Tag Archive for: DOL

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Get Ready to Explain Lifetime Income Illustrations

“When are the new lifetime income illustrations due and what should I be telling my clients who are 401(k) sponsors and participants about them?”

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 an advisor in Colorado is representative of a common question related lifetime income illustrations in 401(k) plans.

Highlights of Discussion

  • It’s good you are thinking ahead! Sponsors of participant-directed defined contribution (DC) plans must provide lifetime income illustrations to participants in their plans no later than with the second quarterly benefit statements of 2022 (i.e., the first illustration needs to be in place for the quarter that ends June 30, 2022). For nonparticipant directed DC plans, sponsors must provide lifetime income illustrations on the annual pension benefit statement for the 2021 calendar year (e.g., making October 15, 2022, the deadline).
  • Showing what a lump sum amount will equate to as monthly income is a step in the right direction because people don’t retire on lump sums; they retire on monthly income. However, some say these particular income illustrations have the potential to upset participants and force plan sponsors and advisors into damage control mode because they are based on incomplete assumptions.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 amended the Employee Retirement Income Security Act of 1974 (ERISA) to require 401(k)s and other DC plans to include lifetime income illustrations in participant benefit statements on an annual basis. Final Department of Labor (DOL) interim final regulations, which provide the details for calculating these lifetime income illustrations, took effective September 18, 2021, and a series of DOL Frequently Asked Questions instruct plan sponsors on when they must provide the first disclosures (mid 2022).
  • According the DOL’s interim final regulations, the income Illustrations must show a monthly income amount based on a DC plan participant’s account balance as of the last day of the statement period converted to a lifetime income equivalent as a
  • Single life annuity (SLA) and
  • Qualified joint and survivor annuity (QJSA) involving a spouse.
  • The income projections for the new disclosures must be based on the following assumptions:
  • The participant is retiring at age 67 (the Social Security full retirement age for many workers) or the participant’s actual age, if older than 67),
  • An interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates;
  • Life expectancy from a gender-neutral Mortality table pursuant to IRC Sec. 417(e)(3)(B), and
  • The current account value—assuming no further contributions.
  • By not accounting for future contributions, the retirement income projections will be significantly smaller than the actual number at retirement—which could be shocking—especially for younger participants. Example:  Theresa is age 40 and single. Her account balance on December 31, 2022, is $125,000. The 10-year CMT rate is 1.83% per annum on the first business day of December. The benefit statement of this participant would show the following amounts.

 

Current Account Balance $125,000
Single Life Annuity $645 per month for life (assuming Participant X is age 67 on December 31, 2022)
Qualified Joint and 100% Annuity $533 per month for participant’s life, and $533 for the life of spouse following participant’s death (assuming Participant X and her hypothetical spouse are age 67 on December 31, 2022)

Source: DOL Fact Sheet

 

  • It is essential for advisors and plan sponsors to get in front of these upcoming disclosures from a messaging and communication perspective. Specifically, advisors are encouraged to take the following steps to prepare for the statement delivery this summer and fall.
  1. Alert plan sponsors to the rules, assumptions, and the potential for negative feedback from plan participants. Explain the DOL assumptions upon which the income illustrations are based and how they may understate the actual retirement income amount—especially for younger plan participants.
  2. Craft an employee communication strategy explaining the new statements and assumptions. Provide a positive, encouraging message about the importance of making ongoing deferrals, automatically escalating deferral rates, the time value of contributions, and explain why the actual number will likely be larger—especially with ongoing contributions.
  3. Execute the communication plan and provide ongoing support.

 

Conclusion

Slowly the DC market is shifting from a lump sum accumulation mindset to a retirement income mentality. Plan sponsors soon must implement the formalized lifetime income disclosure rules. Although the lifetime income illustrations under the DOL’s regulations are far from perfect, they do press the issue of helping participants understand how their retirement plan balances translate into monthly retirement income. Plan sponsors and advisors can use this impetus to carefully craft their participant communications and messaging. A key differentiator for advisors, moving forward, will be the ability to effectively support participants in transitioning to a true retirement income mindset.

© Copyright 2022 Retirement Learning Center, all rights reserved
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Failure to Fulfill PTE 2020-02’s Requirements

“When relying on PTE 2020-02 to provide investment advice for a fee, what are the penalties for failing to fulfill the requirements?” 

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 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 an advisor in Massachusetts is representative of a common inquiry regarding Prohibited Transaction Exemption (PTE) 2020-02.

Highlights of Discussion

PTE 2020-02 is the Department of Labor’s (DOL’s) newest PTE which, when followed, allows financial institutions and investment professionals to provide investment advice to retirement investors for a fee. Failure to comply with the PTE’s requirements could result in a variety of penalties, depending on the severity of the breach. Adopting the PTE is optional.

The most severe penalty is the imposition of a 10-year ineligibility period in the following scenarios.

  1. Financial institutions and investment professionals who are convicted of certain crimes arising out of their provision of investment advice to retirement investors will be ineligible to rely on the exemption for 10 years. “Crimes” are described in ERISA Sec. 411 (e.g., embezzlement, fraud, perjury, etc.). A financial institution with such a criminal conviction may submit a petition to the DOL to seek a determination that would allow it to continue to rely on the exemption. Petitions must be submitted to the DOL within 10 business days of the conviction.
  2. Financial institutions and investment professionals also will be ineligible to rely on the exemption for 10 years if they engage in systematic or intentional violations of the PTE’s conditions or provide materially misleading information to the DOL in relation to their conduct under the exemption. The DOL will first issue a warning and provide a six-month cure period. But without correction, the DOL will issue a written “ineligibility notice.”

Parties found to be ineligible to rely on PTE 2020-02 are permitted to rely on an otherwise available statutory exemption or administrative class exemption, or they can apply for an individual prohibited transaction exemption from the DOL.

With any misstep of the PTE’s requirements, the DOL has the right to transmit information to the IRS regarding the party’s violation of the prohibited transaction provisions of ERISA Sec. 406. IRC Sec. 4975 imposes a 15 percent tax on disqualified persons participating in prohibited transactions involving plans and IRAs.

Participants, beneficiaries, and fiduciaries with respect to plans covered under Title I of ERISA have a statutory cause of action under ERISA Sec. 502(a) for fiduciary breaches and prohibited transactions under Title I. The exemption, however, does not expand to IRA owners. ERISA Sec. 502(a) provides a cause of action for fiduciary breaches and prohibited transactions with respect to Title I Plans (but not IRAs) (see DOL FAQ #21).

Note the nonenforcement period that applies through June 30, 2022, for the rollover disclosure and documentation requirements of PTE 2020-02. (See an earlier Case of the Week for more details.)

Conclusion

Those who take advantage of the protections offered under PTE 2020-02 should be aware that failure to uphold the requirements could result in penalties and, potentially, loss of the PTE’s shield for a decade.

 

© Copyright 2022 Retirement Learning Center, all rights reserved
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Cybersecurity and DOL Document Requests

An advisor asked: “I understand the Department of Labor (DOL) is already checking the cybersecurity procedures of plans that are currently under audit. Do you have any insight into what the DOL’s auditors are requesting from plan sponsors with respect to cybersecurity policies?”

Highlights of the Discussion

Yes, we have a little insight. The DOL’s “Cybersecurity Document Requests” that we have seen, which have been given to at least some plans under audit, reveal the DOL has been asking for quite an extensive list of documentation, as represented below. Moreover, the DOL has noted that plan administrators should be aware that they may need to consult not only with the sponsor of the plan, but with the service providers of the plan to obtain all the documents requested, and if they are unable to produce the requested documents the plan administrator must specify the reasons why the documents are unavailable.

1. All policies, procedures, or guidelines relating to

• Data governance, classification and disposal.
• The implementation of access controls and identity management, including any use of multi-factor authentication.
• The processes for business continuity, disaster recovery, and incident response.
• The assessment of security risks.
• Data privacy.
• Management of vendors and third-party service providers, including notification protocols for cybersecurity events and the use of data for any purpose other than the direct performance of their duties.
• Cybersecurity awareness training.
• Encryption to protect all sensitive information transmitted, stored, or in transit.

2. All documents and communications relating to any past cybersecurity incidents.
3. All security risk assessment reports.
4. All security control audit reports, audit files, penetration test reports and supporting documents, and any other third-party cybersecurity analyses.
5. All documents and communications describing security reviews and independent security assessments of the assets or data of the plan stored in a cloud or managed by service providers.
6. All documents describing any secure system development life cycle (SDLC) program, including penetration testing, code review, and architecture analysis.
7. All documents describing security technical controls, including firewalls, antivirus software, and data backup.
8. All documents and communications from service providers relating to their cybersecurity capabilities and procedures.
9. All documents and communications from service providers regarding policies and procedures for collecting, storing, archiving, deleting, anonymizing, warehousing, and sharing data.
10. All documents and communications describing the permitted uses of data by the sponsor of the Plan or by any service providers of the Plan, including, but not limited to, all uses of data for the direct or indirect purpose of cross-selling or marketing products and services.

Most recently, the DOL on April 14, 2021, issued three cybersecurity directives nationwide for retirement plans:

Tips for Hiring a Service Provider: This piece helps plan sponsors and fiduciaries prudently select a service provider with strong cybersecurity practices and monitor their activities, as ERISA requires.
Cybersecurity Program Best Practices: This piece assists plan fiduciaries and record-keepers in their responsibilities to manage cybersecurity risks by following these 12 steps.
Online Security Tips: This piece offers plan participants and beneficiaries who check their accounts online basic rules to reduce the risk of fraud or loss.

For more details, please see RLC’s previous Case of the Week: Cybersecurity and Retirement Plans-What’s the Latest?

Conclusion
The industry is still waiting for definitive cybersecurity rules for retirement plan administration. In the meantime, the best that concerned parties can do is make a good faith effort to adopt cybersecurity policies, following the series of guidelines, suggestions and best practices issued by the DOL, and document, document, document.

 

© Copyright 2022 Retirement Learning Center, all rights reserved
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Voluntary Fiduciary Correction Program and PTE 2002-51

A financial advisor asked:  “Prohibited Transaction Exemption (PTE) 2002-51 exempts certain transactions that are corrected under the DOL’s VFC Program from the 15 percent IRS penalty pursuant to IRC §4795.  What is the definition of transaction?”

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 an advisor in California is representative of a common question on the Department of Labor’s (DOL’s) Voluntary Fiduciary Correction (VCP) Program.

Highlights of the Discussion

The DOL’s VFC Program allows plan officials to voluntarily correct 19 specific transactions that are prohibited under the Employee Retirement Income Security Act of 1974 (ERISA). These 19 prohibited transactions are typically subject to an IRS excise tax under IRC §4975 of 15 percent. Prohibited Transaction Exemption (PTE) 2002-51 provides relief from the IRS excise tax for six of the 19 transactions.

The six transactions that can be exempt from the IRS penalty are

  1. The failure to timely transmit participant contributions to a plan and/or loan repayments to a plan within a reasonable time after withholding or receipt by the employer;
  2. The making of a loan by a plan at a fair market interest rate to a party in interest with respect to the plan;
  3. The purchase or sale of an asset (including real property) between a plan and a party in interest at fair market value;
  4. The sale of real property to a plan by the employer and the leaseback of such property to the employer at fair market value and fair market rental value, respectively;
  5. The purchase of an asset (including real property) by a plan where the asset has later been determined to be illiquid as described under the Program in a transaction which was a prohibited transaction, and/or the subsequent sale of such asset to a party in interest; and
  6. Use of plan assets to pay expenses, including commissions or fees, to a service provider for services provided in connection with the establishment, design or termination of the plan (settlor expenses), provided that the payment of the settlor expense was not expressly prohibited by a plan provision relating to the payment of expenses by the plan.

There is an important time constraint associated with utilizing the PTE. A business can only take advantage of the relief for a transaction once every three years. Assume a business has multiple failures to transmit participant contributions. The DOL has informally commented that multiple occurrences of delinquent deposits over more than one pay period can be treated as one transaction if the pay periods are close together in time and the delinquencies are related to the same cause.

EXAMPLE 1:

The employee responsible for payroll at Better Late Than Never, Inc., resigned, and the company is having a hard time replacing her. As a result, over the next few pay periods Better Late Than Never is late in depositing employee contributions to its 401(k) plan. The DOL would count the multiple delinquencies as one transaction because they all are related to the same cause.

Example 2:

Random, LLC, misses the deferral deposit deadline in December 2020, and in March and June of 2021. Each delinquency is for a different reason (e.g., power outage, switching payroll providers, sick employee). Because there is no common cause, the missed deposit deadlines cannot be treated as one transaction for purposes of the three-year timeframe.

Conclusion

The DOL’s VFC Program allows plan officials to voluntarily correct 19 specific prohibited transactions. (PTE) 2002-51 provides relief from the IRS excise tax for six of the 19 transactions. A business can only take advantage of the IRS excise tax relief for a transaction once every three years.

For more information, please refer to the following

Frequently Asked Questions of the VFC Program

VFC Program Class Exemption

 

 

 

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