On April 8, 2016 the Department of Labor (DOL) issued final guidance that greatly expands the types of retirement investment advice that will be subject to the fiduciary duty rules under the Employee Retirement Income Security Act of 1974 (ERISA). The so-called “conflict of interest” rule for retirement investments will have a significant effect on those who provide investment advice and sell investment products and services to retirement plans and IRAs. The central focus of the DOL guidance is to protect plan participants from conflicts of interest that could threaten their retirement savings.
The new rule will not apply until April 10, 2017. The rule has proved controversial and numerous lawsuits have been filed by industry groups and the U.S. Chamber of Commerce challenging the new rule. Plaintiffs argue that “The rule and [prohibited transaction exemptions] overstep the Department’s authority, create unwarranted burdens and liabilities, undermine the interests of retirement savers, and are contrary to law.” President Obama has vetoed a resolution to kill the rule which was approved by the House in April and the Senate in May.
Background
This new guidance was prompted by the changing landscape of retirement plans over the past 40 years with the shift from employer-sponsored defined benefit plans, with no participant investment responsibility, to participant directed 401(k) plans. When the old fiduciary rules were issued in 1975, 401(k) plans did not exist nor did the now common practice of rolling assets of ERISA plans into IRAs. Under the old rules, a person or institution is considered a fiduciary adviser only if a five-part investment advice test is satisfied.
In today’s marketplace, plan sponsors may be surprised to learn that many investment professionals, consultants and advisers have no obligation to adhere to ERISA’s fiduciary standards because they do not satisfy the five-part test. Without fiduciary obligation, advisers could potentially give imprudent advice or steer investment decisions towards products that would affect the amount of compensation the adviser would receive for the advice.
The DOL cited this and other factors to justify the expanded definition of investment-advise fiduciary. Fiduciaries are subject to heightened standards of care and must provide impartial advice solely in the best interest of the recipient of the advice and, if found in breach of the fiduciary standards, can be subject to personal liability.
Activities Considered Investment Advice
Under the regulation, a party is treated as providing “investment advice” if it renders any of the following general categories of recommendations for a fee or other compensation (either directly or indirectly) to a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner:
- The advisability of buying, holding, selling or exchanging securities or other investment property;
- The management of securities or other investment property such as advice regarding investment portfolio composition, selection of other persons to provide investment advice or management services or selection of investment account arrangements;
- Rollovers, transfers or distributions from a plan or IRA including whether, in what amount, in what form and to what destination such rollover, transfer or distribution should be made; or
- How to invest securities or other investment property once they are rolled over, transferred or distributed from the plan or IRA.
A “recommendation” is broadly defined by the DOL as any “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.”
Advice Provider Relationship
The regulation sets forth the types of relationships that must exist for such “recommendations” to give rise to fiduciary investment advice responsibilities. A person providing the type of advice described above (either directly or indirectly, such as through an affiliate) is a fiduciary if the party:
- Represents or acknowledges that it is acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code (Code);
- Renders investment advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the recipient’s particular investment needs; or
- Directs the investment advice to a specific recipient or group of recipients regarding the advisability of investing in a particular investment or offers advice regarding the management of investment property.
A party providing investment advice must receive a “fee or other compensation,” either directly or indirectly, for such advice in order for the party to be a fiduciary under ERISA and applicable Code provisions. “Fee or other compensation” includes, but is not limited to, such things as commissions, loads, finder’s fees and revenue sharing.
Activities not Considered Investment Advice
The regulation describes the following services, communications and materials as generally not involving a “recommendation.”
Providing an Investment Platform for Directed Investment
Service providers, such as recordkeepers and third-party administrators, often offer a “platform” or selection of investment alternatives from which plan fiduciaries may choose when creating the plan’s menu of investment options. Simply marketing or making available the platform of investment alternatives, without regard to the individualized needs of the plan or its participants and beneficiaries, is not a recommendation under the regulation. This exception is subject to two conditions:
- The platform provider must disclose in writing to the plan fiduciary that it is not providing impartial investment advice or giving advice in a fiduciary capacity; and
- The plan fiduciary selecting the platform must be independent of the platform provider.
Selection and Monitoring Assistance for Plan Fiduciaries
Identifying investment options that satisfy the pre-established criteria of the plan fiduciary (e.g., expense ratios, size of fund, type of asset, etc.) is not considered a recommendation. The provider must disclose in writing any financial interest in any of the investment alternatives. Also, providing objective financial data and comparisons with independent benchmarks to the plan fiduciary is not considered a recommendation.
Investment Education
Generally the following kinds of investment information and materials will not be treated as recommendations:
- Plan information including benefits or participation, forms of distributions, fee/expense information;
- General financial, investment or retirement information such as retirement-related risks (e.g., longevity, inflation), diversification and risk tolerance;
- Asset allocation models projecting return based on hypothetical fact patterns; and
- Interactive investment materials (questionnaires, worksheets, software) allowing plan participants to calculate retirement needs and income.
Advice Provided by Employees
The DOL recognized that the expanded fiduciary definition could potentially cause employees of a plan sponsor to be treated as fiduciaries and that an explicit exception was appropriate. Employees of a plan sponsor, such as those working in employee benefits and human resources departments, may provide advice in connection with certain matters without becoming an investment advice fiduciary if the employee does not receive compensation for the advice beyond the normal compensation for work provided for the employer and other conditions are satisfied.
This exclusion covers employees who routinely develop reports and recommendations for the company and other fiduciaries such as an investment committee member suggesting to others on the committee that they consider adding a specific investment to the plan’s portfolio. The exclusion also covers employees who are charged with communicating information about the plan and distribution options to other employees as long as the employee’s job responsibility does not involve the provision of investment advice and the employee is not licensed to provide investment advice.
General Communications
Providing general investment communications that a reasonable person would not view as investment advice would not be viewed as investment recommendations. Examples given by the DOL of some communications that should meet this exception include general circulation newsletters, public media talk show commentary, remarks at widely attended speeches and conferences, general marketing materials and general market data.
Best Interest Contract (BIC) Exemption
ERISA and the Code generally prohibit fiduciaries from receiving payments from third parties and from acting on conflicts of interest, including using their authority to affect or increase their own compensation, in connection with transactions involving a plan or IRA. Certain types of fees and compensation common in the retail market may fall within these prohibitions when received by fiduciaries. To facilitate continued provision of advice to such retail investors under conditions designed to safeguard the interest of these investors, the BIC exemption was included in the regulation and allows investment advice fiduciaries to receive these various forms of compensation that, in the absence of an exemption, would not be permitted under ERISA and the Code.
As a condition of receiving compensation that would otherwise be prohibited, financial institutions and advisers are required to take several protective steps to mitigate the impact of any conflicts of interest, such as acknowledging their fiduciary status, implementing policies and procedures designed to prevent conflict of interest violations, disclosing information about their conflicts of interest and the cost of their advice and receiving no more than reasonable compensation.
What Plan Sponsors Need to Know
While the final rule is targeted primarily at providers of retirement plan products and services, it will also affect plan sponsors. Plan sponsors should expect to receive new disclosures and amended contracts from their advisers and need to review and understand the nature of the relationships they have with their advisers. The decision to hire or retain service providers remains a fiduciary decision, and plan sponsors have an ongoing duty to monitor advisers. Failure to do so could subject plan sponsors to potential ERISA fiduciary violations.
Since rollover or distribution recommendations will be covered by the new conflict of interest rule, some service providers may be less willing to assist participants with the decision of whether or not to roll over their plan assets to an IRA in order to avoid being held to the standard of fiduciary in giving advice on such a decision. This is a significant change to the rules and may result in participants electing to leave assets in the plan following termination.
Plan sponsors should also take a close look at the investment education that is provided to plan participants and beneficiaries to ensure that the investment education qualifies as education rather than advice under the new rules.
Pending lawsuits could delay or overturn the regulation. Also a new administration in the White House may result in the rules possibly getting delayed or killed. Even the DOL may take action…the DOL acknowledges that additional “sub-regulatory guidance will likely be necessary.” Time will tell.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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