Your Organization’s Retirement Plan. When was the Last Time You Reviewed it? Creating and Maintaining Your Retirement Plan Produces a Great Employee Benefit Which Helps You Attract and Retain Talent to Help You Grow Your Company or Non-Profit Organization. Over the Last Few Years the Department of Labor (DOL) and the Employee Benefits Security Administration (EBSA) Have Made a Number of Changes to the Regulations Governing How You Manage Your Qualified Retirement Plan. This Affects Not Only Your 401k, 403b or Profit Sharing Plan. There has Also Been Talk of Applying these Regulatory Concepts to Less Complicated Retirement Plans such as Individual Retirement Accounts (IRA) Which Could Include Both SEP-IRA Plans (Simplified Employer Plans) and SIMPLE Plans (Savings Incentive Match Plan for Employees of Small Employers). This Article Provides a Few Helpful Tips to Help You Understand the Concepts, Regulations and Laws to Help You Administer Your Retirement Plan for the Benefit of Your Employees. Retirement Plan Regulation Has Become Synonymous With the Best Interest of Your Employees. For Purposes of Discussion This Article is Limited to Defined Contribution Plans. The Scope of This Article Profiles Broad Categories Involving the Regulation of Qualified Retirement Plans and is Not a Comprehensive Discussion. It Should Not Replace Counsel with Your Attorney, Accountant, Investment or Financial Advisor.
1. Fiduciary Responsibility: Since the Financial Crises the Government has Become Very Serious About Protecting Your Employees Retirement Savings. The Balances in 401k Plans for the Average Person is Extraordinarily Low in Relationship to the Amount Needed to Fund a Secure Retirement. Therefore, the Government Wants Money Saved for Retirement Protected in the Belief that More Secure and Cost Effective Retirement Plans Will Help Prompt Employees to Use Them. This is Really Just One Arrow in the Quiver to Spurring Greater Retirement Savings. Most Business Owners, Managers, Employees and Professionals Not Schooled in the Operation of Retirement Plans Still have Trouble Understanding How to Administer and Invest Within Them. One of the Outgrowths of This has Been to Make You the Plan Sponsor (i.e.: You the Company, Non Profit, Organization, Plan Trustee) Responsible for Managing Your Retirement Plan in the Best Interest of Your Employees Who Participate in Your Plan.
Fiduciary Responsibility Holds You to the Status of an “Expert” in Managing Your Retirement Plan. Under ERISA (Employees Retirement Income Security Act) You are Held Accountable for How the Plan is Managed. It is Vitally Important You Perform the Necessary Due Diligence for Each Aspect of Your Plan. This includes Documenting the Steps You Take in Managing Your Plan and Monitoring the Investments Held in Your Plan.
According to the Department of Labor a Retirement Plan Fiduciary is Required to:
- Act Solely in the Interest of Plan Participants and Their Beneficiaries, With the Exclusive Purpose of Providing Benefits to Them
- Carry Out Their Duties with Skill, Prudence, and Diligence
- Follow the Plan Documents (Unless Inconsistent with ERISA)
- Diversifying Plan Investments
- Pay Only Reasonable Expenses of Administering the Plan and Investing its Assets
- Avoiding Conflicts of Interest
2. Parity: Parity Refers to the Relative Equality of Plan Contributions Between Management and Rank and File Employees. Retirement Plans Are Managed for the Benefit of All the Employees for Which They Are Created. Not Simply Owners, Senior Management or Other Highly Compensated Employees. A Good Rule of Thumb is No More Than 60% of Your Retirement Plan’s Assets Should Come From Highly Compensated Employees.
Qualified Retirement Plans Are Required to Have Non-Discrimination Testing Performed Each Year. Non-Discrimination Testing is Used to Determine Whether or Not Your Retirement Plan “Discriminates” in Favor of Highly Compensated Employees. If This is the Case Your Retirement Plan Will be Deemed to be Out of Compliance.
3. Fees: Under Retirement Plan Regulations Created by Rule 408b(2) by the DOL (Department Labor) and the EBSA (Employee Benefit Security Administration) All Fees Paid by Your Retirement Plan Must Be Fair and Reasonable. As the Trustee of Your Retirement Plan it is Your Responsibility for You to Determine That the Fees Your Plan Pays Offer the Best Value. Simply Choosing the Least Expensive Providers and Vendors Does Not Satisfy the Requirements of Rule 408b(2). Rule 408b(2) Requires Choosing Providers That are the Most Effective in Helping You to Properly Administer Your Plan to Help You Secure the Best Outcomes and Produce the Greatest Value for Your Employees and Their Investments in Your Plan.
Some Examples of Service Provider Fees You May Need to Document While Managing Your Retirement Plan May Include: Accounting, Auditing, Actuarial, Banking, Consulting, Custodial, Insurance, Investment Advisory, Legal, Recordkeeping, Securities Brokerage, Third Party Administration, or Valuation Services.
The Types of Services These Providers Offer Range From Plan Design, to the Investments Held in Your Plan to the Platform From Which Your Plan is Delivered. Fee Sharing Arrangements or Revenue Sharing Where Fees are Allocated Back to Your Retirement Plan to Cover Certain Plan Costs May be Considered to be Plan Assets. Fee Revenue Sharing Arrangements Should Be Structured to Benefit Your Retirement Plan. As Plan Assets They Should be Used to Benefit Your Employees as Participants in Your Retirement Plan. It is Also Important to Determine Which Fees Your Organization Will Pay and Which Fees Your Employees Will Pay.
It is Vitally Important You Document Your Philosophy and Process Around Which You Select Providers, Vendors and Investments for Your Retirement Plan with Respect to the Fees Your Plan Pays. (See It’s Not Your Father’s Retirement Plan Anymore)
4. Employee Communication: Communicating to Your Employees How Your Retirement Plan Operates, Functions and How to Investment in Your Plan is Critical to Your Employees Successfully Creating a Financially Secure Retirement. Some of the Documents You May Need to Create for Your Plan to Communicate With Your Employees Include:
a. Your Plan Document: This is the Document Which Creates the Terms and Conditions Under Which Your Retirement Plan is Created. It Can be Provided by Your Retirement Plan Services Provider. It May be a Prototype Plan Document (a Pre-Created Document) or a Custom Document. Custom Documents are Generally Created by an Attorney Well Versed in ERISA Law Specifically for Your Organization.
b. Your Plan’s Summary Plan Description: Your Summary Plan Description (SPD) is an “Important Disclosure Document Prepared by the Plan that Describes, in Understandable Terms, the Rights, Benefits, and Responsibilities of Participants and Beneficiaries in ERISA Covered Pension, Health and other Employee Benefit Plans. The SPD Must Include Important Information Regarding the Plan, Such as Information on How the Plan Works, Eligibility requirements, What Benefits the Plan Provides, and How Those Benefits May be Obtained.
Plan Sponsors are Required to Automatically Provide Copies of These Documents to Plan Participants Upon Enrollment and Upon Written Request of a Plan Participant or Beneficiary. ERISA also gives the Department of Labor the Authority to Request Copies of These Documents from Plan Administrators/Employers on Behalf of Participants and Beneficiaries.”
c. Annual Report (Form 5500): Your Retirement Plan’s Annual Report Provides Financial Information About Your Plan. “This Report is Required to be Submitted Annually by Many ERISA-Covered Plans. It Contains Various Schedules with Information on the Financial Condition and Operation of the Plan. Certain Entities in Which Plans Invest or Participate Also File Annual Reports with the Department of Labor. These Entities, Called Direct Filing Entities or “DFEs,” Include Banks, Common or Collective Trusts, Insurance Company Pooled Separate Accounts, Master Trusts, Group Insurance Arrangements and Entities Covered by Department of Labor regulation 29 CFR 2520.103-12. These Reports Include Financial Information Regarding the DFE and a List of the Investing or Participating Plans. Generally, the Six Most Recent Reports filed by Employers or Plan Administrators are Available. (Note: electronic copies of the data contained on all of the Forms 5500 and schedules filed each year are available for a fee by submitting a Freedom of Information Act request)”
d. Summary Annual Report (SAR): Your SAR “Outlines in Narrative Form the Financial Information in the Plan’s Annual Report, the Form 5500 and is Furnished Annually to Participants.”
e. Summary of Material Modification (SMM): Your SMM “Apprises Participants and Beneficiaries of Changes to the Plan or to the Information Required to be in the SPD. The SMM or an Updated SPD for a Retirement Plan Must be Furnished Automatically to Participants Within 210 days After the End of the Plan Year in Which the Change Was Adopted.”
f. Individual Benefit Statement (IBS): Your Employees IBS “Provides Participants With Information About Their Account Balances and Vested Benefits. Plans That Provide for Participant-Directed Accounts Must Furnish Statements on a Quarterly Basis. Individual Account Plans That do Not Provide for Participant Direction Must Furnish Statements Annually.”
g. Automatic Enrollment Notice: Your Plan’s Automatic Enrollment Notice “Details the Plan’s Automatic Enrollment Process and Participant’s Rights. The Notice Must Specify the Deferral Percentage, the Participant’s Right to Change That Percentage or Not Make Automatic Contributions, and the Plan’s Default Investment.”
h. Blackout Period Notice: The Blackout Period Notice “Requires at Least 30 days’ (but Not More Than 60 Days’) Advance Notice Before a 401(k) or Profit Sharing Plan is Closed to Participant Transactions. During Blackout Periods, Participants (and Beneficiaries) Cannot Direct Investments, Take Loans, or Request Distributions. Typically, Blackout Periods Occur When Plans Change Recordkeepers or Investment Options, or When Plans Add Participants Due to a Corporate Merger or Acquisition.”
i. Plan and Investment Information for Participant Directed Accounts: Plan and Investment Information, Including Information about Fees and Expenses, so Participants Can Make Informed Decisions to Manage Their Individual Accounts. The Investment Information Must be Provided in a Format, Such as a Chart, That Allows for Comparison Among the Plan’s Investment Options.
j. Operational Process: Documents Communicating to Your Employees in Plain Language the Details of Processes for How Your Plan Functions Including Where Employees Can Find Information to Access Your Plan Such as Websites, Investment Information, Enrollment Kits, PDF’s and Other Printed Material.
This May Include Communicating How Plan Services and Investments Help You Manage Your Plan and How They May Help Your Employees Succeed in Saving for Their Retirement.
5. Employee Education: The Purpose of Retirement Plan Regulation is Protecting Your Employees Retirement Savings. A Corollary of This Goal is to Help Ensure Your Employees Feel Comfortable Enough to Invest and Save for Their Retirement in Your Plan. Providing Tools to Help Your Employees Succeed in the Endeavor of Creating a Financially Secure Retirement is Paramount in Importance. This is the Reason to Provide Investment Education for Your Employees.
Investment Education for Your Retirement Plan Falls Into Two Categories:
a. General Investment Education: General Investment Education is Not Specific to Your Employees Individual Circumstances. It is Information Only. It May for Example Provide Descriptions and Examples of Investment Concepts Such as:
- Asset Allocation
- What a Mutual Fund is
- How a Mutual Fund Can Be Used to Achieve Diversification
- How to Project Your Retirement Savings Goal
- Tools Such as Calculators to Determine the Amount Your Employee Needs to Save to Reach Their Retirement Savings Goal Based on a Presumed Rate of Return
This Type of Investment Education is Typically Delivered via a Website or Other Self Learning Method.
b. Personalized Investment Education: Personalized Investment Education is Specifically Tailored to Each Employees Unique Financial Situation. It is Typically Delivered by an Investment or Financial Advisor Through an in Person Consultation with Your Employee. It takes into Account Your Employees Complete Financial Picture Including: Income, Size of Portfolio, Net Worth, Tax Bracket, Marital Status, Age, Number of Children, and Aversion to Risk. It Considers Other Investment and Savings Accounts the Employee May Have, What Rates of Return are Needed to Achieve Your Employees Retirement Savings Goal, the Retirement Lifestyle Your Employee Wants to Achieve and Over What Period of Time. It Also Considers Where Best to Position Taxable, Tax Free, Tax Advantaged, Growth and Income Producing Investments.
Acting as an Investment Advisor to Employees Participating in your Retirement Plan Makes an Investment or Financial Advisor a Fiduciary to Your Retirement Plan. Providing an Investment Advisor to Counsel Employees as to How Best Invest Within Your Retirement Plan May Involve Financial Planning.
This Article is an Introduction to Some of the Concepts Involved in Managing Your Qualified Retirement Plan. There is a Great Deal More You Will Need to Consider. The Overriding Theme of Managing Your Retirement Plan in the Best Interest of Your Employees Based on Both Regulatory Adherence and Investment Outcomes Sets the Stage for You to Create and Manage Your Retirement Plan so Your Employees Have the Best Opportunity to Create a Secure Retirement.
The Investment Advisor Helps Companies, Self-Employed Individuals and Non-Profit Organizations Manage their Qualified Retirement Plans. The Investment Advisor Provides a Comprehensive Consulting Service with Respect to Defined Contribution Qualified Retirement Plans. The Investment Advisor Also Performs Feasibility Studies For Those Companies, Self Employed Individuals and Non-Profit Organizations Who Wish to Create or Evaluate Their Existing Qualified Defined Contribution Plan such as Their 401(k), 403(b), Profit Sharing Plan, KEOGH, SEP-IRA, SIMPLE-IRA or IRA Plan.
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