Compliance February 27, 2024

New Voluntary Correction Rules Could Be Finalized Soon

In ‘the next few months,’ fiduciaries may be allowed to self-correct certain administrative errors.

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The Department of Labor should be finalizing its proposed update to the Voluntary Fiduciary Correction Program in “the next few months,” according to a representative of the Employee Benefit Security Administration speaking at a conference on Tuesday.

Ali Khawar, the principal deputy assistant secretary for EBSA, at the Small Business Retirement Summit hosted by the U.S. Chamber of Commerce and Paychex Inc., spoke about the VFCP and other regulatory items, including the DOL’s retirement security proposal.

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The VFCP allows fiduciaries to document administrative errors and then submit a correction to EBSA in order to receive a no-action letter from the agency. Under current regulations, “certain transactions such as prohibited purchases, sales and exchanges; improper loans; delinquent participant contributions; and improper plan expenses” may be corrected using the VFCP.

The DOL proposed in November 2022 to permit certain errors to be self-corrected: A fiduciary could fix the error and inform EBSA after the fact, instead of seeking pre-approval. Eligible errors would include employee contributions that are invested or loan repayments that are deposited in an untimely manner, provided the cost of error does not exceed $1,000 and is not more than 180 days old. This is believed by EBSA to represent the majority of the fiduciary errors made in plan administration.

Khawar explained that many errors are made by small businesses that are not acting recklessly or in bad faith. He said that, in some cases, the plan’s bookkeeper simply took a vacation, and the backup bookkeeper needed more training.

He added that permitting plan fiduciaries to fix these issues without resorting to enforcement action is a “win-win,” and he anticipates final rules to be issued in the coming months.

Khawar also spoke briefly about the retirement security proposal. He noted that small businesses are not considered retail investors and are therefore not protected by the Securities and Exchange Commission’s Regulation Best Interest when paying for advice on investment menu design, which the retirement security proposal would address.

Tim Hauser, the deputy assistant secretary for program operations of the Employee Benefits Security Administration, also highlighted this element of the proposal, which would subject one-time investment menu sales to fiduciary standards under the Employee Retirement Income Security Act, in a recent interview with PLANADVISER. A comment letter from Morningstar to the DOL on the proposal estimated that small businesses often overpay on such fees, which could cost them as much as $55 billion per year in unnecessary fees.
Data & Research February 27, 2024

Fidelity 401(k) Millionaire Totals Rebound in Q4 2023

The total number of 401(k) accounts exceeding $1 million at Fidelity increased in last year’s final quarter.

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The fourth quarter of 2023 saw a 20% surge in the number of 401(k) millionaires from the previous quarter, a rebound from Q3’s dip, due in part to strong market dynamics, according to Fidelity Investments’ full year 2023 retirement analysis.

The total number of retirement savers in Fidelity 401(k) plans with balances reaching seven figures reached 422,000 on December 31, 2023, a significant rise from the total of about 349,000 millionaires at the close of Q3 2023. The number is close to the record high of 442,000 millionaires at year-end 2021.

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Meanwhile, the trend of individual retirement account millionaires at Fidelity has mirrored that of 401(k) millionaires. The number dipped to 338,725 in Q3 2023 and has grown back to 391,562 in Q4 2023, a 15.6% increase.

Fidelity’s analysis, which considers 22.7 million participants, revealed a positive outlook for retirement savers as the year concluded. Improved market conditions, coupled with consistent contributions, pushed average account balances to their highest levels in nearly two years. Notably, 37% of workers increased their retirement savings contribution rates throughout 2023.

“This past year ended on a high note for retirement savers,” said Sharon Brovelli, president of workplace investing at Fidelity Investments, in a statement. “When it comes to matters like market stability and economic events, 2023 gave us the highs of the highs, and the lows of the lows, but encouragingly, many retirement savers took the long view and stayed the course through it all, which is the type of commitment that can lead to a secure financial future.”

Fidelity’s report highlighted that the combined savings rates for 401(k) plans, including both employee and employer contributions, remained steady at 13.9%. This was sustained from Q2 and Q3 2023, with a marginal increase from the previous year’s 13.7%. By year-end 2023, 78% of 401(k) savers contributed at a rate sufficient to secure the full matching contribution offered by their employer.

The average retirement account balances of IRAs increased by 6% from Q3 2023 to $116,600. At the same time, average 401(k) balances grew by 10% to $118,600 and average 403(b) account balances grew by 9% to $106,100.

With the SECURE 2.0 Act of 2022, the required minimum distributions amount was increased from age 72 to 73 in 2023. Retirees younger than 70 have mostly refrained from making 401(k) withdrawals. A fifth of retirees aged 70 to 72 withdrew from their 401(k) plans in 2023, in contrast to the 94% withdrawal rate among retirees aged 73 and above, according to Fidelity.

Plan designs are also evolving, according to Fidelity’s analysis of 23,500 corporate defined contribution plans.

The firm found that more plan sponsors are offering workplace managed accounts, up to 42.1% in Q4 2023, as compared with 37.7% in Q4 2021. Plans are also including Roth options at a higher rate, with 90.4% of employers offering a Roth option as compared to 76.4% in Q4 2021.

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