THE PILLARS OF A SOUND 457(b) DEFERRED COMPENSATION PLAN April 7, 2016 GFOA of CT Spring 2016 Quarterly Meeting
Important Information Please be advised that this presentation is not intended as legal or tax advice. Accordingly, any tax information provided in this presentation is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. Michael Linehan offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC, offers investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offers annuity and insurance products through AXA Network, LLC. AXA Advisors and its affiliates and associates do not provide tax, accounting or legal advice or services. You should consult with your own tax and legal advisors regarding your particular circumstances. GE-113318 (04/16)(exp.04/18) 2
It takes less time to do things right than to explain why you did it wrong. ~Henry Wadsworth Longfellow
CONTENTS 1. Introduction 2. Plan Document 3. Plan Administration 4. IRS Audit Concerns 5. Investment Oversight 6. Education 7. Summary 4
Introduction It is estimated that American workers will need 70 to 90% of their preretirement income to maintain current standards of living in retirement A workplace savings plan will help workers save for the future as well as help employers attract and retain quality employees The tax benefits associated with a 457(b) plan require compliance with Internal Revenue Code requirements Governmental plan sponsors have a duty to act in the best interests of employees Understanding key areas of focus is a critical step in establishing best practices to avoid common mistakes IRS Publication 4484 5
Plan Document What & Why?
Plan Document A governmental 457(b) plan is required to be maintained in accordance with a written plan document (Treasury Reg. Section 1.457-3(a)). Some common plan document mistakes include: Failure to follow Plan Document rules Multiple Plan Documents Municipalities that offer more than one provider Exception regarding plans for specific groups of employees Failure to update the plan document to reflect law and/or regulatory changes For example, Roth IRA contribution provisions Missing Plan Documents 7
Plan Document Best Practice Recommendations IRS recommends reviewing the plan document annually Identify who is responsible to maintain the plan document language Share the location of the document with multiple employees Sample plan document versus ongoing plan document services 8
Plan Administration What are the duties?
Plan Administration A governmental 457(b) plan must be administered in accordance with the terms of the plan document (Treasury Reg. Section 1.457-3(a)). Common administration challenges include: CONTRIBUTION MONITORING DISTRIBUTION & LOAN MONITORING BENEFICIARY MANAGEMENT 2016 contribution limit is $18,000 Employer contributions are combined with employee contributions towards the annual limit Special catch-up provisions Distribution eligibility Unforeseeable emergency distributions Rollovers Loan eligibility and maximums Who is responsible? Third-Party Administrator (TPA) Services? 10
The IRS Audit Common Audit Concerns
The IRS Audit The Internal Revenue Service is charged with enforcement of the rules that allow 457(b) plan tax benefits. Common IRS compliance concerns include: Improper application of employer contribution limits Issues with plans that offer employer contributions Excess contributions caused by improper application of catch up rules Issues related to multiple plan documents Annual contributions limit applies to the individual Additional confusion with catch up provisions Conflicting document provisions Misinterpretation of unforeseeable emergency withdrawal rules Failure to monitor loan limits Loan limits frequently exceeded when a sponsor offers more than one plan or investment provider The 457 Answer Book, by Lesser, Gulia & Powell, Chapter 16, Question 16-10 12
Investment Oversight Are local government officials considered fiduciaries?
Investment Oversight Fiduciary Oversight The Employee Retirement Income Security Act of 1974 (ERISA) defines a plan fiduciary as: Anyone who exercises discretionary authority or discretionary control over management or administration of the plan, exercises any authority or control over management or disposition of plan assets, or gives investment advice for a fee or other compensation with respect to assets of the plan. 14
Investment Oversight Fiduciary Oversight What does the GFOA say about local government fiduciary responsibility for deferred compensation 457(b) plans? GFOA Best Practices* state: Many governments offer a deferred compensation plan to their employees. In operating these plans, governments act as fiduciaries. Because deferred compensation plans shift investment risk to the plan participant, GFOA recommends that governments provide employee education about the management of the investment risk. In carrying out their responsibilities as fiduciaries, in the public and private sector, plan sponsors make decisions in the best interests of plan participants and beneficiaries. In making these decisions, it is assumed that plan sponsors have knowledge about all fees and expenses charged to the plan and participants while ensuring that these costs are reasonable. It is also assumed that plan sponsors are disclosing to plan participants adequate and accurate information about the fees and expenses that affect their account balances. GFOA Best Practice : Investment Policies Governing Assets in a Deferred Compensation Plan (2004)(CORBA) GFOA Best Practice: Monitoring and Disclosure of Fees for Defined Contribution (DC) Plans (2008) (CORBA) 15
Education How much education is needed?
Education What is the American sentiment towards retirement? 50% of American workers guess at how much they will need to save for retirement 1 81% of American workers say they are not on track for retirement 1 Research shows that the number of employees who say they are on track for retirement doubled with repeat utilization of workplace financial wellness programs 1 GFOA RECOMMENDS THAT PUBLIC PLAN SPONSORS MAKE SURE HIGH-QUALITY INVESTMENT EDUCATION IS PROVIDED TO DEFINED CONTRIBUTION PLAN PARTICIPANTS WHO ARE ALLOWED TO DIRECT THEIR INVESTMENTS 1 State of U.S. Employee Retirement Preparedness 2015, Financial Finesse, Inc. 17
Summary 457(b) plans provide important benefits to both plan sponsors and participants in the plan Plan sponsors should understand compliance requirements and avoid common mistakes Plan sponsors have a duty to provide investment oversight and quality participant education Establishment of best practices to facilitate compliance saves time, expense and resources 18
Judgment without further investigation leaves a man blind ~unknown
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