Compliance February 11, 2014

Time to End Complacency About Plan Errors

More defined contribution retirement plans are out of compliance with Department of Labor (DOL) and Internal Revenue Service (IRS) regulations than some might think.
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In 2013, the DOL collected $1.69 billion in fines, voluntary fiduciary corrections and informal complaint resolutions, a 33% increase over 2012’s $1.27 billion tab. Increased enforcement efforts have found a number of violations common to plans (see “10 Lessons Learned from Others’ Mistakes”).

Brett Goldstein, director of Retirement Planning at American Investment Planners LLC in Jericho, New York, tells PLANADVISER the most common DOL violation he sees among his clients is the failure of the trustee to timely remit employee contributions and loan repayments to the plan. The most common IRS violation is the failure to have the proper plan documents. “The shocking part is that most employers don’t care and only correct the problems when they get caught,” he says, offering a couple of anonymous examples of clients who ignored his warnings about violations for their plans.

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For one thing, according to Goldstein, if a plan sponsor uses a prototype plan document, it has to have every one going back to 1986. But, he finds most have just five or six years of past plan documents. And companies do not amend the documents as they should.

In addition, since the Form 5500 is an informational return, not like a personal 1040 where if you don’t send money you’ll get into trouble, Goldstein finds some clients are lax in filing it.

“It’s worse to get caught, [than to fix errors on their own],” he says. “Every plan enjoys tax-qualified status, but once you stop following the rules, they lose tax-qualified status—the money in the plan becomes taxable and money sponsors put in they will not get a deduction for.”

Goldstein contends that plan sponsors take for granted that the money is tax-deferred, but they need to remember that is only so if they follow the rules.

Goldstein points out that both the DOL and IRS have correction programs with language providing that plan sponsors can fix some things themselves. “Fixing mistakes yourself is better because you only pay someone to make calculations for the correction, but if you get caught, there’s a fee or fine to get into a correction program, then you have to hire someone to make calculations, and you may also pay penalties,” he explains.

Plan sponsors have to start caring whether their plan is in compliance; they have to start devoting time to this, Goldstein insists. He concedes that many employers, especially in the small business market, are so busy just trying to run their business, they don’t have the time to commit to their plans. This is where the help of an adviser can come into play.

“Don’t take for granted your plan’s compliance, start checking your plan to make sure you are ok, and you need to get a second opinion,” Goldstein suggests.

The IRS and DOL also offer helpful information on their websites to make plan sponsors aware of common mistakes and how to fix them.

The Markets February 11, 2014

Corporations Look to Secure Pension Gains

The recent decrease in the funded status of defined benefit pension plans highlights the need for plan sponsors to possess a strategy for locking in a favorable funded status.
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A new analysis from Russell Investments, featured in its January “LDI Update” report, finds while 2013 saw an increase in the funded status of pension plans, this year has begun on a less favorable note. The analysis points out there are ways plan sponsors can attempt to lock in pension funding gains.

Marty Jaugietis, managing director, LDI Solutions, Russell Investments tells PLANSPONSOR, “There should be some modeling done of the impact of a reduction in funded status volatility.” He says plan sponsors pursing such a strategy will also tend to invest more in an LDI-type portfolio, investing, for example, in something such as a fixed-income vehicle that possesses a duration similar to that of the plan’s liabilities.

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The New York-based Jaugietis, who is one of the authors of the analysis, explains that de-risking and Liability-Responsive Asset Allocation (LRAA) schedules can be used as tools in the locking-in process: “The process to de-risk a plan is usually incremental. It’s not one step and you’re done. It’s also more cost-effective to de-risk over time. The LRAA schedules act as more of an investment policy strategy. As the funded status of a plan improves, a schedule can act as a glide path for funding all current and future plan liabilities.”

The report discusses plan sponsors using piping and de-risking triggers to foster a quicker response to funded status volatility. “I would define piping as the infrastructure and data feeds necessary to monitor plan liabilities and funded status on a daily basis. Piping can help plan sponsors measure when they hit certain triggers,” says Jaugietis. He explains that a plan sponsor can sit down with a provider and map out a set of responses for different levels of funded status (e.g., If trigger A happens, go with response B).

When a scenario unfolds in the marketplace and triggers are hit, the sponsor’s pre-planned response can then be carried out by the provider, who Jaugietis terms as the “LDI quarterback.” While the plan sponsor is still responsible for establishing and overseeing the content of the responses, this “quarterback” is responsible for actually carrying them out.

The “Russell LDI Update” for January can be downloaded here.

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