firms (50 or fewer employees) to avail themselves of considerably higher tax-deductible contribution limits than 401(k) plans allow.

Let’s look at how cash balance plans compare to other types of plans noted above:

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Business Owners: Find Your Best Retirement Plan—Part 1

By the Madison Pension Editorial Team

When most business owners think “retirement plan,” they automatically presume a 401(k) plan. With approximately 513,000 401(k) plans covering more than 88 million American workers as of April 2014, this is the most common retirement plan companies offer to employees.

There are a number of reasons why the 401(k) has remained a go-to for so many business owners. The plan offers their employees the opportunity to defer their own money on a pre-tax basis as well as significant flexibility in terms of the employer’s contributions. Overall, for many business owners today, a 401(k) plan is considered one of the easiest and more cost-effective retirement plans to maintain on a day-to-day basis.

But just because the 401(k) plan has, over the years, emerged as the retirement plan option of choice for U.S. companies does not mean that it is in your best interest to follow the herd. Rather, a savvy retirement plan sponsor should explore other plans that may be best for his or her organization based on its unique specifications—not what is well-liked among the many.

To determine which retirement plan is right for your organization, you must first familiarize yourself with retirement plan options that exist outside of a traditional 401(k) plan. In this blog we will explore a defined benefit/defined contribution (DB/DC) “combo” plan—the first of a few alternate plans in this ongoing series designed to help business owners and/or plan sponsors determine the best-fitting plan for their organization.

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Cash Balance Plans: Putting More Tax-Deferred Money Away for Retirement

By David Gensler, President

Cash balance plans are the fastest-growing retirement plan in the country—flooding a market saturated with 401(k) profit-sharing plans, which are on a flat to slightly downward trajectory. According to market research, cash balance plans—hybrids of defined benefit (DB) and defined contribution (DC) plans—increased in number by 500 percent during the 10-year period ending in 2011.

So, what’s the big deal with cash balance plans? In a nutshell, they offer business owners the opportunity to avail themselves of considerably higher tax deductible contribution limits compared to 401(k) plans, reducing their tax bill and allowing them to accumulate more retirement wealth at an accelerated rate.

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Six Questions Plan Sponsors Should Ask Following the Supreme Court’s 401(k) Ruling

By David Gensler, President

A few weeks ago, I commented in my last blog on the recent U.S. Supreme Court case, Tibble vs. Edison. In that ruling, the Court clarified that retirement plan sponsors have a fiduciary duty “to continuously monitor” the investments in their company’s 401(k) plans. The Court’s ruling also spelled out the responsibilities of plan stewards, directing them to not only monitor trust investments but also “remove imprudent ones.”

While this certainly was not news to the professionals in the retirement plan field, it may come as a surprise to the business owners that sponsor 401(k) plans.

If you are in this latter category, you may be getting an inkling that your practices as a plan sponsor should change. And you would be on the money. Yet the Court’s ruling did not provide any practical guidance as to what this “duty” actually means. Nevertheless, without committing a lot of time and effort to updating your process, you and your management team can create procedures that will lead to what most observers would view as a robust fiduciary governance program.

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Retirement Plan Sponsors: Are You Continuously Monitoring Your Investments?

By David Gensler, President, Madison Pension Services, Inc.

Imagine if the participants in your company’s 401(k) plan just discovered that the funds supporting their retirement plan haven’t been reviewed in years. Furthermore, what if they also learned that the exact same (but cheaper) fund choices were available but that no action had been taken to make those choices available to them? The resulting reduction in the value of their accounts, the very accounts intended to finance their golden years, would—understandably—be a tough pill for them to swallow.

Indeed, such was the situation that drove Edison International’s employees to take their concerns to court. They brought suit against their employer in 2007 for violating its fiduciary duties with respect to mutual funds added to their 401(k) Savings Plan in 1999 and 2002. The employees, in a lawsuit that ultimately ended up in the U.S. Supreme Court (Tibble vs. Edison), argued that Edison acted imprudently by offering higher-priced mutual funds when materially identical lower-priced mutual funds were available.

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