Developing a Strategy for Moving from Pension to 401(k) Benefits

Budgeting for next year’s cost of employer-provided benefits can seem daunting, especially when an organization sponsors both a defined benefit pension plan and a 401(k) defined contribution plan. Is it time to consider moving away from the defined benefit pension plan to avoid the volatility and risk? If so, plan sponsors should develop a well-thought-out process for analyzing the alternatives and impact to both employer costs and participant benefits. The overall strategy and objectives should be reviewed.

Each year, an actuary provides projections for the defined benefit pension plan and the amount required to fund seems to be ever-increasing. It feels like there’s no end in sight. Becoming fully funded seems to be a dream instead of a reality. Even in years when the assets in the plan had double-digit returns, there was either a new mortality table that needed to be adopted or the required interest rates dropped – all increasing the plan’s liability. This can be very difficult to manage going forward.

Strategy for Moving from Pension to 401(k) Benefits

While it is challenging to deliver an equivalent benefit in a defined contribution plan at the same level of contribution, defined contribution plans provide a predictable level of employer contribution each year. If plan sponsors are considering a transition to a replacement 401(k) plan, an analysis should be conducted to:

  • Determine the level of benefit desired for employees
  • Set a budget that provides the desired level of benefit when considering a defined benefit pension plan freeze

Performing the Analysis

When performing this type of analysis, we encourage companies to start by thinking of both the defined benefit pension and defined contribution plans together as a total retirement benefit. This allows the plan sponsor to contemplate its philosophy and develop a strategy related to short- and long-term goals for the retirement program.

Pension to 401(k) Benefits Flowchart

Establish Guidelines

Plan sponsors should start with a well-defined and proven process, taking the time to establish guidelines and understand the financial strategy. Begin by discussing the organization’s philosophy and define objectives for the retirement program to guide decision-making. These guidelines should include how the plan sponsor feels about management/budgeting of retirement plan costs, willingness to take on risk, providing benefits based on the organization’s ability to fund – discretionary vs. mandatory, the level of employees’ retirement benefits, and the competitiveness of benefits.

Determine Affordability

By evaluating all the current retirement plans and the projected cost and benefits, organizations will better understand the current and projected state of the plans and be able to determine the affordability of current plans over the long-term. The evaluation also allows them to discuss acceptable benefit levels and a cost strategy. A thorough analysis of the current and projected costs should include an outline of the current state of the program, including five-year projections under three scenarios for the defined benefit pension plan:

  • Ongoing plan
  • Closed to new entrants
  • Frozen accruals

In addition, the termination liability estimate under agreed upon assumptions should be calculated.

Determine Competitive Position

The guidelines and budgets are then coordinated with competitive market benchmarking to identify relevant alternatives to evaluate. Benchmarking the retirement plan benefits with competitive norms relative to the market allows the organization to measure the competitive position of benefits and expenses compared to industry/geographic region/employer size based on revenue or number of employees. The benchmarking helps the plan sponsor make informed decisions on the:

  • Form of benefit to be provided
  • Desired level of benefit for new hires/newly eligible participants
  • Impact on total compensation and the benefits package
  • Desired contribution allocation structure – pro-rata on pay, position-based, or based on age and/or length of service

Evaluate Alternate Strategies

Potential plan design alternatives including utilizing the current defined contribution plan should be developed based on previous discussions related to the organization’s philosophy, objectives and strategic direction for the retirement program. Alternative strategies can be assessed to determine the final strategic direction of the retirement program, such as modifying the current level of pension benefits or reduction/elimination of the defined benefit pension plan by freezing pension benefit accruals for all participants and moving toward a defined contribution plan only strategy.

Other strategies such as grandfathering selected participants or providing participants a “choice” between defined benefit and enhanced defined contribution benefits should be considered. If providing enhanced defined contribution benefits, determination of how the benefit will be provided – either with matching contributions and/or non-elective contributions in a fixed amount, performance-based, or based on a tiered age and/or service allocation – should be evaluated as well.

Modeling different plan designs that include variations of both defined benefit pension and defined contribution structures helps the plan sponsor compare costs and benefits. Based on the guidelines set upfront, these plan designs reflect the organization’s philosophical principles for providing these benefits to employees. The results of this analysis and each alternative are compared to the current plan(s) to show the overall impact on the employer-provided cost and level of employee benefit. Be prepared to study supplemental alternatives at this point because the first set may provoke additional thoughts or refinements.

Plan sponsors must be aware of compliance testing restrictions and be sure that any alternative considered will satisfy compliance rules — there is no point in studying an alternative that cannot be adopted due to nondiscrimination or coverage issues.

Making and Implementing the Decision

When all alternatives are reviewed, a final recommendation that ultimately links the retirement strategy with the philosophy and desired objectives is presented. Any potential transition issues or challenges should be outlined and a communication strategy should be developed. Establishing a formal communication plan is very important.

Develop and Document the Retirement Plan Strategy and Implementation Plan

The end result of the review should include a proposed retirement plan strategy to be presented to the board of directors. The proposed strategy should document the findings and conclusions of the review process and identify the steps necessary to carry out the recommendations within the strategy.

Change Management: Communicating to Employees

After the decision is made to change retirement benefits, communication to those impacted is key. This is the perfect time to remind employees of the retirement program and its overall value. In addition to government-required notices, you should also consider proactively sending out an individualized statement outlining the changes and providing the impact on participant’s benefits. It is important to make sure the changes are communicated clearly and that each participant understands the changes. Sometimes plan sponsors will hold group or one-on-one meetings with those impacted.

In Perspective

A change in the retirement program is a significant decision that affects the organization and its employees significantly. A thoughtful approach to a change like this can lead to better alignment of the overall program with organizational philosophy and goals, while still providing employees with competitive benefits.

If you have any questions regarding your options with transitioning from pension to 401(k) benefits, please contact Amy Kennedy at amy.kennedy@findley.com or Kathy Soper at kathy.soper@findley.com.

Published May 14, 2020

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Breaking Down the SECURE Act – 401(k) and Other Defined Contribution Plans

Benefits experts are still poring through the SECURE Act’s various mandated provisions, optional provisions, and effective dates, some of which may be retroactive. This series of articles will break down the implications that the Act has for existing tax-qualified retirement plans. This article will focus on the Act’s impact on 401(k) and other defined contribution plans. Related articles address required minimum distributions, which impact defined contribution plans and defined benefit plans, and future articles will discuss changes for tax-qualified defined benefit plans only; as well as other changes to the retirement plan landscape.

Remedial Amendment Period

Plan sponsors generally have until the last day of the 2022 plan year to adopt amendments that reflect the Act’s required revisions.  For calendar year plans the last day is December 31, 2022. Governmental plans have until the 2024 plan year to amend. Remember that operational compliance is still required during the period from the effective date for the Act’s required changes and the date the plan is amended.

401(k) Plans: Part-time Long-term Workers – MANDATORY

Prior law:  An employer-sponsored 401(k) was permitted to exclude employees who did not complete a year of service, defined as the completion of 1,000 hours of service during a 12-month measurement period.

Under the SECURE Act: Part-time long-term workers must be eligible to make salary deferrals (pre-tax, Roth and catch-up, as applicable) under a 401(k) plan if they (a) obtain age 21; and (b) work at least 500 hours in three consecutive 12-month measurement periods. For purposes of vesting, a year of vesting service is a 12-month measurement period during which a participant works at least 500 hours.

Purpose: This change expands retirement savings opportunities for an employer’s long-term part-time workers.

Effective date: The new inclusion and vesting rules are effective for plan years beginning after December 31, 2020.

What to do and when: 401(k) plans sponsors should begin to track part-time workers on the first day of the plan year after December 31, 2020. For calendar year plans, that means January 1, 2021. If part-time workers under a calendar year plan provide at least 500 hours of service in plan years starting January 1, 2021, January 1, 2022 and January 1, 2023, then such part-time workers must be permitted to make deferrals under the 401(k) plan beginning January 1, 2024.

Now is the time for employers and their service providers to plan for tracking part-time employees beginning in 2021 for possible inclusion and for purposes of vesting under the 401(k) plan in 2024.

Special notes: Plans are not required to include these part-time long-term workers in matching or other employer contributions. Additionally, these workers are excluded from non-discrimination (ADP, ACP, 401(a), 410(b)), safe harbor plan and top-heavy testing. Remember that if otherwise eligible part-time employees provide 1,000 or more hours of service and meet any age requirement, they must be included in the retirement plan for all contribution purposes.

The SECURE Act has implications for 401(k) and other defined contribution plans

Safe Harbor 401(k) Plans: QACA Maximum Deferral Rate Increase – OPTIONAL

Prior law: A Qualified Automatic Contribution Arrangement (“QACA”) is an employer-sponsored retirement plan that provides for automatic enrollment. Among the strict requirements applicable to a QACA is a maximum automatic deferral rate of 10% of compensation.

Under the SECURE Act: A QACA plan can now provide a new maximum deferral rate of 15% of compensation, except for the participant’s first year, which remains 10%. The minimum thresholds of 3% to 6%, depending on the year of participation, remain in place.

Purpose: This change encourages more retirement savings by permitting higher 401(k) deferral rates for safe harbor plans which provide automatic increases.

Effective date: The new maximum deferral rate can be effective for plan years after December 31, 2019. That is January 1, 2020 for calendar year plans.

What to do and when: Plan sponsors should review the pros and cons of raising the maximum deferral rate, including its impact on matching and other employer contributions. Changing the deferral rate will also impact other plan documentation including a summary of material modifications, safe harbor notices and other employee communications.  Remember, plan sponsors must adopt an amendment to change the maximum deferral rate. If you are considering a mid-year change, service providers will need to be consulted to ensure it can be operational as intended.

Prior law: In order for a tax-qualified 401(k) plan to rely on the 3% nonelective contribution safe harbor, participants had to be provided (definitive or contingent) notice of the plan’s safe harbor status by the 30th day before the end of the plan year. In addition, the safe harbor provision had to be in the plan document.

Under the SECURE Act: A 401(k) plan can be amended as late as 30 days prior to the end of the plan year to provide for a 3% nonelective contribution safe harbor for that plan year, without any notice to participants. A plan can also be amended as late as the last day for distributing excess contributions for a plan year, which is generally the last day of the following plan year, if a plan sponsor provides for a 4% nonelective contribution.

Purpose: This change takes away one more hurdle for employers to adopt safe harbor plans that provide a minimum employer contribution that encourages retirement savings.

Effective date: The changes to safe harbor notice requirements are effective for plan years after December 31, 2019.

What to do and when: Plan sponsors must amend their tax-qualified retirement plans in order to effect these changes. Note that the permitted retroactive amendment may be of special interest to plans which experience ADP/ACP test failures.

Special notes: The Act did not eliminate the notice requirement for matching safe harbor contributions.

In-service withdrawals for birth and adoption expenses – OPTIONAL

Prior law: There were no special provisions for plan distributions related to birth or adoption expenses.

Under the SECURE Act: A defined contribution plan may permit withdrawals of up to $5,000 within one year following the birth or legal adoption of a child.  The withdrawal will not be subject to either the 10% penalty for withdrawals by participants under age 59-1/2 or the 20% mandatory withholding for federal income tax. The plan may provide for repayment of the withdrawal.

Purpose: This change provides an opportunity for families to ease some of the immediate financial burdens associated with becoming parents.

Effective date: The new in-service withdrawal opportunity is available for withdrawals after December 31, 2019.

What to do and when: Plan sponsors may amend their plans now to permit these in-service withdrawals. Employers should work with their service providers to implement these new withdrawals. In light of the current lack of guidance from the Internal Revenue Service (IRS), plan sponsors should consider acting conservatively by requiring documentation and certain representations as to the birth or adoption, and setting forth clear repayment provisions. Other operational considerations include updating distribution forms, summary plan descriptions (SPDs), participant communications and reporting requirements.

Lifetime income disclosures – MANDATORY

Prior law: ERISA requires periodic employee benefit statements from defined contribution plans that detail vesting status and account investments.

Under the SECURE Act: A “lifetime income disclosure” has been added as an annual disclosure. The new disclosure must describe a monthly annuity amount that could be obtained with the balance of the participant’s account. The monthly amount will be based on assumptions specified by the Department of Labor (DOL) in interim rules to be issued by December 20, 2020, which will include a model disclosure statement. Disclosures that meet legal requirements will protect plan sponsors and other plan fiduciaries from liability based on the information provided in the statements.

Purpose: This change gives participants more information to help them assess their current retirement savings status so they can make appropriate changes for retirement readiness.

Effective date: The disclosure will be required 12 months after the latest of the DOL’s issuance of the assumptions to be used, the model disclosure and the interim final rules. The earliest date this requirement will be effective is sometime in 2021.

What to do and when: Plan sponsors should stay in contact with their service providers to timely implement this new requirement. Plan sponsors should anticipate that this requirement will increase plan expenses.

Lifetime income contract portability – OPTIONAL

Prior law: In-service distributions from defined contribution plans are subject to certain restrictions that vary by plan type.

Under the SECURE Act: 401(k) plans, 403(b) plans and governmental 457(b) tax-qualified plans can be amended to provide for the in-service distribution of in-plan annuity contracts if the plan stops offering that investment option. Portability options include direct rollover of the contract to an eligible retirement plan that will continue the investment, or distribution to the participant or beneficiary. Distribution must take place in the 90-day period prior to the investment option becoming unavailable under the plan.

Purpose: This change encourages investment in lifetime income options by expanding portability, and enhances the possibility of retirement readiness.

Effective date: The new distribution option for lifetime investments is available for plan years beginning after December 31, 2019.

What to do and when: Plan sponsors must amend their plans in order to effect this change.

403(b) plan termination and treatment of custodial accounts

Prior law: Under IRS guidance, individual annuity contracts could be distributed to participants, but the guidance did not address individual custodial accounts.

Under the SECURE Act: Individual custodial accounts may be distributed in-kind from a terminating 403(b) plan, without causing immediate taxation to the participant or beneficiary. The IRS has until June 20, 2020 to issue guidance which will include that the distributed custodial account will be maintained by the custodian on a tax-deferred basis until amounts are actually paid.

Purpose: This change conforms the treatment of annuity contracts and custodial accounts in terminating 403(b) plans, and makes it easier for employers to terminate plans with custodial accounts.

Effective date: The treatment of custodial accounts from a terminating 403(b) plan is retroactively effective for taxable years beginning after December 31, 2008. By adopting this retroactive effective date, the in-kind distributions of custodial accounts to participants or beneficiaries to complete a termination during the retroactive period will not be treated as having been taxable distributions.

What to do and when: For plan sponsors that are considering terminating a 403(b) plan with individual custodial accounts, this new flexibility may provide a deciding factor. In addition, plan sponsors should watch from new guidance from the Secretary of the Treasury regarding this change. The guidance must be issued within six months of December 20, 2019.

Questions? Please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com, or 216.875.1927.

Looking for how the SECURE Act impacted Required Minimum Distributions (RMDs), see our article here.

Published March 31, 2020

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Breaking Down the Secure Act – Required Minimum Distributions

Benefits experts are still poring through the SECURE Act’s various mandated provisions, optional provisions, and effective dates, some of which may be retroactive. This series of articles will break down the implications that the Act has for existing tax-qualified retirement plans. This article will focus on the Act’s impact on required minimum distributions (RMDs) for both defined benefit and defined contribution plans. Related articles will address (1) changes that impact 401(k) and other defined contribution plans only, (2) changes for defined benefit plans only; and (3) other changes to the retirement plan landscape.

Remedial Amendment Period

Plan sponsors generally have until the last day of the 2022 plan year to adopt amendments that reflect the Act’s required revisions.  For calendar year plans the last day is December 31, 2022. Governmental plans have until the 2024 plan year to amend. Remember that operational compliance is still required during the period from the effective date for the Act’s required changes and the date the plan is amended.

Delay of Lifetime RMDs – MANDATORY

Prior law: Distributions from an eligible employer retirement plan must be made by April 1 of the calendar year following: (a) the calendar year in which the participant turns age 70-1/2, or (b) for a participant who is not a 5% owner, the calendar year in which he or she terminates employment after age 70-1/2.

Under the Act: The required age for RMDs is raised from 70-1/2 to 72. Participants who are not 5% owners and who work beyond the required age for RMDS, under the Act still don’t trigger RMDs until the calendar year in which they retire. The Act did not change the way in which 5% owners are determined. In addition, post-death distributions to a participant’s surviving spouse are not required to begin before the calendar year in which the participant would have obtained age 72 (formerly 70-1/2). 

Effective date: The new age applies to employees who turn age 70-1/2 after December 31, 2019; that is, for those born after June 30, 1949. For those born on or before June 30, 1949 (already obtained age 70-1/2 prior to January 1, 2020), the prior law applies.

What to do and when: Plan sponsors should work with their service providers to track two populations: those born on and before June 30, 1949 (for whom age 70-1/2 is the RMD trigger date), and those born after that date (for whom age 72 is the RMD trigger date). Distributions of RMDs for the latter population therefore need not begin until April 1 of the calendar year following the year they attain age 72.

This change to tax-qualified retirement plans will necessitate updates to distribution forms, SPDs, 402(f) notices, and participant communications.

Post-Death RMDs are accelerated – MANDATORY

Prior law: In general, distributions are permitted to be paid annually over the beneficiary’s life expectancy. In general, if the participant died before RMDs began, distributions could be made at various times, provided the entire account was distributed by the end of the fifth year following the participant’s year of death.

Under the Act:  Following the death of the participant, distributions must generally be made by the end of the 10th calendar year following the year of death. The determination of the 10-year period is presumably calculated in the same way that the 5-year period was calculated. Payments can be made over the beneficiary’s life expectancy provided the beneficiary is an “eligible designated beneficiary”, which can be the surviving spouse, a disabled/chronically ill individual, a minor child of the participant or a beneficiary no more than 10 years younger. Prior rules still apply to a beneficiary that is not a “designated beneficiary”.

Effective date: The rule regarding the acceleration of post-death RMDs is effective for deaths that occur after December 31, 2019. Special delayed effective dates apply to collectively bargained and governmental retirement plans. 

What to do and when: Sponsors of tax-qualified retirement plans should be working with their service providers to implement these rules now.

This change will impact beneficiary designation forms, distribution forms, SPDs and other participant/beneficiary communications.

Special Note for Defined Benefit Pension Plans

The Act does not change actuarial increases required by Internal Revenue Code 401(a)(9)(C).  For individuals who continue working and choose to retire late, a defined benefit plan must provide actuarial increases beginning at age 70-1/2.  

General Thoughts

Commentators anticipate IRS guidance to provide self-correction relief for plans that fail to implement the new rules correctly during the remedial amendment period and clarify the Act’s impact on current regulations. Tax-qualified plan sponsors considering an amendment prior to the remedial amendment deadline, for the sake of clarity for itself and its service providers, may want to wait to see how further guidance may affect that amendment.

Questions? Please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com, or 216.875.1927.

To learn more about the passage of the Secure Act and changes to retirement plans, click here

Published March 19, 2020

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2020 Defined Contribution Plan Compliance Calendar

Calendar Plan Year & Calendar Employer Tax Year*

defined contribution plan compliance calendar 2020 January through June
defined contribution plan compliance calendar 2020 July through December

January 2020

31   Last day to file Form 945 to report withheld federal income tax from distributions

31   Last day to furnish Form 1099-R to recipients of distributions in 2019

February 2020

14   Last day to furnish fourth quarter 2019 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

28   Last day to file Form 1096 and Form 1099-R on paper with the IRS

March 2020

15   Last day to refund excess contributions (ADP test) and refund or forfeit (if forfeitable) excess aggregate contributions (ACP test) for 2019 to avoid 10% excise tax (unless plan is an EACA)

31   Last day to file Form 1099-R electronically with the IRS

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on 2018 plan year excess contributions or excess aggregate contributions where excess amounts not distributed (or forfeited, if forfeitable) by Mar. 15, 2019 (or by June 30, 2019 in case of an EACA)

April 2020

01   Last day to make required minimum distributions (for first distribution calendar year) to applicable plan participants

15   Last day to distribute excess deferrals in excess of 402(g) dollar limits for 2019 to applicable participants

15  Last day for C corporation employer plan sponsors to make contributions and take tax deductions for 2019 without corporate tax return extension

May 2020

15   Last day to furnish first quarter 2020 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

June 2020

30   Last day to refund excess contributions (ADP test) and refund or forfeit (if forfeitable) excess aggregate contributions (ACP test) for 2019 to avoid 10% excise tax – in case of an EACA

July 2020

29   Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits

31   Last day to file Form 5500 for 2019 without extension

31   Last day to file Form 8955-SSA without extension

31   Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA)

31   (or the day Form 5500 is filed, if earlier) – Last day (without 5500 extension) to furnish annual benefit statement to a participant or beneficiary in an individual account plan that does not provide for participant investment direction

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on nondeductible contributions, prohibited transactions, certain employee stock ownership plan dispositions, and certain prohibited allocations of qualified securities by an ESOP (if applicable)

August 2020

14   Last day to furnish second quarter 2020 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

30   Last day to furnish annual participant fee disclosures in a participant-directed individual account plan (or up to 14 months from last disclosure notice, if later)

September 2020

15   Last day to pay balance of remaining required contributions for 2019 plan year to satisfy minimum funding requirements for plans subject to minimum funding requirements (such as money purchase pension plans)

30   Last day to furnish Summary Annual Report for 2019 plan year to participants and beneficiaries if an extension to file Form 5500 was not obtained

October 2020

15   Last day to file Form 5500 (with extension)

15   Last day to file Form 8955-SSA (with extension)

15   Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA)

15   (or the day Form 5500 is filed, if earlier) – Last day (with 5500 extension) to furnish annual benefit statement to a participant or beneficiary in an individual account plan that does not provide for participant investment direction

15   Last day to adopt and implement retroactive corrective plan amendment to correct 2019 410(b) coverage or 401(a)(4) nondiscrimination failures

15   Last day for C corporation employer plan sponsors to make contributions and take a tax deduction for 2019 if 6-month automatic extension to file federal income tax return was obtained

November 2020

14   Last day to furnish third quarter 2019 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

December 2020

01   Last day to provide a notice of intent to use safe harbor contribution formula for 2020 plan year to eligible employees

01   Last day to provide an automatic contribution arrangement notice for 2020 plan year to all eligible employees

01   Last day to furnish a qualified default investment alternative (QDIA) notice for 2020 plan year to participants and beneficiaries on whose behalf an investment in a QDIA may be made

15   Last day (with 5500 extension) to furnish Summary Annual Report for 2019 plan year

31   Last day to refund excess contribution (ADP test) and refund or forfeit (if forfeitable) excess aggregate contributions (ACP test) for the 2019 plan year

31   Last day to make required minimum distributions to applicable participants for distribution calendar years other than for the first distribution calendar year

31   Last day for plan sponsors to adopt discretionary plan amendments that would be effective for the current plan year

*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.

Copyright © 2020 by Findley, Inc. All rights reserved.

If you would like more specific information about each compliance item, you may review or print the calendar below.

Print 2020 Detailed Defined Contribution Plan Compliance Calendar

Interested in other compliance calendars?

Defined Benefit

Health & Welfare

Are You Looking for Missing Participants?

The Department of Labor (DOL) continues to focus on missing participants in retirement plans. In recent years, the DOL, in conjunction with the Employee Benefits Security Administration (EBSA), has been auditing retirement plans and reinforcing the actions that plan sponsors must take to locate lost participants and pay the benefits due to them.

“There’s really no more basic fiduciary duty than the duty to operate the plan for the purpose of paying benefits, so falling down here is a serious matter,” explained Preston Rutledge, Assistant Secretary of Labor for EBSA, while speaking at a policy conference. “We can’t just look the other way.”

While formal guidance is primarily directed at terminating plans, DOL auditors still expect sponsors of active, ongoing plans to be routinely searching for missing participants. As mentioned in Pension & Invesments, Plan sponsors under DOL investigation have reported surprising positions taken by some DOL auditors, including:

  • Failure to find a missing participant is a breach of fiduciary duty.
  • A plan which forfeits funds back to the plan until a participant is found is engaging in a prohibited transaction.
  • Sponsors must document their efforts to find missing participants and should try different search methods every year.
missing participants for retirement plans

These Searches Make Sense

Aside from the DOL’s focus, there are a number of practical reasons plan sponsors should address lost participant accounts:

  • There are large amounts of money at issue. In fiscal 2018, the DOL reported recovering $807 million for terminated, vested participants in retirement plans.
  • Missing participants may prevent payment of required minimum distributions (RMDs), which may result in penalties to the employer and participant.
  • Missing participants may prevent payment of death benefits. This is another important reason to maintain up-to-date beneficiary election data.
  • Missing participants may prevent payment of annual cash-out distributions for balances under $5,000. When processed timely, these cash-outs help reduce the number of accounts for which the employer is paying its recordkeeping service.
  • Missing participants may delay plan terminations, requiring another year of audit and governmental filings.

In addition, sponsors should address uncashed checks on a consistent basis to avoid prohibited transactions related to income earned by the trustee on uncashed check accounts. While many recordkeepers and trustees issue periodic reports alerting the sponsor of outstanding checks, the sponsor must conduct an address search or request that those checks be reissued.

Current Guidance

While the retirement industry awaits formal guidance addressing active plans, plan sponsors can refer to prior guidance issued for terminating plans. This guidance offers recommended steps to document attempts to locate missing participants.

The DOL released Field Assistance Bulletin (FAB) 2014-01 listing the fiduciary duties related to missing participants in terminating 401(k) plans (and other defined contribution plans). It requires plan fiduciaries to take all of the following steps to search for missing participants:

  1. Send a notice by certified mail.
  2. Check related plan and employer records.
  3. Contact the participant’s named beneficiary.
  4. Use free internet search tools (such as search engines, public record databases, obituaries, and social media).
  5. If the fiduciary does not find the missing participant during the required steps above, the fiduciary must consider additional search methods that may involve fees (such as, fee-based Internet search services, commercial locator services, or credit reporting agencies). Sponsors may take into account the size of the account balance and may charge associated fees against the account.

Since 2014, other agencies have released similar guidance. The IRS issued a Memorandum in 2017 for when its Employee Plans (EP) examiners should not enforce penalties for missed RMD payments. This memo required the plan to take virtually the same search steps before concluding it would not or could not pay an RMD.

Similarly, when the Pension Benefit Guarantee Corporation (PBGC) expanded its Missing Participants Program to terminating 401(k) plans in 2018, it pointed to the guidance under FAB 2014-01 for its requirement to conduct a “diligent search” before reporting or transferring missing participant accounts to the PBGC.

Handling Small Balances

Many sponsors have adopted distribution provisions to promptly pay out terminated employees with small balances, which can help prevent participants from losing track of their accounts in the first place. The IRS requires balances between $1,000 and $5,000, which are distributed without the participant’s consent, to be rolled into a default IRA. Therefore, most 401(k) plans will only force-pay balances under $1,000 as true cash-out distributions. Even when these cash-outs are paid annually, some of the smallest checks may go uncashed, and end up on the list of “missing participants” to be dealt with another way.

Retirement Clearinghouse, LLC (RCH) recently received approval from the DOL for its Auto-Portability Program, which may help connect participants with their old accounts. This service identifies when an individual with a default IRA has opened a new plan account with a new employer. If the participant does not respond to two letters of notification, RCH then automatically transfers the default IRA into the new plan account. This way, the account follows the participant – even when they take no action. The DOL has given RCH a prohibited transaction exemption (for five years) on fees collected for facilitating rollovers of small balances.

Best Practices

It’s important to be diligent in monitoring the plan for uncashed checks or nonresponsive participants. The DOL has made it clear that this is a fiduciary duty of the plan sponsor. Service providers often can help identify accounts that may need special attention, so sponsors should coordinate efforts to establish proper procedures and designate an individual or team to ensure necessary follow-up efforts are taken

Consider the following questions. Do you:

  • Have a formal procedure for identifying missing participants?
  • Conduct a full plan review for missing participants at least annually? (Consider timing this review with another annual process, such as annual cash-out distributions.)
  • Review uncashed check reports from the trustee? (These are typically made available on a monthly or quarterly basis.)
  • Conduct address searches for returned checks?
  • Document the steps that are taken annually to locate missing participants?

Questions? Contact the Findley consultant you normally work with, or contact Laura Guin, CPC at 615.665.5420 or Laura.Guin@findley.com

Published March 18, 2020

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Year-End Spending Bill includes the SECURE Act and other Retirement Plan Changes

Featured

With the passage of the 2020 federal government spending bill less than a week before Christmas, Congress has gifted us with the most significant piece of retirement legislation in over a decade. This newly enacted legislation incorporates the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that was overwhelmingly passed by the House of Representatives earlier this year but never considered by the Senate. The spending bill even has a few additional retirement-related tidbits that were not part of the SECURE Act.

Here are some of the key changes:

Frozen Defined Benefit Plan Nondiscrimination Testing

Currently- Defined benefit plans that were frozen to new hires in the past and operate with a grandfathered group of employees continuing to accrue benefits have ultimately run into problems trying to pass nondiscrimination or minimum participation requirements as the group of benefiting employees became smaller and normally higher paid. This problem for frozen defined benefit plans has been around for a while and the IRS has been providing stop-gap measures to deal with it every year.

Effective as of the date of enactment of this legislation and available going back to 2013 – plans may permit the grandfathered group of employees to continue to accrue benefits without running afoul of nondiscrimination or minimum participation rules so long as the plan is not modified in a discriminatory manner after the plan is closed to new hires. This special nondiscrimination testing relief also extends to:

  • defined benefit plans that close certain plan features to new hires,
  • defined contribution plans that provide make-up contributions to participants who had benefits in a defined benefit plan that were frozen.

Increasing the 10% Limit on Safe Harbor Auto Escalation

Currently – a safe harbor 401(k) Plan with automatic enrollment provisions cannot automatically enroll or escalate a participant’s contribution rate above 10%.

Effective for Plan Years beginning after Dec. 31, 2019 – the 10% cap would remain in place in the year the participant is enrolled but the rate can increase to 15% in a subsequent year.

Simplifying the Rules for Safe Harbor Nonelective 401(k) Plans

Currently – All safe harbor plans must provide an annual notice prior to the beginning of the year that provides plan details and notifies employees of their rights under the plan. Also, any plan sponsors that want to consider implementing a safe harbor plan generally must adopt the safe harbor plan provisions prior to the beginning of the plan year.

Effective for Plan Years beginning after Dec. 31, 2019 – the notice requirement for plans that satisfy the safe harbor through a nonelective contribution has been eliminated. Also, sponsors can amend their plan to become a nonelective safe harbor 401(k) plan any time up until 30 days prior to year-end. The safe harbor election can even be made as late as the end of the next year if the plan sponsor provides for at least a 4% nonelective contribution.

Open Multiple Employer Plans (Open MEPs)

CurrentlyMultiple employer plans (MEPs) are legal and actually quite common, but a couple of limitations have stunted the development of a concept called open MEPs. An open MEP is a situation where the employers within the MEP are not tied together through a trade association or some common business relationship. In 2012 the DOL issued an Advisory Opinion provided that a MEP made up of unrelated employers that did not have “common nexus” must operate as a separate plan for each of these unrelated employers and not as a single common plan. This advisory opinion took away much of the perceived advantages of operating an open MEP. Additionally, the IRS has followed a policy that provides if one employer within the MEP makes a mistake, that the error can impact the qualified status of the entire plan; this is known as the “one bad apple” rule, this policy is clearly a negative selling point for any plan sponsor that might consider signing up to participate in a MEP.

Effective for Plan Years beginning after Dec. 31, 2020 – the “common nexus” requirement and the “one bad apple” rule are eliminated. The new open MEP rules provide for a designated “pooled plan provider” that would operate as the MEPs named fiduciary and the ERISA 3(16) plan administrator. The open MEP will be required to file a 5500 with aggregate account balances attributable to each employer. These changes are expected to create a market for pooled plans that will offer efficient retirement plan solutions to smaller plan sponsors.

Required Minimum Distribution Age Now 72

Currently Required Minimum Distribution from a qualified plan or IRA must begin in the year the participant turns 70 ½.

Effective for Distributions after 2019, with respect to individuals who attain 70 ½ after 2019. – This is a simple change to age 72 for computation purposes, but note the effective date means that if the participant is already subject to RMD rules in 2019 they remain subject to RMDs for 2020 even though the person may not be 72 yet. Also, plan sponsors should be aware that distributions made in 2020 to someone that will turn 70 ½ in 2020 will not be subject to RMD rules and therefore would be eligible for rollover and subject to the mandatory 20% withholding rules.

Increase Retirement Savings Access to Long-Term Part-Time Workers

Currently– Plans can exclude employees that do not meet the 1,000 hours of service requirement

Effective for Plan Years beginning after Dec. 31, 2020 – Plans will need to be amended to permit long-term part-time employees who work at least 500 hours over a 3 year period to enter the plan for the purpose of making retirement savings contributions. The employer may elect to exclude these employees from employer contributions, nondiscrimination, and top-heavy testing.

Stretch IRAs are Eliminated

Currently– If Retirement plan or IRA proceeds are passed upon death to a non-spouse beneficiary; the beneficiary can set up an inherited IRA and “stretch” out payments based upon the beneficiary’s life expectancy. Depending upon the age of the beneficiary and the size of the IRA this strategy potentially provided significant tax advantages.

Effective for distributions that occur as a result of deaths after 2019 – Distributions from the IRA or plan are generally going to need to be made within 10 years. There are exceptions if the beneficiary is (1) the surviving spouse, (2) disabled, (3) chronically ill, (4) not more than 10 years younger than the IRA owner or plan participant, or (5) for a child that has not reached the age of majority, the ten year rule would be delayed until the child became of age.

Increased Penalties for Failure to File Retirement Plan Returns and Other Notices

Current Penalty Structure:

Failure to file Form 5500$25 per day maximum of $15,000
Failure to report participant on Form 8955-SSA$1 per participant, per day maximum of $5,000
Failure to provide Special Tax Notice$10 per failure up to a maximum of $5,000

New penalty structure:

Failure to file Form 5500$250 per day maximum of $150,000
Failure to report participant on Form 8955-SSA$10 per participant, per day maximum of $50,000
Failure to provide Special Tax Notice$100 per failure up to a maximum of $50,000

Other Retirement Plan Changes Effective for Years Beginning After December 31, 2019

  • Phased retirement changes – defined Benefit Plans can be amended to provide voluntary in-service distributions begin at age 59 ½, down from the current age 62 requirement.
  • Start-up credits – the cap on tax credits that small employers (up to 100 employees) can get for starting up a new retirement plan has gone up from $500 to $5,000.
  • Auto-Enroll credits for small employers – small employers can get an additional $500 tax credit for adopting an automatic enrollment provision.
  • More time to adopt a plan – currently a qualified plan must be adopted by the end of the employer’s tax year to be effective for that year. The new rule will permit a plan to be adopted as late as the due date of the employer’s tax return for the year.
  • Plan annuity provisions – in recognition that defined contribution plans typically do not offer lifetime income streams two changes have been added to encourage in-plan annuity options.
    • A fiduciary safe harbor standard that if followed, would protect plan sponsors from potential liability relating to the selection of an annuity provider.
    • Plans may permit tax-advantaged portability of lifetime income annuity options from one plan to another.
  • 403(b) changes include providing a mechanism for the termination of a 403(b) custodial account and clarification that non-qualified church controlled organizations (e.g. hospitals and schools) can participate in Section 403(b)(9) retirement income accounts.
  • Penalty free distribution for birth or adoption expenses – up to $5,000 could be distributed from a defined contribution or 403(b) plan to cover costs relating to birth or adoption of a child.
  • Special tax penalty relief and income tax treatment for distributions for qualified disaster distributions from qualified plans up to $100,000.  Additionally, plan sponsors can permit the $50,000 participant loan limit to be increased to $100,000 with increased repayment periods for participants that suffered losses in a qualified disaster area.

Other Changes with a Delayed Effective Date

  • Lifetime income disclosure – this provision will require a defined contribution plan to provide all participants with an annual statement that discloses the projected lifetime income stream equivalent of the participant’s account balance.  This requirement will become effective for benefit statements furnished one year after applicable DOL guidance has been issued that will be necessary to provide the prescribed assumptions and explanations that will be used to create this disclosure.
  • Combining 5500 – IRS and DOL have been directed to permit a consolidation of Form 5500 reporting for similar plans. Defined contribution plans with the same trustee, same-named fiduciary and same plan administrator using the same plan year and same plan investments may be combined into one 5500 filing. This is scheduled to begin no later than January 1, 2022, for 2021 calendar plan year filings.

What to Do Now

Obviously the SECURE Act is bringing a lot of changes to retirement plans. Many of the operational aspects to this new retirement legislation will need to be implemented immediately, in particular, tax withholding related items that will change in 2020 will necessitate plan sponsors and their recordkeepers act immediately to review tax withholding and distribution processes. Plans do have until the end of the 2022 plan year to adopt conforming amendments to their documents. The amendment deadline is the 2024 plan year for governmental plans.

If you have any questions about the SECURE Act and this new retirement plan legislation we encourage you to contact the Findley consultant you normally work with, or contact John Lucas at 615.665.5329 or John.Lucas@findley.com.

Published December 23, 2019

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© 2019 Findley. All Rights Reserved.

2019 Defined Contribution Plan Compliance Calendar

Calendar Plan Year & Calendar Employer Tax Year*

January - June 2019 Defined Contribution Plan Calendar Image

January 2019

31   Last day to file Form 945 to report withheld federal income tax from distributions

31   Last day to furnish Form 1099-R to recipients of distributions in 2018

February 2019

14   Last day to furnish fourth quarter 2018 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

28   Last day to file Form 1096 and Form 1099-R on paper with the IRS

March 2019

15   Last day to refund excess contributions (ADP test) and refund or forfeit (if forfeitable) excess aggregate contributions (ACP test) for 2018 to avoid 10% excise tax (unless plan is an EACA)

April 2019

01   Last day to make required minimum distributions (for first distribution calendar year) to applicable plan participants

01   Last day to file Form 1099-R electronically with the IRS

01   Last day (unextended deadline) to file Form 5330 and pay excise tax on 2017 plan year excess contributions or excess aggregate contributions where excess amounts not distributed (or forfeited, if forfeitable) by Mar. 15, 2018 (or by June 30, 2018 in case of an EACA)

15   Last day to distribute excess deferrals in excess of 402(g) dollar limits for 2018 to applicable participants

15  Last day for C corporation employer plan sponsors to make contributions and take tax deductions for 2018 without corporate tax return extension

May 2019

15   Last day to furnish first quarter 2019 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

June 2019

30   Last day to refund excess contributions (ADP test) and refund or forfeit (if forfeitable) excess aggregate contributions (ACP test) for 2018 to avoid 10% excise tax – in case of an EACA

July to December 2019 Compliance Calendar

July 2019

29   Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits

31   Last day to file Form 5500 for 2018 without extension

31   Last day to file Form 8955-SSA without extension

31   Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA)

31   (or the day Form 5500 is filed, if earlier) – Last day (without 5500 extension) to furnish annual benefit statement to a participant or beneficiary in an individual account plan that does not provide for participant investment direction

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on nondeductible contributions, prohibited transactions, certain employee stock ownership plan dispositions, and certain prohibited allocations of qualified securities by an ESOP (if applicable)

August 2019

14   Last day to furnish second quarter 2019 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

30   Last day to furnish annual participant fee disclosures in a participant-directed individual account plan (or up to 14 months from last disclosure notice, if later)

September 2019

15   Last day to pay balance of remaining required contributions for 2018 plan year to satisfy minimum funding requirements for plans subject to minimum funding requirements (such as money purchase pension plans)

30   Last day to furnish Summary Annual Report for 2018 plan year to participants and beneficiaries if an extension to file Form 5500 was not obtained

October 2019

15   Last day to file Form 5500 (with extension)

15   Last day to file Form 8955-SSA (with extension)

15   Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA)

15   (or the day Form 5500 is filed, if earlier) – Last day (with 5500 extension) to furnish annual benefit statement to a participant or beneficiary in an individual account plan that does not provide for participant investment direction

15   Last day to adopt and implement retroactive corrective plan amendment to correct 2018 410(b) coverage or 401(a)(4) nondiscrimination failures

15   Last day for C corporation employer plan sponsors to make contributions and take a tax deduction for 2018 if 6-month automatic extension to file federal income tax return was obtained

November 2019

14   Last day to furnish third quarter 2019 benefit statement to a participant or beneficiary in an individual account plan that permits participant investment direction

December 2019

01   Last day to provide a notice of intent to use safe harbor contribution formula for 2020 plan year to eligible employees

01   Last day to provide an automatic contribution arrangement notice for 2020 plan year to all eligible employees

01   Last day to furnish a qualified default investment alternative (QDIA) notice for 2020 plan year to participants and beneficiaries on whose behalf an investment in a QDIA may be made

15   Last day (with 5500 extension) to furnish Summary Annual Report for 2018 plan year

31   Last day to refund excess contribution (ADP test) and refund or forfeit (if forfeitable) excess aggregate contributions (ACP test) for the 2018 plan year

31   Last day to make required minimum distributions to applicable participants for distribution calendar years other than for the first distribution calendar year

31   Last day for plan sponsors to adopt discretionary plan amendments that would be effective for the current plan year

*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.

Copyright © 2019 by Findley, Inc. All rights reserved.

If you would like more specific information about each compliance item, you may review or print the calendar below.

Print 2019 Detailed Defined Contribution Plan Compliance Calendar

Interested in other compliance calendars?

Defined Benefit

Health & Welfare

Retirement Savings Opportunities for High Earning Owners and Professionals

Overview: For successful small businesses, a 401(k) plan combined with a cash balance plan can provide opportunities to:

  • Build wealth and retirement savings for the owners/ professionals with much greater contributions than through a 401(k) plan alone
  • Save on federal, state, and local taxes through higher deductible contributions
  • Protect substantial assets from creditors or legal action
  • Provide attractive retirement benefits for nonowner
  • Attract and retain talented employees
  • Enhance financial well-being and retirement readiness for all participants

The Tax Cuts and Jobs Act substantially reduced corporate tax rates for C corporations, and added a complex set of rules on deductions for pass-through entities such as partnerships, LLCs, and S corporations. Fundamentally, tax reform enacted a slightly lower individual tax rate (top brackets reduced from 39.6 percent to 37 percent) for high-earning owners, which means that these plans are still tax effective, while the substantial long-term benefits remain unchanged. Business owners who are currently sponsoring or planning to set up a 401(k) plan and cash balance plan should talk with their tax advisor and actuary, to see if any changes to plan design or their business structure are desirable.

Impact of the Tax Cuts and Jobs Act

A lot has been written and said about the Tax Cuts and Jobs Act and the tax rule changes that affect businesses. In this article, we focus on the very fundamental aspects of these changes.

C corporations now have a flat 21 percent income tax rate and pass-through entities now have a 20 percent deduction on qualified business income. This 20 percent deduction is limited or phased-out based on the type of business and business income through very complex rules. For taxpayers in the top individual income tax bracket of 37 percent, this 20 percent deduction can be viewed as a 7.4 percent (20 percent of 37 percent top individual income tax rate) rate reduction.

Thus for most high-earning owners and professionals, the evaluation of the tax effectiveness of their 401(k) and cash balance plan will involve only a change in tax rate from 39.6 percent to 37 percent. We’ve seen that this may cause subtle changes in design and contribution levels, but it does not change fundamental decisions on whether to adopt one or both plan types.

To illustrate how the combination of a 401(k) and cash balance plan can be used, let’s look at a case study of a professional firm we’ll call ABC Services.

Case Study:  ABC Services

Cash Balance  Plan Contribution Chart

ABC Services is a partnership of any type of business professionals such as accountants, doctors, or lawyers. There are three partners in the business, each owning one-third of the practice. The firm has a number of nonowner professionals we’ll call associates. The firm employs other staff as well.

The partners at ABC have these goals for their retirement program:

  • Partners – Adam and Bill (both age 55) would like to maximize their retirement savings. Carol (age 45) needs more current income and less saving for retirement. No partner wants to subsidize the retirement benefit of the other partners.
  • Associates – the associates are ages 30 to 45. Associates prefer current compensation over future retirement benefits. ABC wants to minimize retirement plan contributions to this group.
  • Staff – ABC hires relatively young staff and experiences moderate turnover among this group. ABC wants to offer a market-competitive level of retirement benefits to attract staff employees.

Tables 1A and 1B show the employer contributions provided under the 401(k) and cash balance plans established by ABC. Each participant can make salary deferral contributions to the 401(k) plan up to the IRS limits, including additional catch-up contributions for individuals age 50 and older.

Table 1A: Annual contribution amounts for ABC partners

 

Eligible Pay

Salary
Deferrals
Employer 401(k)
Contributions
Employer
Cash Balance
Contributions
Total
Employer
Contributions
Total
Retirement
Contributions
Adam $280,000 $25,000 $14,000 $140,000 $154,000 $179,000
Bill $280,000 $25,000 $14,000 $140,000 $154,000 $179,000
Carol $280,000 $19,000 $14,000   $35,000   $49,000   $68,000

*Subject to IRS limits

Table 1B: Annual employer contributions, as a percentage of eligible pay, by employment category

  Employer 401(k)
Contribution
Employer Cash Balance
Contribution
Total Employer
Contribution
Partners      
Adam 5% 50.0% 55.0%
Bill 5% 50.0% 55.0%
Carol 5% 12.5% 17.5%
Associates 0%      0%       0%
Staff 5%   2.5%    7.5%

How well does this retirement program accomplish ABC’s objectives?

  • Partners – Adam and Bill are able to receive contributions of (and defer tax on) $179,000 each year. Carol accomplishes her goal by having a meaningful, but significantly lower, contribution amount of $68,000 per year with flexibility to change her contribution amounts through the 401(k) plan.
  • Associates – ABC minimizes retirement contributions for associates by providing a separate, employee deferral only 401(k) plan for associates, and excluding the associates from the cash balance plan.
  • Staff – ABC offers a strong benefit to this group in order to attract and retain staff employees. The plan design provides employer contributions of 7.5 percent of pay for staff, plus employee 401(k) salary deferrals and  catch-up contributions if the employee is at least age 50.

What Types of Employers Should Consider a 401(k) Cash Balance Plan?

We’ve noted that any successful business can consider implementing a 401(k) and a cash balance plan. We find, however, that businesses with the following characteristics are the most likely to see the benefits of implementing these plans together:

  • The business owners are age 40–64
  • The business has had consistent cash flow and profitability
  • The future of the business looks good, with positive cash flow and profitability over the next five years
  • The ratio of nonowner employees to owner employees is relatively low
  • The business has a 401(k) plan in place and is making employer contributions currently

Also, we frequently hear these goals in discussions with owners of successful businesses:

  • We want (or need) to save more for retirement than the current IRS annual limit imposed on the 401(k) plan
  • We want to reduce our current taxes
  • We need protection of assets from creditors, or in the event of a lawsuit
  • We want to recognize and reward key staff
  • We want to attract and retain the best employees

By implementing a 401(k) plan and cash balance plan with advanced plan designs, successful businesses can meet their owners’ goals for wealth building and retirement savings and offer an attractive and cost-effective retirement program to their employees.

Looking Closer at Cash Balance and 401(k) Plans

Qualified retirement plans are divided into two categories: defined benefit (DB) plans and defined contribution (DC) plans. Cash balance plans are a typical DB design for small businesses and professional firms, while 401(k) plans are a common DC plan design.

A cash balance plan is structured to look like a DC plan with each participant having a recordkeeping account that receives employer contributions and interest credits. These interest credits are often defined and guaranteed by the plan.

Common Features

Since both 401(k) and cash balance plans are types of qualified retirement plans, they share a number of common features that are important for employers and participants:

  • Contributions are tax-deductible
  • Trust earnings are tax-deferred
  • Trust assets are protected from the claims of creditors
  • Distributions are usually immediately available after termination, retirement, death or disability
  • Lump sum distributions may be rolled over to a successor plan or another tax-advantaged plan
  • Distributions are not subject to FICA or FUTA tax

Key Differences

Table 2 highlights the key differences between 401(k) and cash balance plans:

401(k) Plans Cash Balance Plans
Contributions (based on 2019 limits) Contributions
Participants can save up to $19,000 in before tax or Roth (after tax) employee savings

Participants age 50 or older can save an extra $6,000 in catch-up contributions

The employer and employee contributions can be up to $56,000 ($62,000 including catch-up contributions)

Employer contributions (match and profit sharing) are usually discretionary
Contributions can be far greater than current 401(k) limits, depending on the owner’s/professional’s current age

The cash balance account is guaranteed
Additions to the cash balance account are based on pay credit and interest rate factors defined in the plan document

Employer contributions are required
Investments Investments
Participants usually direct the investments in their 401(k) account

The participant chooses their investment strategy and bears the investment risk
Assets are invested in a pool for all participants in the plan, usually with a conservative investment strategy

Plans are allowed to credit the actual performance of the portfolio to participants’ cash balance accounts (certain restrictions apply)

The employer sets investment strategy and often bears all the investment risk
Accounts Benefits
The participant’s account value is based on contributions and actual investment returns (or losses) The participant’s account has guarantees; the account is based on contributions, interest credits as defined by the plan, and minimum guarantees required by law

Distribution

Distribution

In-service distributions are allowable for hardship or upon reaching age 59½

Distributions are usually as a lump sum, some plans allow for installments or purchase of an annuity

Participant loans are often available through the plan


In-service distributions are allowable at or after age 62

Distributions are usually made as a lump sum, annuity options are available through the plan

Loans are usually not offered

Other Considerations

With examples showing the benefits of implementing a 401(k) plan and cash balance plan to owners and their employees, the natural question is: why not implement these plans?

Business owners considering these plans should also discuss these issues with their actuary, tax advisor, and plan consultants:

  • Higher contributions for nonowner employees will likely be required
  • There will be higher administrative costs for a second plan, including hiring an actuary to certify the minimum funding required of the cash balance plan
  • There may be PBGC premium expense for certain plans and employers; however, PBGC coverage can result in additional deductible contributions
  • There are annual required minimum contributions for the cash balance plan
  • Volatility in the investments held by the cash balance plan can lead to volatility in the required minimum contributions
  • Funding levels must be managed to avoid certain restrictions on distributions

In Summary

The combination of a 401(k) plan and a cash balance plan is often the best solution for a successful business wishing to provide substantial tax-deferred savings for key individuals. This combination of plans is easy to understand and can provide surprising flexibility along with increased contribution limits.

The case study shown in this article shows the retirement accumulation potential of implementing a 401(k) and cash balance plan. Other cost-effective plan designs are generally available; for more information, please contact your Findley consultant.

Published on June 7, 2019

© Copyright 2019 • Findley • All rights reserved

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Building Toward a Better Retirement: Choice Architecture and Plan Participants

Overwhelming. That’s normally the first response plan participants give as to why they didn’t start saving for retirement. HR professionals and retirement consultants have heard it before, “Too many options; too many decisions; I wasn’t sure what these words even meant.” Effectively helping plan participants prepare for retirement takes designing the message in a different way.

Choice architecture is a term used to describe how decisions can be influenced by the layout, order, and variety of the choices presented. This concept can be used to help steer retirement plan participants into better decision-making. Plan sponsors can use choice architecture to their advantage by improving how participants’ choices are presented and by using smart default options.

An important first step is to consider what obstacles often prevent employees from joining a plan or increasing their savings. A white paper from Wells Fargo, Driving Plan Health says, “Knowing which plan features, communications, and digital tools are designed to address these various psychological barriers is an important first step and can help guide the selection of which features and tools to use.”[1] The plans that have solved for these types of problems, leveraging design elements, usually produce the best retirement outcomes for their employees.

Make their first choice automatic

Automatic enrollment and annual re-enrollment can be used to overcome inertia of participants by automatically putting them into the plan when they first become eligible. The participants must take action to opt out if they do not want to participate; this often results in much higher 401(k) participation rates than plans which don’t use automatic enrollment.

Retirement outcomes for participants can be further improved by implementing automatic deferral increases. This helps those participants who do not take initiative in managing their savings.

Finally, qualified default investment alternatives (QDIA) can be tailored to meet the needs and investment styles of different workforces. Offering QDIAs allows participants to accumulate far greater savings in the form of investment earnings than if they left their funds in cash or a stable return fund. In the article, Choice Architecture and Participant Investment Decisions, Vanguard notes, “Sponsors seeking to change behaviors of longer-tenured participants may wish to consider reenrollment into a low-cost default option, as that is one way to counteract the profound inertia influencing longer-tenured participants’ investment holdings.”[2]

Incentivize their saving goals

Once enrolled, there are many choices participants must make. How those choices are presented to them can make a huge difference in long-term savings. For example, the Save More Tomorrow program gives participants a nudge to save more by having them establish their own future defaults today. The defaults selected happen automatically in the future when a raise occurs, so the participant never has a decrease in take-home pay.[3]

Another common way to incentivize participants to save more is to offer employer matching or profit sharing contributions that are tied to their 401(k) deferral rates—the more they defer, the more the employer gives them.

There are always some participants who select their investments when they first enroll and never touch them again. Auto-rebalancing can be used to return the accounts to their intended asset allocation, often increasing returns and keeping risk in check.

Smart design leads to smart decisions

An article by Voya suggests using a Reflective Index to help apply choice architecture to the plan. It is possible to automate the determination of a participant’s decision-making style. The Reflection Index evaluates participants on three decision-making style indicators: attention, information gathering, and making tradeoffs. The assessment gives insight into how participants in different plans are making decisions. Voya states, “By leveraging the insights of behavioral science and the data of the digital world, we can tailor our suggested ‘course corrections’.”[4] Plan sponsors can use the index to help them make plan design decisions. For instance, plans where more participants are characterized by a reflective decision-making process should encourage their participants to re-evaluate their elections based on additional personalized information; whereas re-enrollment might be a better solution for plans if most participants are characterized by an instinctive decision-making process. “By making it easier for their participants to make the right decision, we can offer them another chance at a successful retirement.”[5]

Something we may not think of as affecting a participant’s retirement plan choices is the website design. Participants’ interactions on websites can be tracked; then small changes can be made to lead participants to better choices. Simple changes to implement might include locating relevant plan information where the participant is being prompted to make a choice, making the language of enrollment options as simple as possible, or using a “traffic light” color design to guide choices.

One size doesn’t fit all when it comes to participant communication. Tailor the plan’s communications to have language and information designed for your workforce. This will help grab the participant’s interest and improve the communication’s overall effectiveness.

Saving to and through retirement

Choice architecture can be used not only to optimize auto features but also to help eliminate the loss of funds. Retirement Clearinghouse has recently developed a program which helps participants keep track of their retirement funds as they move from job to job. For smaller account balances, which might otherwise get cashed out or rolled to an IRA by default, this program captures and tracks these assets by moving terminated participants’ account balances with them to their new employer’s plan—all by default.[6]

Another way savings can be preserved is by limiting opportunities to withdraw from the plan through loans, hardship withdrawals, in-service or termination cash outs.

Finally, choice architecture can even influence the age at which a participant might begin to draw down their savings. Using a “consider the future first” checklist of eight reasons to claim benefits later, The TIAA Institute encourages some participants to delay claiming their benefits for up to 18 months.[7]

In perspective

Whether a participant logs in once and makes a single choice or is making a lifetime of choices, there are many ways employers can use choice architecture to assist all types of decision-makers when they do engage. Understanding your employees and tailoring the approach can help them make the best decision–ultimately improving retirement readiness.

Questions? Contact the Findley consultant you normally work with or Laura Hohwald at Laura.Howald@findley.com or 615.665.5349.


[1] “2018 Driving Plan Health.” Wells Fargo, 2018. Accessed January 2019.

[2] Pagliaro, Cynthia, and Stephen Utkus. “Choice Architecture and Participant Investment Decisions.” The Vanguard Group, May 2018. Accessed January 2019. www.oecd.org/els/health-systems/Obesity-Update-2017.pdf.

[3] Thaler, Richard, and Shlomo Benartzi. “Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving.” American Journal of Education, Feb. 2004. Accessed January 2019. www.journals.uchicago.edu/doi/abs/10.1086/380085?journalCode=jp.

[4] Benartzi, Shlomo. “Using Decision Styles to Improve Financial Outcomes.” Voya. 2019. Accessed January 2019. www.voya.com/behavioralfinance.  

[5] Ibid.

[6] “Moving Retirement Forward.” Retirement Clearinghouse. January 2019. Accessed January 2019. https://rch1.com/.

[7] Johnson, Eric, Kirstin Appelt, Melissa Knoll, and Jon Westfall. “Preference Checklists: Selective and Effective Choice Architecture for Retirement Decisions.” TIAA Institute. June 2016. Accessed January 2019. https://www.tiaainstitute.org/sites/default/files/presentations/2017-02/ti_selective_effective_choice_architecture_for_retirement_decisions.pdf.

Posted on March 13, 2019

© 2019 Findley. All Rights Reserved.

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Scared vs. Prepared: Conducting an Operational Compliance Review

Well, it arrived.  On your desk is a white envelope with a return address to the Federal Government. Are you prepared for this day?  Are your procedures up-to-date? 

Fortune Favors the Prepared

No one likes finding out that they are being audited by the Internal Revenue Service (IRS) or Department of Labor (DOL). But the fact of the matter is that all qualified retirement plans (defined benefit and defined contribution) may be audited. Prudent plan sponsors are proactive, have up-to-date procedures and guidelines, and periodically conduct an operational compliance review, or self-audit. Taking the initiative to do a self-review can help you avoid added costs and liabilities down the road.

Plan sponsors have a fiduciary responsibility to ensure their plans are operating according to the law and governing plan documents. This includes everything from documentation, to benefit calculations, to the day-to-day administrative processes. No matter what type of retirement plan you have, or whether it is administered in-house or outsourced to a professional recordkeeper, you should consider conducting an operational compliance review every few years.

Bonus: It’s also the perfect time for plan sponsors to locate and organize all plan documents, Summary Plan Descriptions, administrative manuals, third-party service agreements, and meeting minutes.

A particularly good time to conduct a review is when a merger or acquisition takes place. If you are considering merging one plan into another, it is beneficial to correct errors in each plan before merging. Once the plans are merged, it is harder to isolate when and where the problem started and to calculate any corrections needed.

Start to finish, a self-audit can last from six weeks to six months depending on the size of the plan, depth of review, and findings. The review may be broad, focusing primarily on plan documents, annual filings, and compliance testing. It may be very detailed, structured to encompass everything from internal payroll processes down to spot checking select records or transactions from the recordkeeping system.

How Do We Make Sure We’re Prepared?

When considering an operational compliance plan review, it’s tempting to think, “Nothing has changed with our plan, so we’re good.” However, just because your plan hasn’t changed in your eyes doesn’t mean you shouldn’t review. New tax laws, legislative updates, and organizational restructure all affect retirement plans. Use these eight questions to help you pinpoint areas that may need to be addressed in your review:

  • How long ago was the last internal review completed?
  • Are there any recent laws or regulation changes affecting your plan, your company, and your employees?
  • Does your plan document reflect the way the plan is currently being administered?
  • When was the last time your benefits and payroll teams reviewed the wage types to confirm that they align with the plan document?
  • Is there a committee that meets to discuss and make decisions regarding the retirement plan?
  • Are the retirement plan committee decisions documented in meeting minutes?
  • Have there been tax laws or internal company changes which may impact the plan’s operation?
  • Has your company made any acquisitions or changes in payroll systems?

Where Is the Most Exposure?

The DOL and IRS periodically publish lists of the most common compliance issues they find when reviewing retirement plans. The most common issues include:

  • Definition of compensation
  • Updates to the plan documents for tax law changes
  • Employee eligibility
  • Loans
  • In-service distributions
  • Minimum required distributions
  • Nondiscrimination testing
  • Vesting
  • Timing of payroll deposits
  • IRC 410(b) coverage testing
  • Qualified domestic relations orders
  • Target date funds
  • Revenue Sharing and 12b-1 fees
  • Plan committee meetings
  • Blackout participant notices

This list is not exhaustive; however, it is a good reference and cheat sheet for areas of focus for your plan review. Most recently, the DOL has been focused on the diligence of plan sponsors in locating missing participants.

In Perspective

The day that letter arrives doesn’t have to be scary.  Performing an operational compliance plan review every few years can keep your plan up-to-date and compliant. Questions? If you would like to learn more about conducting an operational compliance review of your plan, please contact the Findley consultant you normally work with, or contact Amy Kennedy at amy.kennedy@findley.com, 419.327.4102, or Beth Mattimoe at beth.mattimoe@findley.com , 419.327-4416.

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Posted March 6, 2019