Compliance December 8, 2015

IRS Outlines Familiar Exam Priorities for 2016

Employee plans division leadership at the Internal Revenue Service candidly admits worsening budget constraints are making its job more difficult.
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Current Internal Revenue Service (IRS) employee benefit plan examinations initiatives heading into 2016 match closely the priories announced for the year almost ended.

The main areas of examination remain commonly occurring Form 5500 Series return errors and several other broad categories of recurring errors found across 401(k), 403(b), very large plans, and multiemployer plans. These include but are not limited to improper definitions of compensation for plan deferral and matching purposes; running the plan in a way that does not conform with plan documents; investing heavily in hard-to-value assets; nondiscrimination testing errors; not recognizing the plan as a top heavy plan; untimely remittance of employee or employer contributions; and utilizing faulty participant data. 

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According to Lisa Beard, director of employee plans examinations within the Tax Exempt & Government Entities Division (TEGE) of the IRS, “it’s no secret we are facing our lowest funding levels since 2008—and adjusted for inflation our budget hasn’t been this low since 1998.”

“Is this impacting exams? Yes,” Beard told reporters convened for a recent webcast explaining the IRS examination priorities. “It’s one of our biggest challenges as an organization.”

The budget constraints for 2016 mean the IRS will “have to rethink some things,” Beard suggested. “For fiscal year 2016, our focus will remain on developing and refining enforcement mechanisms and enhancing voluntary compliance corrections, but we’re going to have to be mindful of our resources.”

Beard was quick to add that she doesn’t feel IRS examination quality will suffer as a result of resource scarcity, but it will make her staff’s jobs more difficult and could lead to fundamental changes in the way audits are conducted. “Moving forward, we have a really tight budget and it’s getting tighter, so we have to be careful with our travel budget,” she explains. “This means we are looking into greater use of remote examinations. Plan officials should expect to see more correspondence audits, or even a full remote examination.”

The process for more remote examinations has not been finalized, according to the IRS, but Beard did suggest some details. She said plans selected for an IRS audit will likely see audit-related records first requested and collected by an IRS staffer on site, but then the staffer will proceed to conduct the bulk of the auditing work back at IRS field office. “Then they would return to close the investigation,” Beard explains, potentially saving significant sums on travel expenses. “That’s something we’re looking at.”

Beyond its traditional auditing casework, Beard explains IRS staff “will also continue to do inter-agency referrals and other cooperation with Department of Labor enforcement efforts.” She says IRS will also take a hard look at cash balance plans in particular next year, in no small part because “they represent about a third of all DB plans that file a Form 5500 return in U.S. and we are seeing a pretty dramatic increase in the prevalence of hybrid-type cash balance plans.”

Plan officials should be aware that changes are coming to “various processes regarding electronic payments and data distribution. These are areas where we are looking forward to development in 2016,” Beard said. “We’ve had a lot of requests and discussion in these areas.” 

Data & Research December 8, 2015

RIAs Have More of What Plan Sponsors Want

Using an independent RIA can mean the difference between information on plan fees … and no information whatsoever.
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Compared with other types of financial advisers, fee-only registered investment advisers (RIAs) offer more investment advice to participants, more support and more education to plan fiduciaries, according to TD Ameritrade Institutional’s new 2015 Plan Sponsor Sentiment Survey.

The survey found that independent RIAs, unaffiliated with a broker/dealer (B/D), provide greater fiduciary support to retirement plan sponsors at roughly two times the rate of other advisers or plan administrators and are twice as likely to offer educational services to plan sponsors.

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One startling finding is how lacking plan sponsors are in their awareness of the fee disclosure regulations from the Department of Labor (DOL), says John Newman, managing director, retirement plan solutions, TD Ameritrade Institutional. “I found it a little surprising,” he tells PLANADVISER, emphasizing that the regulations, which were finalized in February 2012, are nearly four years old.

A substantial number of plans—having an average size of about $50 million in assets—have committee members and a human resources (HR) staff who could help explain the regulations, yet plan sponsors still were unaware of the nuances of fee disclosures. “We found that 30% had done nothing about the regulations—a fairly healthy percentage,” Newman says. TD Ameritrade expected to see high awareness and action related to the disclosures, especially given how critical they are to plan outcomes.

Newman says the survey findings show that 62% of plan sponsors do not fully understand the implications of the fee disclosure rules. Plan sponsors that use RIAs receive updates and education about fee disclosure from their advisers at twice the rate of those that do not use RIAs. And, of those plan sponsors that don’t use an RIA, 30% say they have received no communication on the requirements.

NEXT: Plan sponsors mistakenly view these two plan components as separate

The big takeaway, Newman says, is that plan sponsors do want to evaluate their plans. “The survey delves more deeply into components they want to focus on,” he says, mainly plan fees and investment options. Plan sponsors might view these as two separate items, Newman says, but they are quite interdependent.

“Once you get out of micro-size plans and get to the $50 million plan size, the largest expense is the investment options,” Newman says. The reason: Larger plans pay a decreasing proportion of fees in relation to those costs. “Once you become a plan of some significance, your fees are driven by your investment options.”

Plan outcomes—how much employees contribute and when they start—are directly tied to these investment costs, Newman points out. As a plan’s balance mounts, it can actually create a bit of drag on the plan. “Plan sponsors seem to be sniffing around these various components,” Newman says, “but they are not putting them together in a simple and distinct way.”

Regulatory changes mean that RIAs are poised to shine for plan sponsors, Newman says, noting that RIAs are hardwired to deliver fiduciary support and investment advice in a way that other providers are not.

“A lot is changing for employer-sponsored retirement plans, so it’s not surprising that plan sponsors need more guidance and services for themselves and for their participants,” he says.

Advisers need to get the word out, TD Ameritrade says.

“RIAs need to be more of a known entity to plan sponsors,” Newman says, “and they need to broadcast the benefits to plan sponsors of having this working relationship.”

TD Ameritrade Institutional’s 2015 Plan Sponsor Sentiment Survey was conducted by phone, questioning 242 retirement plan sponsors between September 28 and October 6. Survey respondents had at least 25 employees from the public and private sectors and self-identified as the primary or shared decisionmaker for their organization’s retirement plan.

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