Compliance August 26, 2010

It's Exam Time

Did 403(b) plan sponsors get it right?  
Reported by

Since the passage of new 403(b) plan regulations in 2007, plan sponsors have been focused on meeting the compliance deadline. For some, especially those employers not subject to the Employee Retirement Income Security Act (ERISA), that meant a complete revamp of their programs: Internal staff had to be educated and duties reconsidered, vendor relationships had to be reexamined and perhaps changed (including the implementation of information-sharing agreements with some), and a written plan document had to be put in place—all in a remarkably short time. 

As Chris Cummings, Senior Vice President, Not-for-Profit Business, Great-West says, “[403(b)] plan sponsors needed to learn in one year’s time what corporate plan sponsors have been perfecting since 1974.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

While the changes were not as great for those 403(b) plans already subject to ERISA’s structures, the new regulations provided even those an opportunity to review and reshape their programs. 

So what does a 403(b) plan sponsor need to have a compliant program? 

Who’s in Charge? 

Bob Architect, Vice President, Compliance and Market Strategy, VALIC, formerly Senior Tax Law Specialist and 403(b) guidance author in the Internal Revenue Service’s Employee Plans Division, says sponsors need to decide formally who will be responsible for running the program and dealing with providers, whether a committee, HR person, or payroll person. They should decide who has the authority and should be charged with the task of making plan decisions and amendments. Architect says he believes many sponsors still do not have this nailed down. 

If there is no one internally who can take on the responsibility, Cummings says organizations should look to hire someone who will understand the significance of the plan document and the importance of complying with its terms, as well as plan limits on things like contributions, withdrawals and loans, and, if an ERISA 403(b) plan, the importance of timely reporting to the Department of Labor (DoL). 

Bob Lavenberg, Partner with BDO Seidman LLP, and Chair of the American Institute of Certified Public Accountants’ (AICPA) 403(b) Plan Audit Task Force, notes that many sponsors do not have the budget to hire someone internally or to hire outside help, such as a plan adviser. He suggests those sponsors turn to their current 403(b) vendors for help in understanding and complying with the rules. He also cites resources provided online by the DoL and IRS and, for ERISA plans subject to Form 5500 reporting and a plan financial audit, says that sponsors can turn to the AICPA’s Web site, the DoL’s EFAST help line, and the Form 5500 instructions themselves. 

Lavenberg notes that many vendors now provide comprehensive services, from a plan document, to plan administration, investment offerings, and Form 5500 filing. When choosing such a vendor, sponsors need to make sure fees are disclosed and reasonable for participants in relation to the services being provided. 

Richard Turner, Vice President, Deputy Legal Counsel, VALIC, adds that sponsors should seek service providers with 403(b) experience that have systems in place to operate comfortably within the parameters  of the employer’s plan, and can, either themselves or in cooper­ation with other service providers, offer coordination of loans and hardship withdrawals. 

Cummings suggests that, when looking for a service provider, sponsors should turn to someone experienced with not only ERISA, but also processing loans and hardships, and managing funds to comply with an employer’s Investment Policy Statement. He says a bundled approach makes the most sense because it is less costly and could simplify administration.

 

(cont...) 

Will This Be on the Exam? 

What will the IRS be looking for when examining a 403(b) plan, and where can plan sponsors turn for help? 

Architect says the written plan will be looked at in two areas: form—making sure the document includes the language required and amends provisions to match statutory compliance; and oper­ation—making sure the 403(b) program operates in accordance with plan terms. Service providers can be a big help in ensuring document compliance. While Turner says he certainly hopes that sponsors have legal counsel involved, Architect notes that a prototype program is coming soon from the IRS, and he suggests sponsors work with providers that offer a prototype plan. These service providers will understand that two big issues right now, from an IRS exam viewpoint, are complying with universal availability rules and making sure the document does not violate them in form, syncing the language of any underlying investment contracts with the terms of the plan document. 

Cummings is not yet seeing an urgency with plan sponsors on monitoring loans and hardship withdrawals in a multivendor environment, which potentially could lead to problems in a violation of plan terms and of limits set by the IRS. Even if plan sponsors have hired a service provider to coordinate the administration of loans and hardship withdrawals, they should make sure there is a process in place for doing so and that that process is documented, he says.  

In addition to the IRS, 403(b) plan sponsors will have to answer to the DoL. The new requirements of a written plan document, and transaction and limit monitoring have created confusion as to who falls under the ERISA safe harbor exempting certain plans from being ERISA-governed. Lavenberg says sponsors can turn to ERISA counsel to confirm whether they still qualify for the safe harbor exemption. 

The new regulations also now require ERISA-governed 403(b)s to file a complete Form 5500, and plans with 100 or more participants also must have a financial plan audit performed, making it necessary to hire an independent auditor. 

According to Lavenberg, when hiring an auditor, sponsors should make sure the auditor is someone who understands employee benefit plan auditing and the nature, history, and environment of 403(b) plans. The auditor also should be someone the sponsor feels comfortable with, because there may be difficult decisions to make, especially when discussing the audit opinion that the auditor expects to be able to make. 

Realizing the lack of oversight and multivendor environment previously traditional in the 403(b) plan market, the DoL provided relief for plans, allowing them to omit data about certain old vendors, and allowed for an audit opinion disclaimer if that is the only reason for the audit not having complete data. Lavenberg says that, if an auditor assumes there is not a lot of work to be done since it will issue that disclaimer opinion, then the sponsor does not want to use that auditor.

Regardless of the help they get from others, the responsibility for compliance ultimately lies with the plan sponsor.  “As part of the process of bringing the plan into compliance and keeping it in compliance, [sponsors] have to take their role seriously, including in the process of hiring service providers,” says Lavenberg.

 

Products August 26, 2010

Retirement Income: New and Improved

Retirement income solutions are new and different.
Reported by

Coming out of the 2008 financial mess were tales of scores of workers delaying retirement and retirees returning to work. “We all know people who planned to retire but couldn’t after the fourth quarter of 2008,” says Charlie Nelson, President of Great-West Retirement Services in Greenwood Village, Colorado.  Market volatility wreaked havoc on defined contribution and IRA assets that had no income guarantees or downside protection. 

Market volatility led to participants and retirees looking at retirement investments in a whole new light. According to a 2009 Merrill Lynch survey, 56% of participants surveyed stated that the economic volatility of 2008 and 2009 made them look at retirement differently, and 51% said they wished they had spent more time planning for retirement, says Katherine Roy, Head of Personal Retirement Innovations with Merrill Lynch Wealth Management. 

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

With employees delaying retirement or former employees clamoring to return to work, sponsors began reconsidering how retirement income is provided to workers. There has been a lot of conversation regarding retirement income, particularly delivery, says David Wray, President of the Profit Sharing/401K Council of America in Chicago.  There is new focus on providing a less volatile experience to participants, he says. 

Historically, the problem has been that the typical defined contribution account does not translate into a guaranteed stream of retirement income payments, but there were not any workable solutions to provide participants with steady retirement income. Previously, says Nelson, products providing guaranteed retirement income were retrofitted and did not work well in defined contribution plans.  

Sponsors now are showing more interest in providing retirement income products designed exclusively for the defined contribution market, says Nelson. In response, vendors are creating a new generation of retirement income products, designed specifically to fit inside defined contribution plans, says Nelson. Newer generation products address retirement plan issues such as qualified domestic relations orders and fiduciary liability, he says. Additionally, the newer products are portable, so there are no hindrances if, for example, the recordkeeper is changed. 

Some new products allow participants to dollar-cost-average the purchase of an income stream with the money put into a defined contribution plan, rather than just stocks and bonds, says Wray.

Other new products offer participants insurance protection five to 10 years prior to retirement to protect against volatility, says Wray. Sponsors now can offer participants the option to buy wrappers that preserve principal, he says. Participants enjoy the advantages when the market goes up, but it still provides a steady check, says Nelson.

 

(cont...)  

One example of these wrap products is Great-West’s SecureFoundation®.  SecureFoundation is a product designed for the defined contribution market that provides benefit protections as of a date certain, e.g., after age 55. Great-West charges 90 basis points in addition to the underlying investment management fees. However, says Nelson, the additional fees do not have to be paid over the participant’s entire lifetime, but only in the last 10 years prior to retirement. For example, he says, if a participant wants to retire at age 65, he can start paying for the protection when he is 55. 

Wray notes that, while these wrappers do dampen volatility, they also reduce overall returns because participants are charged for them. Nelson, however, compares it to buying insurance. People typically buy insurance to protect their house or their car, he says; now, they can buy insurance to protect their retirement. 

Furthermore, argues Nelson, by buying these wrappers, participants can maintain a higher equity exposure, which could counteract the additional cost. In the defined contribution markets, glide paths typically reduce equity exposure as participants near retirement, says Nelson,  but the new products allow participants to have higher equity exposure than they might otherwise have had because the income is protected. Rather than reduce equity exposure when nearing retirement, participants can buy insurance, keep their equity exposure, and benefit if the market goes up. 

Sponsors are looking at these new products, says Wray, but there has not been a big take-up rate because they are new.  

Outside the plan, the retirement income market traditionally has been dominated by individual variable annuities, says Nelson. While there have been a number of changes recently, he says, costs increased significantly since the fourth quarter of 2008, primarily because of hedging costs providers pay to make the guarantees.  

However, things are changing even in this market. People want to stay actively invested in the equity market, says Nelson, so we are seeing a trend of having ’40 Act mutual funds with retirement income product wrapped around them.   

Vendors also are coming through with products to help retirees manage their retirement income flow. Merrill Lynch Global Wealth Management recently launched My Retirement Income™, says Roy, which connects customized retirement income planning with the Bank of America, N.A., retail banking network. My Retirement Income allows clients nearing or in retirement to plan out for the long run their retirement income, and execute it to get a paycheck.  

There even have been changes on the sponsor side. To get around limitations presented when annuities are offered as a distribution vehicle inside the plan (see “Holding Patterns,” below), vendors are creating products that employers can offer outside the plan, says Wray. Participants can roll over their money into an IRA and be delivered an institutionally priced annuity. This way, says Wray, the annuity is a lot less expensive than if employees were to buy them on their own.  

Had these products been available prior to the financial crisis, says Nelson, participants near retirement and retirees could have been somewhat protected. That is what is driving plan sponsors and participants to look at these products despite the extra costs, he says.

 

(cont...) 

 SIDEBAR: 

Holding Patterns 

While offering an annuity as a distribution option through the plan seems to make sense, it is unlikely that sponsors will move in that direction. “I don’t think you’ll see annui­tization out of plans until the regulatory regime changes,” says David Wray, President of the Profit Sharing/401K Council of America in Chicago. 

When annuities are offered through the plan, explains Wray, current rules and regulations make them undesirable to most participants. Annuities purchased through the plan must meet the Joint and Survivor regime and have gender-neutral pricing—making them undesirable to men. Men have shorter life-spans, explains Wray, so annuity pricing for them is cheaper outside the plan.  

Additionally, says Wray, when annuities are a defined contribution plan distribution option, it has to be all or nothing; either 100% of defined contribution assets must go to the annuity purchase, or nothing. Few participants want to annuitize their entire benefit, says Wray. Those who are 65 could live to be 85, so they need to stay invested in equities to retain purchasing power and not annuitize their entire account.  

Another factor that makes sponsors hesitant to offer annuities, says Wray, is the liability issue. When employers choose an insurance company to offer annuities to their employees, he explains, they are exposing the organization to liability should that insurance company go out of business, leaving employees’ annuity contracts worthless.

«