Tag Archives: retirement plans

The Trouble with 401(k) Investment Policies

Contributed by Rebecca Dobbs Bush, September 15, 2017

If I had a dollar for every time this conversation occurred…

Lawyer: Do you have a copy of your investment policy?

                Client: Who would have been the one to write that?  Us? Our broker/advisor?

Or, this one…

Lawyer: Is your investment advisor serving as a fiduciary to your plan?

                Client: What does that mean? How would I determine that?

17800977 - an ornate clock with the words time to invest on its faceThe most common area in which 401(k) plans are being scrutinized these days is in their selection and design of investment offerings. While participants often get to direct how their funds are invested, that direction is limited to only those investment offerings that an employer/sponsor makes available as part of the 401(k) plan.

Employers typically rely on investment advisors to help design the options available to participants. In some cases, options are limited depending on the total dollars invested in the plan. In many cases, the investment advisor provides the employer with a model investment selection policy to customize and adopt.

While a model policy is a helpful starting place, in many cases the employer, not quite sure what to do with it, never customizes the model policy and instead sticks it away in a file. The policy is then often forgotten and not reviewed or even referenced each time investment offerings are scrutinized. It is impossible to ensure the selection and design of the investment offerings is in line with the policy if the policy has been completely forgotten.

Every employer that offers a 401(k) plan should ask themselves the following:

  1. What fiduciary status does the plan’s investment advisor maintain? (i.e., who really has the final say on investment option design and selection for the plan?); and
  2. What is our 401(k) investment policy and what are we doing to make sure it’s understood and being followed by decision-makers for the plan?

An employer that can’t answer these questions is not only vulnerable to potential litigation, but also risks the potential of not maximizing the invested assets of all participants.

In most cases with a 401(k) plan, an employer is supposed to serve as a trusted fiduciary maintaining a multi-million dollar investment portfolio on behalf of their employees.  With that much at stake, an employer needs to make sure it is selecting and monitoring investments, along with a skilled investment advisor, carefully and diligently.

DOL’s Final Fiduciary Rule – What Does It Mean for Your 401(k)?

By: Rebecca Dobbs Bush

Every employer offering a 401(k) plan is faced with the decision about what investment options to make available to participants through their plan. Investment options carry different risks as well as different costs. The amount of total assets in a 401(k) plan can affect the variety of investment options an employer can make available to participants. Typically, a greater variety is available to larger plans. Most employer/plan sponsors aim to provide a diverse offering in order to allow participants a wide variety of options in directing their own investments. In designing available investment options, a plan sponsor generally relies on a third-party advisor. Those advisors may or may not maintain fiduciary status in regards to the 401(k) plan. Where an advisor does not maintain fiduciary status, an employer is ultimately the party responsible for selection and monitoring of available investment options.

401 KThe final rule issued by the DOL on April 8, 2016 aims to increase the level of responsibility for every third-party advisor to a 401(k) plan. Many advisors were typically held to a weaker “suitability” standard, met by recommending products that meet a client’s general needs and risk tolerance even where those same products may result in greater rewards for the advisor than competing lower-fee investments would. As a result of the final rule, those providing investment advice to retirement plan sponsors and participants now need to meet a “best interests” standard, meaning they must only offer advice in the best interests of plan participants and beneficiaries and must disclose any potential conflicts of interest.

So what should an employer that sponsors a 401(k) plan do in light of the DOL’s final rule? First, every plan sponsor should clarify the status of their current advisor. Is that advisor a registered investment advisor? Is that advisor a fiduciary to the 401(k) plan? Once the answers to those questions are confirmed, plan sponsors should be prepared for receiving and reviewing more disclosures from third-party advisors and lengthier service contracts.

Retirement Plans Must be Amended to Recognize Same-Sex Marriages by December 31, 2014

Contributed by Kelly Haab-Tallitsch

The IRS released Notice 2014-19 earlier this month, answering many of the open questions on the application of the Supreme Court’s decision in U.S. v. Windsor to qualified retirement plans.  Although the IRS provided initial guidance on the impact on employee benefit plans shortly after the Court found the Defense of Marriage Act’s (DOMA) ban on same-sex marriage unconstitutional, many details specific to retirement plans were still outstanding.

Effective Date and Retroactivity

The recent release reaffirms that qualified retirement plans are required to recognize same-sex marriages as of the date of the Windsor decision (June 26, 2013), and confirms that plans will not be penalized for not recognizing them earlier. Plans are required to recognize same-sex marriages using the “state of celebration rule” beginning on September 16, 2013, the date of the prior IRS Notice 2013-17. Under this rule, a plan must recognize a same-sex marriage if the individuals were legally married in a state that recognizes such marriages, even if they are currently living in a state that does not. Plans that were relying on the laws of the state of residency, instead of the state of celebration of the marriage, prior to the September 16, 2013 notice will not be penalized.

Plans may choose to recognize same-sex marriages retroactively prior to June 26, 2013, and may choose to recognize them for some or all purposes, provided the plan is amended to specify the effective date and the specific rules that will be applied. For example, a plan may choose to apply Windsor to its joint and survivor annuity requirements and only with respect to participants with benefit commencement dates as of a certain date.

Plan Amendments

Retirement plans only need to be amended to comply with Windsor if the current plan terms are inconsistent with the decision or the IRS guidance. For example, a plan that specifies that a marriage is between two individuals of the opposite sex will need to be amended, but a plan that uses the term “spouse” or “legally married spouse” may not require an amendment. A clarifying amendment is permissible, however, and may be helpful to plan administrators.

The deadline to adopt a required Windsor plan amendment is December 31, 2014 for most plans. The notice provides that a plan amendment must be adopted to bring a plan into compliance with Windsor by the later of December 31, 2014 or the otherwise applicable deadline for plan amendments (i.e. the later of the end of the plan year in which the change is first effective or the due date of the employer’s tax return for the tax year that includes the date the change is first effective).

To ensure your retirement plan remains compliant, plan language should be reviewed in the next few months to determine if a December 31, 2014 amendment is needed.