Test Your Knowledge of Plan Operation Best Practices

Transcription

1 Test Your Knowledge of Plan Operation Best Practices

2 1 Which Is The Primary Fiduciary Duty? A. Duty of Loyalty B. Duty of Self Governance C. Duty to Maintain Plan Documents on file for auditors and plan participants to access D. Duty of Prudence E. Duty to act for the exclusive purpose of providing retirement benefits and comply with 5 basic principals

3 The Duties Are. Primary duty = to act for the exclusive purpose of providing retirement benefits to the participants and comply with 5 basic fiduciary principles. 1. Duty of Loyalty the exclusive benefit rule: Must act solely in the best interest of plan participants, Must ensure fees are reasonable, and Must avoid conflicts of interest. 2. Duty of Prudence to act with the care, prudence, skill and diligence a knowledgeable person administering a qualified retirement plan would use. Prudence is key - comes into play in every fiduciary decision. Prudence requires good judgment and sound processes. Monitor all plan decisions to ensure they remain in the best interest of the plan and participants, Keep good records of your deliberations and decisions in a safe accessible place

4 The Duties Are. 3. Duty to Monitor and make changes when warranted: Investment options and fees. Service providers and fees. 4. Duty to Diversify plan assets the DOL requires a minimum of three different types of investments with different risk and return characteristics. 5. Duty to Follow Plan Documents: In an IRS audit, fiduciary s duty to operate the plan in compliance with plan documents will be a primary issue. Failure to operate the plan in compliance with governing documents is a top audit catch-all and can cause the plan to become disqualified.

5 2 Can The Plan Sponsor Solely Rely On Job Titles to Determine Who is Considered a Plan Fiduciary? A. Yes B. No

6 Here s why. Generally fiduciary status is based on functions performed, not a person s title. Anyone who exercises discretionary authority or discretionary control over plan administration or management of plan assets. Plan sponsor is always a fiduciary. Committee members administering the plan or selecting investments and/or service providers. Those who give investment advice for a fee with respect to plan assets. Staff members who exercise discretion, such as interpreting plan provisions or making hardship withdrawal determinations. Even if a Fiduciary delegates fiduciary authority, they still have a fiduciary duty to monitor that delegated authority. One can never absolve themselves of that duty.

7 3 How Frequently Should The Investment Committee Meet? A. Monthly B. Quarterly C. Semi-Annually D. Annually

8 Here s why. Investment committee should be reviewing the performance of the funds at least quarterly. A fully comprehensive review should be done annually or more frequently if funds are on the watch list or if there was some major development that would warrant immediate review/action on a fund within the plan. Examples would be: Change in Investment Objective Fund manager departure Fund company problems that affect the fund

9 4 How Frequently Should The Retirement Committee Meet? A. Monthly B. Quarterly C. Semi-Annually D. Annually

10 Here s why. The Retirement committee should be reviewing the operational oversight of their provider at least annually. A fully comprehensive review of administrative procedures should be measured against the Service Level Agreement (SLA) and any operational failures should be reported and documentation on the correction be provided for audit purposes. With enhanced audit risk from the DOL focusing on non-compliance with stated loan provisions and missing participants, plans should consider increasing their oversight meeting to semi-annually. It is also important to note that the best practice is to conduct the Investment and Retirement Committee meetings separately so there is clearer documentation on specific actions taken.

11 5 In A Non-Stock Purchase M&A Transaction, Can The Plan Be Terminated After Closing? A. Yes B. No C. Possible

12 Here s why. Possible, It is better if the termination occur before the transaction, otherwise if the plan is terminated after the transaction, the employees in the acquired plan can t be offered another 401k for 12 months.

13 6 In A Non-Stock Purchase M&A Transaction, Which Option Explains The Process Of A Plan Termination? A. Seller s plan maintained B. Acquired retained employees roll into the new plan, remaining accounts turned over to the PBGC C. Acquired retained employees roll into the new plan and remaining non-retained employees roll into an IRA. D. Seller s plan merged into Buyer s plan

14 Here s why. In a plan termination prior to the transaction, the employees now have a qualifying event of termination. Therefore all employees are given the opportunity to take a lump sum, rollover to an IRA or qualified plan. Employees being retained are given the opportunity to roll into the buyer s plan, but any accounts that remain, including any uncashed checks need to be rolled over into an IRA to legally distribute all assets and be able to complete a final 5500.

15 7 In A Non-Stock Purchase M&A Transaction, what is the biggest concern about merging plans? A. The buyer s plan is responsible for any plan failures of the seller s plan B. Determining asset liquidity or the ability to transfer in-kind C. Reviewing document and having protected benefits D. Having to convert loans and insure the original loan terms are maintained. E. Deciding on whether to map assets or re-enroll employee

16 Here s why. The biggest risk the buyer takes on when merging plans, are the operational decisions of the acquired employer. General areas of non-compliance are; timely remittance of contributions lack of adequate hardship documentation compliance testing failures and adequate resolution failure to comply with the provisions of the plan document audit issues. Benefits are generally the last thing thought of in a transaction, but a decision should be made before closing to insure the buyer has all options available to them.

17 8 Which Two Factors Do Record Keepers Primarily Use To Determine Plan Pricing? A. The number of hardships and loans that were issued in the past 12 months B. The number of participants with a balance and average account balance C. The number of participants and average contribution amount D. Which funds are offered in the Plan and how much the record keeper receives in servicing fees.

18 Here s why. All record keepers need to be able to estimate administrative work generated by the plan. That is why the number of people with a balance is a key factor in determining pricing. A Plan with a higher average account balance indicates to the record keeper that there is better participation and higher contribution rates. They generate an expected revenue number from the funds and earnings on any fixed investment. Regardless of the pricing model chosen, these two factors are key in determining the cost to the Plan.

19 9 What Other Factor Impacts Retirement Plan Pricing? A. Repayment of plan loans via payroll deduction B. Auto Enrollment C. 5 year vesting schedule D. QJSA provision E. Safe Harbor Employer Contribution

20 Here s why. Although Auto Enrollment increases participation, it can negatively impact pricing by driving down the average account balance and significantly increases the number of accounts being record kept. One way to offset this negative factor is to continue auto enrollment, but increase the deferral percentage to 6-8% and implement auto increase.

21 10 The IRS, DOL And PBGC Are Working On Modernizing The What Is Their Objective Behind This? A. Standardize reporting to simplify the 5500 B. Ability to review revenue streams and payments C. Expanded collection of more specific data to develop models that identify areas of non-compliance. D. Be more specific on the data required, to use computers instead of agents to handle audits.

22 Here s why. The Form 5500 Overhaul Will Be Designed to Compel fiduciaries to evaluate plan compliance with Important requirements under ERISA and the Code... Expand data collection to better identify areas of non-compliance Expand reporting of the classifications of assets held Identify Plan and provide relationships, payments and parties-in-interest Disclose the number and value of uncashed checks Provide written procedures on how the Plan Sponsor manages uncashed checks, including the timing and frequency Identify Plan reporting failures of missed Required Minimum Distribution payments under the plan Source - U.S. Department of Labor Employee Benefits Security Administration, July, 11, Proposal to Modernize and Improve the Form 5500 Annual return/report Filed By Employee Benefit Plans, Fact Sheet.

23 11 Which Proposed Change Will Be The Most Difficult to Implement and Create More Audit Risk For The Plan Sponsor? A. Identifying payments made to the employer from the plan B. List all uncashed checks on the 5500 and provide written procedures of how they are managed and resolved. C. Reclassifying investments and reporting direct and indirect compensation. D. Reporting of missed RMD payments

24 Here s why. Of all of the proposed changes, uncashed checks would pose the most comprehensive adaptation in the reporting on the Some of the complication would occur based on the employers/record keepers treatment of uncashed checks. The following ways are how most uncashed checks are handled; Record keeper uses an unallocated plan account to store them. Record keeper, after months escheats the money to the state of the former participant. The plan, after a stated period selected by the employer, directs the record keeper to deposit the accounts into plan forfeiture.

25 12 What Requirement Is Necessary To Insure Safe-Harbor Protection For Involuntary Rollovers? A. Signed agreement with provider and the default fund is in a principal preservation fund. B. Signed agreement with provider and the employer can choose a QDIA as the default. C. The Plan must have selected the mandatory force-out provision in the plan document. D. The signed record keeper service agreement.

26 Here s why. Under the regulations of EGTRRA, the requirement was established that in order to receive safe harbor protection, the Plan Sponsor must enter into an agreement with the provider of the IRA rollover service, the default fund preserves principal and credits a prevailing market rate.

27 13 What Is The Primary Reason For Adopting An Involuntary Rollover Provision? A. Reduces the amount of work your record keeper has to do. B. Reduce staff time researching lost participants. Reduces hard costs incurred by complying with annual mailings. C. Helps eliminate 401k leakage D. Eliminates the need to search for participants with uncashed checks.

28 Here s why. The main reason is to reduce the burden on staff. It reduces the number of mail pieces returned, reduces the time searching for new addresses, reduces mailing cost associated with the undelivered mail and the cost of having to deliver it twice. Two other credible reasons if implemented; 1. Can eliminate uncashed checks, if the involuntary rollover to an IRA is expanded to the accounts from $.01 - $1,000. Nearly eliminates the issue of missing participants. 2. It can help eliminate leakage, again expanding the rollover to the accounts from $.01 - $1,000

29 14 Are Retirement Plan Uncashed Checks Still Considered Plan Asset? A. Yes B. No

30 Here s why. While there is still some debate about the status of un-cashed checks, there is prior guidance indicating they still are plan assets until constructive receipt is made. Advisory Opinion by the DOL A (9/13/1993) Footnote 1 states It is commonly understood that a check does not of itself operate as an assignment of any funds in the hands of the drawee bank available for its payment and the bank is not liable on the instrument until it accepts it. U.C.C (1). Clarification position letter to the American Bankers Association in August, 1994 (EBSA Information Letter ) and later the DOL FAB Although these deal primarily with float, the references are there that the DOL considers the funds plan assets until the instrument (check) is negotiate and constructive receipt is made by the participant, beneficiary or rollover IRA. FPS Trust is a directed custodian and does not provide investment to legal advice. This does not constitute legal advice, it is representative of the facts included in those notices.

31 15 The EBSA Investigators Are Focusing On Which Areas Of Non-Compliance In 2018 Audits? A. Failure to make distributions (Mandatory small account distributions and RMDs B. Missing participants C. Plan loans D. Plan fees and disclosure E. A, C & D F. A, B & C

32 Here s why. At the 2018 PSCA National Conference in Phoenix, Dr. James Goldstein from the EBSA provided the following items the investigators are putting great effort into; Failure to make distributions Mandatory small account distributions (plan document procedural and uncashed checks) RMDs Missing participants Plan Loans Loans being issued following plan rules Repayments being credited timely Forced distribution handling and 1099 reporting The DOL s EBSA has already begun investigations solely targeting lost participants.

33 SPECIAL NOTICE FROM FPS Trust Company The material in this seminar is being presented for informational purposes only. The information presented is not legal, tax or compliance advice. The information presented is not intended to provide a comprehensive action plan for any particular benefit plan design or audit situation, and no action should be taken with any plan without consulting an attorney or other employee benefit plan professional. FPS Trust Company LLC acts only as a directed custodian and does not offer tax, legal, or compliance advice.