Compliance June 8, 2021

IRS OC List Helps Plan Sponsor Clients Ensure Operational Compliance

An updated page on the IRS website serves as a reminder of requirements in effect and those that will be in effect soon.

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Plan sponsors that might have been distracted by the COVID-19 pandemic and its related legislation and impact on employees might need a reminder from the of important rules that should be in effect or will be effective next year.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019, just prior to COVID-19’s arrival in the U.S. and the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Changes made by these bills and others are included on the IRS’ updated Operational Compliance (OC) List. The list identifies changes in retirement plan qualification requirements and Internal Revenue Code (IRC) Section 403(b) requirements.

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Many provisions of the SECURE Act went into effect in 2020. For example, Section 102 of the bill increased the 10% cap for the automatic enrollment safe harbor after the first plan year to 15% (but retains the 10% limit for the first plan year in which an employee defers).

Section 103 removed the requirement to provide an annual safe harbor notice for nonelective safe harbor IRC Section 401(k) plans. This section also permits plan sponsors to adopt a safe harbor IRC Section 401(k) plan with nonelective contributions any time before the 30th day before the close of the plan year. Plan sponsors that make nonelective safe harbor contributions of at least 4% of compensation for a plan year may adopt this safe harbor design.

Section 109 of the SECURE Act provided that qualified 401(k) and 403(b) plans may permit certain transfers and distributions of lifetime income investment options in cases in which they are no longer authorized to be held as an investment option under the plan.

The SECURE Act also provides for penalty-free withdrawals from retirement plans for individuals in case of birth or adoption, and increases the age for required minimum distributions (RMDs) from 70.5 to 72. Section 205 of the SECURE Act changed the nondiscrimination testing requirements (generally relating to testing contributions or benefits and compliance with the minimum participation rules) for a grandfathered group of employees with respect to a closed defined benefit (DB) plan by providing alternative nondiscrimination testing methods that the plan sponsor may choose to use.

For 2021, plan sponsors must allow long-term employees working at least 500 but less than 1,000 hours per year to participate in their plans. This section of the SECURE Act applies to plan years beginning after December 31, 2020, except that 12-month periods beginning before January 1, 2021, are not taken into account for purposes of determining a long-term, part-time employee’s eligibility to participate. That is, plan sponsors must start counting hours for their long-term, part-time employees this year.

For distribution calendar years beginning on or after January 1, 2022, the IRS has issued final regulations updating the life expectancy and distribution period tables that are used to calculate RMDs from qualified retirement plans, individual retirement accounts (IRAs), annuities and certain other tax-favored employer-provided retirement arrangements.

Plan sponsors can keep an eye on the IRS’ OC List webpage to ensure they achieve operational compliance.

Compliance June 7, 2021

Northern Trust Faces New Fiduciary Breach Allegations

The plaintiffs argue the plan lost ‘tens of millions of dollars’ in retirement savings due to the retainment of Northern Trust Focus Funds.

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The Northern Trust Co. and its employee benefit administrative committee are facing a lawsuit alleging they breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA).

Filed in the U.S. District Court for the Northern District of Illinois, Eastern Division, the lawsuit alleges that Northern Trust breached its fiduciary duties by failing to prudently select and monitor investment options for its Northern Trust Company Thrift-Incentive Plan. Specifically, the complaint alleges that the defendants failed to regularly monitor plan investments and remove or replace ones that became imprudent.

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According to the complaint, which covers a class period of June 1, 2015, to the present, the plaintiffs argue that Northern Trust loaded the plan with poorly performing proprietary funds called the Northern Trust Focus Target Retirement Trusts and kept these funds on the plan’s investment menu throughout the class period, despite continued underperformance. The complaint claims that the Northern Trust Focus Funds have significantly underperformed their benchmark indexes and comparable target-date funds (TDFs) since their launch in 2010, performing worse than 70% to 90% of peer funds, but says the defendants continued to use the funds as the plan’s default investment option.

Based on an analysis of data compiled by Morningstar, the plaintiffs estimate that the plan has lost “tens of millions of dollars” in retirement savings since 2015, due to the retainment of Northern Trust Focus Funds.

The plaintiffs are seeking to make good to the plan all losses resulting from the alleged breach of fiduciary duty, and are asking the court to order defendants to disgorge any profits made through the alleged breach. They are also pursuing equitable relief and a plan reformation to include only prudent investments.

This is the second ERISA challenge brought against Northern Trust in less than a year, and both lawsuits claim the firm allowed imprudent investment options. In November, the financial services company was hit with a lawsuit that alleged Northern Trust Co. and its retirement plan committee had “failed to regularly monitor plan investments and remove ones that became imprudent.” The lawsuit claimed defendants “loaded the plan” with the poorly performing Northern Trust Focus Target Retirement Trusts and kept the funds on the plan’s investment menu despite continued underperformance.

Responding to a request for comment from PLANADVISER, Northern Trust states, “Northern Trust believes the Northern Focus Funds have been an appropriate vehicle for retirement savings and plans to defend itself from the lawsuit’s claims.”

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