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Buyer Beware: All Fiduciary Services Are Not Equal

Buyer Beware:  All Fiduciary Services Are Not Equal

Many financial organizations tout the benefits of their 401(k) fiduciary services and, frankly, many of these messages can sound irresistibly compelling. But buyer beware; not all fiduciary services are created equal. In today’s increasingly litigious environment, it is imperative for plan sponsors to be educated consumers of ERISA fiduciary services.  What does it take to be a wise consumer of fiduciary services?

Running a qualified retirement plan for employees is like running a business for clients. Just as with a business, the administrative responsibilities and liabilities of operating a plan are significant. The Department of Labor (DOL) views all business owners who sponsor retirement plans for employees as “3(16)” fiduciaries under federal law [ERISA Sec. 3(16)]. A 3(16) fiduciary is responsible for ensuring the plan is operated in compliance with the strict rules of ERISA day in and day out. One can say, the ERISA “buck stops here” on the 3(16)’s desk.

As fiduciaries, plan sponsors are held to the highest standard of care and must operate their plans in the best interest of participants. That means their actions with respect to their plans will be judged against the “Prudent Person” rule, which says that all decisions and acts must be carried out “… with the care, skill, prudence, and diligence…” of a knowledgeable person. The DOL assumes plan sponsors know what they are doing when it comes to running a plan—and if they don’t—they should seek out competent support or be at risk of a fiduciary breach. From an ERISA standpoint, a plan’s “Jack of all trades,” must be master of all—not none.

The DOL can hold plan sponsors personally liable for failing to fulfill their fiduciary obligations to their plan participants. Plan fiduciaries who fail in their duties can face costly civil and criminal penalties, too. Perhaps even jail time! All of this makes a strong argument for seeking expert help in running a qualified retirement plan. Thank goodness ERISA allows plan sponsors to outsource some of their 3(16) fiduciary responsibilities by formally appointing another entity to assume some of their plans’ administrative functions.

By engaging a 3(16)-plan administrator, the plan sponsor shifts fiduciary responsibility to the provider for the services specifically contracted (e.g., plan reporting, participant disclosures, distribution authorization, plan testing, etc.). It is important to note that a plan sponsor may never fully eliminate its fiduciary oversight responsibilities for the plan, and remains “on the hook” for the prudent selection and monitoring of the 3(16) plan administrator.

There are lots of organizations out there that peddle their outsourced fiduciary services (e.g., TPAs, trust companies, RIAs, etc.). The process of selecting a 3(16) outsourced solution must be carried out in a prudent manner and solely in the interest of the plan participants. The DOL requires the plan sponsor to engage in an objective process designed to elicit information necessary to evaluate candidates considering, but not limited to, the following:

  • Qualifications of the service provider,
  • Whether it has a consistent track record of service,
  • Its professional “bench-strength” and tenure of staff,
  • The quality of services provided and
  • Reasonableness of the provider’s fees in light of the services provided.

In addition, such process should be designed to avoid self-dealing, conflicts of interest or other improper influence. In the delicate area of plan administration, it’s prudent to go with the pros.

Conclusion

A plan sponsor can “outsource” some of its plan administration obligations under ERISA to an outside entity that is willing to assume the responsibilities of an ERISA 3(16) fiduciary of the plan.  It is not a decision to be made lightly as the DOL mandates the plan sponsor follow a prudent selection process that looks out for the best interest of plan participants.

© Copyright 2024 Retirement Learning Center, all rights reserved
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DOL Enforcement Deadlines for PTE 2020-02

An advisor asked: “I’m confused by the compliance deadlines for various provisions of Prohibited Transaction Exemption (PTE) 2020-02 related to providing investment advice to retirement investors.  Can you summarize the enforcement deadlines, please?”

Highlights of Discussion

Absolutely; financial professionals and institutions that seek to comply with PTE 2020-02 must satisfy the following six steps by the dates indicated.

PTE 2020-02 Requirements DOL Enforcement Begins
1. Provide advice in accordance with the three “Impartial Conduct Standards,” which mandate that advice be given

·         In the best interest of the retirement investor,

·         At a reasonable price,

·         Without any misleading statements.

 

After January 31, 2022

 

Originally effective February 16, 2021, the DOL implemented a “nonenforcement policy” under DOL FAB 2018-02 Field Assistance Bulletin (FAB) 2018-02 until December 20, 2021, for those who diligently and in good faith complied with the Impartial Conduct Standards. FAB 2021-02  further extended the nonenforcement policy through January 31, 2022.

 

2. Acknowledge in writing their fiduciary status under ERISA and the Internal Revenue Code;

3. Describe in writing the services to be provided and any material conflicts of interest that may exist;

4. Adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest;

5.     Conduct an annual retrospective review of their compliance with the requirements and produce a written report that is certified by one of the financial institution’s senior executive officers;

After January 31, 2022

 

Pursuant to FAB 2021-02, the DOL will not pursue cases against advisors and institutions utilizing PTE 2020-02, provided they make a good faith effort to follow the three Impartial Conduct Standards (see #1 above)

6. FOR ROLLOVERS:  If the advice involves a rollover recommendation, then

 

• Document the reasons that a rollover recommendation is in the best interest of the retirement investor; and

 

• Disclose the justification for the rollover in writing to the retirement investor.

After June 30, 2022

 

Pursuant to FAB 2021-02, the DOL will not enforce the rollover documentation and disclosure requirements of PTE through June 30, 2022.

Conclusion

Financial professionals and organizations that seek relief under PTE 2020-02 should take note of the different enforcement deadlines that apply as a result of FAB 2021-02.

© Copyright 2024 Retirement Learning Center, all rights reserved
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Remember Plan Tax Credits for 2021

“Can you remind me of the special tax credits available for small businesses who set up qualified retirement plans, please?”

ERISA consultants at the Retirement Learning Center (RLC) 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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Arizona is representative of a common inquiry related to incentives for setting up retirement plans.

Highlights of Discussion

My pleasure! Small business owners (with fewer than 100 employees) are eligible for additional tax credits for setting-up retirement plans and/or adding an automatic enrollment feature. The credits are available if the owner establishes a 401(k), a SEP or a SIMPLE IRA plan. The business must

• Have had fewer than 100 employees who received at least $5,000 in compensation for the preceding year;
• Have at least one plan participant who was a nonhighly compensated employee; and
• Not have maintained a plan in the past.

The “Startup Credit” is up to $5,000 (a formula applies), available for the first three years the plan is in existence and offers real benefits to owners by freeing up tax dollars for other important business purposes. The credit was greatly improved as part of the Setting Every Community Up for Retirement Enhancement of 2019 Act (SECURE Act), effective January 1, 2020 (increasing the maximum credit from $500 to $5,000). It is intended to encourage owners to establish retirement plans by helping make the plan more affordable during the startup process. In addition, the owners receive full tax deductions for all contributions made to the plan.

On top of that, if an owner elects to add an automatic enrollment feature to the plan, an additional $500 credit (for the first three years) is also available. The automatic enrollment feature calls for newly eligible participants to be enrolled automatically in the plan with a specified default deferral rate. The IRS provides additional details about the startup and auto deferral credits here.

Eligible businesses may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.

See the Instructions for Form 8881 for more details.

Conclusion
Tax credits for setting up a plan and having an automatic enrollment feature are great tools to help small businesses defray the initial costs of starting and maintaining a plan. Business owners should discuss the credits with their accountants and advisors to determine if it makes sense for them to establish a plan.

 

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EINs for Qualified Retirement Plan Trusts

“Can a business owner use the company’s employer identification number (EIN) to identify the firm’s 401(k)?”

ERISA consultants at the Retirement Learning Center (RLC) 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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Florida is representative of a common inquiry related to qualified retirement plan trusts.

Highlights of Discussion

No, it is not recommended that a company use the same EIN number for the retirement plan trust as it uses for the business. An EIN is a 9-digit number (for example, 12-3456789) assigned to sole proprietors, corporations, partnerships, estates, trusts, and other entities for tax filing and reporting purposes. The business and the qualified plan trust are separate legal tax entities in the eyes of the IRS; therefore, each needs its own EIN.

To obtain an EIN for a retirement plan trust, the plan trustee can either apply online, mail or fax a copy of Form SS-4, Application for Employer Identification Number to the IRS.[1]  For additional details on the process, please see the IRS’s post How to Obtain or Re-Establish an EIN for a Retirement Plan Trust.  The Instructions for Form SS-4 explain how to complete the SS-4 when seeking an EIN for a qualified plan trust.  Additional information on EIN’s for retirement plans in contained in IRS Publication 1635, Employer Identification Number.

Conclusion

The IRS is clear that it wants qualified retirement plans—even for plans for owner-only businesses—to use a separate EIN for plan reporting purposes.

[1] Instructions for Form SS-4

 

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Group of Plans or Defined Contribution Group Plans

“Are there any new plan types for 2022?”

ERISA consultants at the Retirement Learning Center (RLC) 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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New York is representative of a common inquiry related to types of retirement plans. The advisor asked: “Are there any new plan types for 2022?”

Highlights of Discussion

Yes, there is. Thanks to The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Pub. L. 116–94, effective for the 2022 plan year the industry now has Groups of Plans (GoPs) (a.k.a., Defined Contribution Group Plans). Technically, it is a simplified mechanism for filing a single Form 5500 information return for a collection of defined contribution plans that have the same

• Trustee,
• Named fiduciary (or named fiduciaries),
• Plan administrator,
• Plan year, and
• Investment options.

If you are thinking Multiple Employer Plan (MEP) or Pooled Employer Plan (PEP), think again. Generally, MEPs and PEPs allow more than one employer to participate in a single retirement plan. In contrast, GoPs allow several employers each with their own defined contribution plan to file a single Form 5500 for the collection of plans, if they have the same trustee, named fiduciary, administrator, plan year and investment options.

While the industry received some information on GoPs in the Department of Labor’s (DOL) proposed Form 5500 changes released in September 2021, more was anticipated in the DOL’s final Form 5500 regulations and news release issued December 29, 2021. Unfortunately, none was present—just a promise that the consolidated filing option for certain groups of defined contribution retirement plans would be the subject of one or more later final notices.

Conclusion
The SECURE Act created a consolidated Form 5500 filing option for GoPs beginning with the 2022 plan year. The devil is in the details, as they say, and the industry anxiously awaits them.

© Copyright 2024 Retirement Learning Center, all rights reserved