Compliance October 27, 2014

Industry Groups Endorse In-Plan Annuity Guidance

Recent guidance from the Internal Revenue Service and the Department of the Treasury on in-plan annuity use has received a warm response from some in the retirement plan industry.
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Treasury Department and Internal Revenue Service (IRS) guidance published earlier in October seeks to expand the use of income annuities in 401(k) plans. The Department of Labor (DOL) also threw its hat into the game via an explanatory letter, confirming that target-date funds (TDFs) that include annuities among their underlying fixed-income investments satisfy qualified default investment alternative (QDIA) rules.

The flurry of regulatory activity around in-plan annuity use has received positive marks from a number of industry advocacy groups—most of which seem to agree that it’s important to find ways to expand the use of annuities in defined contribution (DC) plans. For example, calling the guidance an “important step to promote retirement security,” the Institutional Retirement Income Council (IRIC) says it fully endorses the move by Treasury and the IRS to bring more certainty to the process of folding annuities into qualified retirement plans.

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“The Institutional Retirement Income Council is pleased with the additional guidance that the Internal Revenue Service and Department of Labor have issued on retirement income strategies in qualified plans,” notes IRIC President William Charyk. “[The guidance] can provide significant comfort to plan sponsors who would like to offer a deferred annuity feature as part of their target-date fund lineup.”

Pointing specifically to the DOL’s information letter, Charyk says that plan sponsors have received critical insights on including deferred annuities as part of their plan’s QDIA without triggering fiduciary liability problems. He suggests the new “annuity selection safe harbor” should provide significant comfort to plan sponsors who have worried about the fiduciary implications of including in-plan lifetime income annuities.

“IRIC appreciates both agencies’ attention to the practical concerns of plan sponsors and looks forward to the release of continued practical guidance from the government to assist the aging population in addressing their retirement needs,” Charyk adds.

The Treasury and IRS guidance was published as Notice 2014-66 and provides that plan sponsors can include deferred income annuities in TDFs used as a QDIA in a manner that complies with key plan qualification rules. Notice 2014-66, in turn, supplements final rules issued this summer for including longevity annuities in a qualified retirement plan account—making it clear that plan fiduciaries have the option to offer TDFs that include such annuity contracts either as a default or as a participant-elected investment.

Another industry advocacy group also weighed in positively on the new guidance. In its own response letter, the Insured Retirement Institute (IRI) says it is enthusiastic that “Treasury continues to support lifetime income retirement plans.”

IRI President and CEO Cathy Weatherford says the guidance “demonstrates the Treasury Department’s commitment to, and ongoing support for, making lifetime income more accessible in workplace retirement plans.”

“By continuing to break down access barriers and providing plan sponsors with this clear guidance, the Treasury Department is acknowledging the important part annuities have in helping Americans attain financial security in retirement,” Weatherford adds. “On behalf of our membership and all those who seek to enhance retirement security in America, we commend Deputy Assistant Secretary Mark Iwry, the Treasury Department and the Administration for their efforts to promote access to lifetime income, and we look forward to their continued partnership as we seek to ensure that all Americans can achieve a financially secure and dignified retirement.”

IRI says it has provided significant input to and has been heeded by the Treasury Department and the Obama Administration since it announced a broad initiative to promote access to lifetime income in retirement plans.

Compliance October 27, 2014

Regulators Doing More to Ensure Plan Compliance, Outcomes

Recent actions from regulators show a focus on compliance and improved outcomes for participants.
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The Internal Revenue Service’s (IRS) latest area of interest, according to Ilene H. Ferenczy, an attorney with Ferenczy Benefits Law Center, is processes. Processes could include policies, systems, computer programs and activities of the plan sponsor, she explains.

“The IRS believes plans with proper internal controls are better administered; maybe they won’t have to review as much and can get out of reviews faster,” she told attendees of the 2014 Association of Pension Professionals and Actuaries (ASPPA) Annual Conference.

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Ferenczy also noted that “theoretically,” sanctions due to errors found on audit will be lower if plan sponsors have proper internal controls in place, because controls “are an ‘equity’ in the plan sponsor’s favor.” She added that the IRS was going to use information it gathered in its 401(k) questionnaire to issue some guidance about proper internal controls, but that effort will not be executed.

Regulators are also focused on lifetime income. Just last week the IRS issued guidance that allows for deferred annuities to be included in target-date funds’ underlying investments. S. Derrin Watson, an attorney with SunGard, told conference attendees the inclusion of annuities in certain TDF series will mean, for those series, plan participants must select or be placed in the TDF investment corresponding with their expected retirement age or date. “Now, I could invest in a 2040 fund even though that is years from my expected retirement age,” he said. “TDFs with annuities will be more restrictive than this because now the funds with the earliest dates may include longevity annuities.”

In a separate discussion at the conference, speakers noted that an accompanying letter from the Department of Labor shows the DOL obviously understands employer’s concerns regarding fiduciary responsibility if participants are offered annuities. In its letter, the DOL noted that plan sponsors are responsible for selecting the TDF manager, but the TDF manager would have responsibility for selecting the annuity and annuity provider.

Ferenczy and Watson also mentioned a few other items plan sponsors and advisers may look for from regulators. The IRS is working on an updated Employee Plans Compliance Resolution System (EPCRS). The update is expected it to address fixes for automatic enrollment errors, and the ability to self-correct loan errors.

Watson also said he expects to see more adjustments to the 403(b) pre-approved plan program. The IRS has already delayed the deadline for submissions of pre-approved documents, modifying the rules for submitting volume submitter plans.

Ferenczy said DOL Assistant Secretary Phyllis Borzi has announced that plan fiduciaries that perform any misconduct related to retirement plans will soon have a public record for that misconduct. The DOL intends to keep a prohibited persons list that those looking to hire someone to work for their plans may access.

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