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Including regular RFPs as part of a fiduciary liability reduction strategy

“Does the DOL require plan sponsors to solicit RFPs on a regular basis from plan service providers?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a senior financial advisor from Massachusetts is representative of a common inquiry involving plan sponsors and service providers.

Highlights of Discussion

While the DOL may not formally require plan sponsors to regularly request RFPs from plan service providers, the agency does assume “ … plans normally conduct requests for proposal (RFPs) from service providers at least once every three to five years … ” in anticipation of changes to fee and service disclosures.[1] In fact, the DOL has stated, “… in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.”[2]

Business owners who sponsor ERISA-governed plans for their employees, such as 401(k) plans, have a fiduciary duty to administer and manage their plans prudently and in the best interest of the plans’ participants and beneficiaries. By extension, plan sponsors must follow a prudent process to both select and monitor any service providers engaged to support their plans. Therefore, requesting RPFs at regularly scheduled intervals can be part of an effective fiduciary liability reduction strategy and established plan governance program.

Court cases have provided more support for including a regular RFP process in plan governance. For example, the appellate court in George v Kraft Foods Global Inc., No. 10-1469, WL 1345463 (7th Cir. Apr. 11 2011) held that plan fiduciaries who did not conduct RFPs every three years were at risk for fiduciary litigation. The case was eventually settled in 2012 for $9.5 million.

An important supplement to the RFP process is annual benchmarking. The two go hand in hand to help protect plan sponsors. A benchmark report will show how a plan’s fees compare to the average in the marketplace, while the RFP process engages the plan sponsor and provides a means to evaluate the quality of those services.

Conclusion

The DOL assumes plan sponsors solicit RFPs for service providers every three to five years as part of their fiduciary duty to monitor plan servicer providers. Annual benchmark reports supplement the RFPs. Both are integral parts of a plan sponsor’s fiduciary liability reduction strategy.

[1] https://www.gpo.gov/fdsys/pkg/FR-2010-07-16/pdf/2010-16768.pdf

 

[2] https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf

 

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Can a plan sponsor merge 401(k) and 403(b) plans?

“I have at least one of my plan sponsor clients who has both a 401(k) plan and a 403(b) plan. Could my client merge the two plans in order to consolidate the assets?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in New York is representative of a common inquiry involving the merging of retirement plans.

Highlights of Discussion

  • Save for two exceptions, no, your client cannot merge 403(b) assets with an unlike plan (e.g., a profit sharing, 401(k), 457(b) plan, etc.) without causing the 403(b) assets to become taxable to the participants. Such a transfer could also jeopardize the tax-qualified status of the 401(k) plan.
  • 403(b) plan assets may only be transferred to another 403(b) plan. Further, the final 403(b) regulations are clear that neither a qualified plan nor a governmental 457(b) plan may transfer assets to a 403(b) plan, and a 403(b) plan may not accept such a transfer (see Treasury Regulation Section 1.403(b)-10 and Revenue Ruling 2011-07).
  • The two exceptions noted previously are plan-to-plan transfers by participants to governmental defined benefit plans in order to 1) purchase permissive service credits; or to make a repayment of a cash out.
  • This does not preclude a 403(b) or 401(k) participant with a distribution triggering event (such as plan termination) to distribute and complete a rollover to another eligible plan [e.g., a 401(k) or 403(b) plan] that accepts such amounts.

Conclusion

While there are similarities between a 401(k) plan and 403(b), the IRS treats them as unlike plans and, therefore, incompatible, for the purpose of plan-to-plan transfers or mergers. Participant rollovers, on the other hand, are potentially possible between the two.

 

 

© Copyright 2018 Retirement Learning Center, all rights reserved