Compliance April 24, 2019

IRS Expands Opportunities for Retirement Plan Sponsors to Self-Correct

The IRS Self Correction Program (SCP) has been expanded to include certain plan document failures and certain loan failures and a way to self-correct via plan amendments.

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The Internal Revenue Service has issued Revenue Procedure 2019-19 to expand Self Correction Program (SCP) eligibility to permit correction of certain plan document failures and certain plan loan failures, and also to provide an additional method of correcting operational failures by plan amendment under SCP.

The agency says the revenue procedure updates the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of Sections 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code, but that have not met these requirements for a period of time. The Department of the Treasury and the IRS have concluded that an expansion of SCP will facilitate compliance for plans, while reducing costs and burdens of compliance by allowing plan sponsors to self-correct in certain additional circumstances.  The new procedures were effective April 19.

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Correcting certain plan document failures

Numerous conforming changes to the revenue procedure have been made to implement the expansion of SCP to permit correction of certain plan document failures. Section 4.01 is revised to provide that SCP is available to correct certain plan document failures.  Section 4.01(1)(b) provides that, if otherwise eligible to correct under SCP, a sponsor of a qualified plan or 403(b) plan may correct certain plan document failures under SCP, other than the initial failure to adopt a qualified plan or the failure to adopt a written 403(b) plan document timely.  Plan document failures under SCP are always treated as significant failures and may be corrected under SCP only if the plan, as of the date of correction, is subject to a favorable letter and the correction is made within the SCP correction period.

The new revenue procedure also permits certain plan document failures to be corrected by plan amendment if the plan has a favorable letter and meets other requirements stated in the revenue procedure.

Correcting operational failures by plan amendment

The revenue procedure adds new rules for correcting operational failures by plan amendment under SCP.  Under the new correction rules, an operational failure may be corrected by plan amendment under SCP if three conditions are satisfied: (a) the plan amendment would result in an increase of a benefit, right, or feature; (b) the increase in the benefit, right, or feature is available to all eligible employees; and (c) providing the increase in the benefit, right or feature is permitted under the Code and satisfies the correction principles of section 6.02. 

Correction of certain plan loan failures

The revenue procedure also provides that errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may be corrected under SCP in accordance with section 6.07(3)(d). The correction methods for a defaulted loan are the same as those provided under Rev. Proc. 2018-52; namely, permitting correction by either a single-sum repayment, re-amortization of the outstanding loan balance, or a combination of the two.

Section 6.07(5) provides that a plan sponsor may correct a failure resulting from granting a number of plan loans that exceeds the number of loans permitted under a plan by adopting a plan amendment in accordance with the correction by plan amendment methods set forth in section 2.07(3) of Appendix B of the revenue procedure.

Section 6.07(1) of Rev. Proc. 2018-52 provided that if correction of a plan loan failure is not made, a deemed distribution under Section 72(p)(1) must be reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with respect to the affected participant. Rev. Proc. 2018-52 permitted, as part of Voluntary Correction Program (VCP) and Audit closing agreement program (CAP), a plan sponsor to report the deemed distribution on Form 1099-R in the year of correction (instead of the year of the failure), but only if the plan sponsor specifically requested that relief. Section 6.07(2) of the new revenue procedure eliminates the requirement that the reporting relief must be requested in order to report the deemed distribution in the year of correction.

Revenue Procedure 2019-19 also addresses correction methods related to plan loans made in excess of statutory limits and plan loans issued without spousal consent.

The Markets April 24, 2019

There’s an Untapped Market for ESG Investing

More investors than research has shown are interested in environmental, social and governance (ESG) investing, but most don't speak out, and many need education to help them invest in what matters to them.

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Some research may lead plan sponsors and advisers to believe only Millennials and women are most interested in sustainable investing, but research from Morningstar finds most investors, across ages and genders, have clear preferences for environmental, social and governance (ESG) investment products.

Morningstar developed a new tool, called My Sustainability Profile. The tool is designed to reveal a person’s sustainability preferences by asking them to make choices between investment options with carefully constructed trade-offs. Experimental economics uses this trade-off, or revealed preference, approach to help mitigate biases like social desirability and to identify people’s underlying preferences based on the pattern of choices.

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Using the My Sustainability Profile to measure the sustainability preference score of a nationally representative sample of 948 respondents, Morningstar found that, overall, 72% of the United States population expressed at least a moderate interest in sustainable investing.

The results indicate that gender isn’t a useful gauge for determining interest in sustainable investing. The research found that while women have a slightly stronger preference for sustainable investing than men—which was mainly driven by more women being especially passionate for sustainable investing—the difference between the weighted averages was small. In addition, this small difference disappeared after controlling for income, age, political ideology, religiosity, risk tolerance, financial literacy, and other sociodemographic variables.

The results also bust the myth that different generations have substantially different preferences for sustainable investing. The average preference score for Millennials and Generation X were statistically equivalent, and while Millennials, on average, showed a slightly stronger preference for sustainable investing when compared to Baby Boomers, the difference didn’t exist after including sociodemographic variables.

Morningstar says there’s an untapped market for sustainable investing that advisers may be able to reach (and retain) by offering sustainable investing options, and if advisers are relying on their clients to broach the topic of sustainable investing first, they may be losing out.

Which is most important, ‘E,’ ‘S,’ or ‘G’?

Although much of the global attention within the ESG sector of investing has been placed on the environmental component, the ESG Investor Sentiment Study from Allianz Life Insurance Company of North America found that in the U.S., social and governance issues are equally important as or more important than environmental record when consumers decide whether or not to invest in or do business with a company. Furthermore, the study found that a company’s ESG profile plays a significant role in its overall reputation as a majority of consumers believe companies focused on ESG issues have better long-term prospects.

When asked about the importance of a variety of ESG topics in making a decision to invest in a company, 73% of American consumers noted environmental concerns like natural resource conservation or a company’s carbon footprint/impact on climate change. However, the same percentage emphasized social issues such as working conditions of employees or racial/gender equality, and 69% highlighted governance topics like transparency of business practices and finances, or level of executive compensation, as being significant in their decision making.

Should ESG investment products be made available to plan participants?

The Allianz study found a significant gap still exists between what people say is important and how they actually invest. More than three-quarters of respondents said the following ESG issues were important in their decision to invest: provides safe working conditions for employees (84%); transparent in their business practices and finances (81%); provides living wages to employees (80%); provides quality health insurance to their employees (78%); and conserves natural resources (76%).

Yet, less than half said they chose to invest/not invest based on those same business practices: provides safe working conditions for employees (42%); transparent in their business practices and finances (44%); provides living wages to employees (40%); provides quality health insurance to their employees (42%); and conserves natural resources (44%).

“Although many people remain skeptical about actual returns from ESG-focused investments and are confused about what qualifies as an ESG investment, investors still see value in supporting businesses with strong ESG practices,” says Kelly LaVigne, vice president of consumer insights for Allianz Life. “As information about the way companies operate becomes more readily available to average investors, we anticipate an even stronger focus on ESG performance. Greater awareness and education on ESG topics will help bridge any existing information gaps on the true importance of ESG.”

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