Data & Research June 10, 2015

Advisers Can Help Sponsors Tackle Plan Problems

Vanguard's annual study examines the rise of automatic plan features and sponsors' growing sense of responsibility for participant outcomes.
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The 2015 edition of Vanguard’s “How America Saves” study shows how plan advisers can help their sponsor clients to continue to develop the defined contribution (DC) workplace savings model.

The study outlines increased use of automatic enrollment among the Vanguard client base. At year-end 2014, 36% of Vanguard plans had implemented auto-enrollment, a 50% increase since 2009. Today, approximately 60% of newly hired employees participating in Vanguard 401(k) plans were automatically enrolled.

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“Moreover, although this feature was traditionally used only with newly hired employees, sponsors of half of Vanguard plans have now chosen to apply it to eligible nonparticipants,” the firm explains. “In addition, seven in 10 auto-enrollment plans have implemented automatic annual deferral-rate increases.”

Vanguard says these two approaches are leading to very meaningful jumps in retirement readiness for participants.

“The first step in retirement savings is participation,” says Jean Young, lead author of the report and a senior research analyst with the Vanguard Center for Retirement Research. “Over the past decade, we’ve seen a meaningful jump in total participation rates. Three-quarters of eligible workers now participate in their employer’s plan, up from two-thirds 10 years ago, underscoring the impact of autopilot plan designs.”

Another positive trend is a marked shift toward optimally designed portfolios for participants, Vanguard says—especially the use of automatic asset-allocation solutions based on a target retirement date or a targeted level of portfolio risk.

“The value of age- and risk-appropriate portfolio construction choices is most prominently reflected in the continued growth of target-date funds [TDFs], particularly as the default investment option,” Vanguard finds. “With 88% of plan sponsors offering target-date funds, nearly all Vanguard participants have access to this professionally managed and diversified investment choice, and 64% take advantage of this option. Last year, $4 of every $10 deposited in Vanguard plans was invested in target-date funds.”

According to Vanguard’s research, TDFs and other professionally managed allocations “have the added benefit of reducing extreme allocations and establishing appropriate risk levels for participants.” As of year-end 2014, roughly one in eight employees held an extreme allocation position. For example, 8% of participants held only equity investments, while 5% held no equity investments in their portfolios.

These numbers are still too high, Vanguard says, but 10 years ago, one in three participants held an extreme allocation position, so things are getting better. This is also true of extreme allocations to company stock, Vanguard notes.

“In addition to the broad adoption of diversified, balanced investment programs, there has been a dramatic shift away from company stock,” the study notes. “Only 8% of participants held a concentrated stock position at the end of 2014 [employer stock or otherwise], compared with 18% a decade prior—more than a 50% improvement.”

Additional findings from the research can be explored here.

Compliance June 10, 2015

4th Circuit Revives Case Over Transfers to Cash Balance Plan

The appellate court found that Bank of America’s closing agreement with the IRS did not make the case moot.
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The 4th U.S. Circuit Court of Appeals has determined that participants in Bank of America’s cash balance plan still have a claim for relief for illegal transfers of their 401(k) account balances to the cash balance plan.

The appellate court first determined that the plaintiffs had standing to sue under Employee Retirement Income Security Act (ERISA) Section 502(a)(3), which provides that a plan beneficiary may obtain “appropriate equitable relief” to redress “any act or practice which violates” ERISA provisions contained in a certain subchapter of the United States Code. The court found that the transfers violated ERISA’s anti-cutback provisions, as determined by the Internal Revenue Service (IRS) during a plan audit, and that the relief the plaintiffs are seeking—the profits Bank of America made from the assets transferred—is “appropriate equitable relief.”

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The 4th Circuit noted that the U.S. Supreme Court found that “[a] case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” The court said, “If an accounting ultimately shows that the bank retained no profit, the case may well then become moot.  But as long as the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot.” 

Finally, the court determined that the statute of limitations of 10 years under North Carolina trust law applied in the case. The first of the transfers in question took place in 1998, and the plaintiffs filed suit in 2004, so their claims are not time-barred by the applicable statute of limitations.

NEXT: Case background.

In 1998, NationsBank amended its 401(k) plan to give eligible participants a one-time opportunity to transfer their account balances to its defined benefit cash balance plan. The cash balance plan allowed participants to select investment options, but they were purely notional, and participants were credited with what their accounts would have received if invested in those options. The bank invested plan assets in investments of its choosing, and if those investments earned more than the return applied to participants’ accounts, the bank kept the difference.

The plaintiffs filed their lawsuit in 2004, seeking to obtain the profits the bank was keeping. In 2005, after an audit of the bank’s plan, the IRS issued a technical advice memorandum, in which it concluded that the transfers of 401(k) plan participants’ assets to the cash balance plan between 1998 and 2001 violated Internal Revenue Code § 411(d)(6) and Treasury Regulation § 1-411(d)-4, Q&A-3(a)(2). According to the IRS, the transfers impermissibly eliminated the 401(k) plan participants’ “separate account feature,” meaning that participants were no longer being credited with the actual gains and losses “generated by funds contributed on the participant[s’] behalf.”

The IRS determination led a federal district court to move the participants’ case forward. However, the bank entered into a closing agreement with the IRS, paying a $10 million fine and setting up a special-purpose 401(k) plan to restore participants’ accounts. The district court determined that, following the closing agreement, the participants no longer had standing to sue.

The appellate court reversed the district court’s decision and remanded the case for further proceedings.

The opinion in Pender v. Bank of America Corporation is here.

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