Spring 2016

Transcription

Spring 2016

A n
o f f i c i a l
p u b l i c at i o n
o f
A S P PA
SPRING 2016
How to connect with all
generations of participants
Takeovers and Conversions
IRS Employee Plans — The ‘New Normal’
My 50 Years as a Pension Actuary
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Contents
SPRING 2016
ASPPA IN ACTION
6 From the President
JOSEPH A. NICHOLS
7 ASPPA Conferences
11ASPPA History Website
Now Online
51New and Recently
Credentialed Members
60Government Affairs Update
CRAIG P. HOFFMAN
COVER STORY
30
Generation Now
How to connect with all three generations of participants.
BY CAM MARSTON
FEATURE STORIES
26Plan Takeovers and
Conversions: Pitfalls and
Pointers (Part 2)
Steps to takeover success.
BY ROBERT E. (BOB) MEYER, JR.
3650 Years as a
40IRS Employee Plans —
Pension Actuary
A past president looks back on how his
50 years in the industry intertwined with
ASPPA’s history.
the ‘New Normal’
R estructuring and budget cuts
bring change.
BY RICHARD A. HOCHMAN
BY HOWARD M. PHILLIPS
WWW.ASPPA-NET.ORG
1
Published by
Editor in Chief
Brian H. Graff, Esq., APM
20
44
COLUMNS
04Letter from the Editor
08Cross-Tested Plans in the
Crosshairs (Again)
REGULATORY/LEGISLATIVE
UPDATE
BRIAN H. GRAFF
TECHNICAL ARTICLES
PRACTICE
MANAGEMENT ARTICLES
44 Operational Self Audits: How
to Avoid the Financial Pitfalls of
Qualified Plans
WORKING WITH
PLAN SPONSORS
JOEL SHAPIRO
48 Mapping Your Business
10Year-End Tax and Spending Bill
Has Retirement Implications
LEGISLATIVE
58
Workflows
BUSINESS PRACTICES
GREG FOWLER
12A Fresh Look at After-Tax
52 Want Your Employees To
Contributions
COMPLIANCE
KELSEY N.H. MAYO AND KELLY MARIE HURD
16Coping with the Changes
to ASOP 35
ACTUARIAL
WILLIAM D. KARBON
20What’s Next for Pre-approved
Plan Documents?
LEGAL
DAVID N. LEVINE
22Key Issues in 403(b) Plan
Takeovers
RECORD KEEPING
JOHN JEFFREY
2
PLAN CONSULTANT | SPRING 2016
Be Productive, Faster?
EDUCATION
BRIAN FURGALA
54 Reporting Professional
Misconduct (Part 2)
ETHICS
LAUREN BLOOM
56 QACAs: Making Retirement
Veggies More Than Palatable
SUCCESS STORIES
JOHN IEKEL
58 Work Smarter by
Leveraging Cheap Tech
TECHNOLOGY
YANNIS P. KOUMANTAROS AND ADAM C. POZEK
Plan Consultant Committee
Mary L. Patch, QKA, QPFC, Co-chair
David J. Witz, Co-chair
Gary D. Blachman
John D. Blossom, Jr., MSPA, QPFC
Jason D. Brown
Kelton Collopy, QKA
Kimberly A. Corona, MSPA
John A. Feldt, CPC, QPA
John Frisvold, QPA, QKA
Catherine J. Gianotto, QPA, QKA
Brian J. Kallback, QKA
Phillip J. Long, APM
Kelsey H. Mayo
Robert E. Meyer, Jr, QKA
Michelle C. Miller, QKA
Robert G. Miller, QPFC
Eric W. Smith
Editor
John Ortman
Associate Editor
Troy L. Cornett
Senior Writer
John Iekel
Graphic Designer
Ian Bakar
Technical Review Board
Michael Cohen-Greenberg
Sheri Fitts
Drew Forgrave, MSPA
Grant Halvorsen, CPC, QPA, QKA
Jennifer Lancello, CPC, QPA, QKA
Robert Richter, APM
Advertising Sales
Erik Vanderkolk
[email protected]
ASPPA Officers
President
Joseph A. Nichols, MSPA
President-Elect
Richard A. Hochman, APM
Vice President
Adam C. Pozek, QPA, QKA, QPFC
Immediate Past President
Kyla M. Keck, CPC, QPA, QKA
Plan Consultant is published quarterly by the American
Society of Pension Professionals & Actuaries, 4245 North
Fairfax Drive, Suite 750, Arlington, VA 22203. For subscription
information, advertising, and customer service contact ASPPA
at the address above or 800.308.6714, customerservice@
USAretirement.org. Copyright 2016. All rights reserved.
This magazine may not be reproduced in whole or in part
without written permission of the publisher. Opinions
expressed in signed articles are those of the authors and do
not necessarily reflect the official policy of ASPPA.
Postmaster: Please send change-of-address notices for Plan
Consultant to ASPPA, 4245 North Fairfax Drive, Suite 750,
Arlington, VA 22203.
LETTER FROM THE EDITOR
PC
What’s Different About Millennials?
N
eed some good news? Try
this on for size.
Back in February,
AARP and Young
Invincibles, a national
nonprofit, nonpartisan
organization that advocates
on behalf of 18- to 34-year-olds,
cosponsored a happy hour event in
New York City’s Greenwich Village
called “Cheers to Your Future.” The
focus: young people’s retirement
prospects.
Now recall what you know
about Boomers and Gen Xers when
they were in their 20s. Retirement
solutions weren’t even on their radar.
But for today’s 85 million Millennials
— those born between 1980 and 2000
— things are different.
Millennials are facing multiple
economic pressures, especially the
It looks like Millennials
are starting to show
signs of having the
‘right stuff’ when it
comes to managing
their finances.”
burden of student debt, but also
including stagnant wages, the rising cost
of child care and fewer opportunities
to build wealth in the same manner
as previous generations did. This
includes saving for retirement. A Young
Invincibles survey found that about half
of employed, low-income Millennials
don’t have access to a retirement plan
at work. In New York State, AARP
research indicates, that figure is north
of 60%.
ASPPA History Now Online
A
new website dedicated to ASPPA’s rich history at the forefront of the retirement
industry is now online, at asppa50.org/.
Designed to complement the ASPPA history book currently in progress, the website includes
material uncovered in the course of researching, writing and editing the book, including:
• Photos from ASPPA Annual Conferences going back to 1974, and more.
• Documents from the ASPPA archives and other sources, including the 1966 certificate
of incorporation, articles from The Pension Actuary by prominent leaders of the past,
and more.
• Videos, starting with ones marking ASPPA’s 25th anniversary in 1991 (and featuring
founder Harry T. Eidson) and previewing this year’s 50th anniversary celebration.
We’ll be adding photos, documents and new videos on a regular basis. When we do,
we’ll let you know in an ASPPA Connect post. Check it all out at asppa50.org/, or click on
“ASPPA History” in the “About” section of ASPPA Net’s nav bar.
Yet in the face of those dire
circumstances, it’s clear that society
cares about Millennials’ financial
situation in general and their
retirement prospects in particular —
led by the retirement industry’s fairly
recent focus on this generation of
future savers.
More importantly, it looks like
Millennials themselves are starting to
show signs of having the “right stuff”
when it comes to managing their
finances. Increasingly, retirement
industry surveys and studies are
showing that Millennials’ views
of their financial future, especially
regarding saving for retirement, are
distinctly realistic and positive. And
when they do save, they tend to be
risk averse.
Realistic, positive and risk averse.
Sounds like a pretty good foundation
to build a financial future on to me.
Perhaps what this all means is that for
Millennials, financial responsibility is
officially becoming… cool.
Doubt it? In a new music video
about student debt, rapper Dee-1
proclaims his happiness at finally
finishing “paying Sallie Mae back.”
The lyrics include references to
checking his credit on Equifax and
working two jobs to pay off his loans.
For a deeper dive into how
Millennials — as well as Boomers
and Gen Xers — are different, check
out this month’s cover story by
generational authority Cam Marston.
Comments, questions, bright
ideas? Contact me at jortman@
usaretirement.org.
JOHN ORTMAN
EDITOR-IN-CHIEF
4
AsppA retirement plan service provider
Assessments performed by CefeX, Centre for fiduCiAry eXCellenCe, llC.
The following firms are certified* within the prestigious
ASPPA Service Provider Certification program. They have
been independently assessed to the ASPPA Standard of
Practice. These firms demonstrate adherence to the industry’s
best practices, are committed to continuous improvement and
are well-prepared to serve the needs of investment fiduciaries.
Actuarial Consultants, Inc.
Blue Ridge ESOP Associates
Pension Planning Consultants, Inc
Alliance Benefit Group North Central States, Inc.
BlueStar Retirement Services, Inc.
Pension Solutions, Inc.
Alliance Benefit Group of Illinois
Creative Plan Designs Ltd.
Pentegra Retirement Services
Alliant Employee Benefits, a division of
Creative Retirement Systems, Inc.
Pinnacle Financial Services Inc.
DailyAccess Corporation
Preferred Pension Planning Corporation
DWC ERISA Consultants, LLC
Professional Capital Services, LLC
First Allied Retirement Services /
QRPS, Inc.
Alliant Insurance Services, Inc.
American Benefits Systems, Inc. d.b.a.
Simpkins & Associates
American Pensions
Associates in Excellence
Qualified Plan Solutions, LC
Aspire Financial Services, LLC
Great Lakes Pension Associates, Inc.
Retirement Planning Services, Inc.
Associated Benefit Planners, Ltd.
Ingham Retirement Group
Retirement Strategies, Inc.
Atessa Benefits, Inc.
Intac Actuarial Services, Inc.
Rogers Wealth Group, Inc.
Atlantic Pension Services, Inc.
July Business Services, Inc.
RPG Consultants
Benefit Management Inc. dba United
Kidder Benefits Consultants, Inc.
Securian Retirement
Moran Knobel
SI Group Certified Pension Consultants
Benefit Planning Consultants, Inc.
National Benefit Services, LLC
SLAVIC401K.COM
Benefit Plans Plus, LLC
North American KTRADE Alliance, LLC.
Summit Benefit & Actuarial Services, Inc.
Benefit Plans, Inc.
Pension Associates International
TPS Group
Benefits Administrators, LLC
Pension Financial Services, Inc.
Trinity Pension Group, LLC
Retirement Plan Consultants
*As of September 5, 2014
For more information on the certification program, please call 416.693.9733.
*as of August 24, 2015
PC
FROM THE PRESIDENT
BY JOSEPH A. NICHOLS
ASPPA Passion
How do we keep the passion alive going forward?
A
s we wind down another
Winter busy season (getting
ready for the Spring busy
season), I cannot help but
think about how we got
here. Not how we got here
on this crazy rock circling
a flaming gas ball, but how ASPPA got
where we are.
We know it all started with three
guys writing down some goals on
a bar napkin. We also know that
there has always been a tremendous
amount of passion and devotion to
our profession driving us along the
path we are traveling. That’s when it
dawned on me — it’s the passion.
Passion drives ASPPA in many
different ways. To some, passion
for ASPPA means loyally attending
the Annual Conference year after
year, not only to keep up on PE
requirements, but also to see our
other passionate ASPPA friends.
To others, passion means writing a
check to ASPPA PAC year after year
because the root of our existence
depends on ASPPA’s Government
Affairs staff and volunteers engaging
with elected officials. And to still
others, passion means being on a
committee to plan a conference, draft
an ASPPA asap or help run a local
ASPPA Benefits Council (ABC) year
after year.
Note the common themes in the
above paragraph — passion and year
after year.
So, what drives the passion? At
the time three pension professionals
in Texas founded ASPPA in 1966,
I think the passion existed because
many actuaries’ professional lives were
at stake. And despite our monumental
6
growth since those days, that “working
hard because we are the little guy”
element still exists today.
Throughout the years, there have
been many challenges that have tested
ASPPA. Sometimes the passion gets in
our way, but in the end, it guides us
to be a stronger association. For just
one example, ASPPA’s impassioned
but reasoned response to the IRS’
small-plan audit initiative in the early
1990s forged a dynamic image for the
organization.
My own ASPPA passion started
in the second half of the 1990s when,
while I was working on my first
small business defined benefit plan,
my colleague (and good friend to
this day) Janet Thompson introduced
me to ASPPA. My passion started
with teaching local ASPPA courses,
jumped to being an ASPPA rep
for the Joint Board exam writing
committee, and continued as I helped
out in committee and leadership
positions.
Most ASPPA presidents probably
think that in their year, the association
is at a crossroad. I cannot think of
a year recently in which something
monumental did not happen, either
within ASPPA or our industry.
To me, here’s the crossroad
we face in 2016: Now that we
are settled into our role as a sister
organization within the American
Retirement Association, are better
able to focus on the needs of our
members and future members, and
have realized that the makeup of our
industry is shifting through growth,
consolidation and attrition, what path
do we choose to maintain the ASPPA
passion?
This is the main task of the
2016 ASPPA Leadership Council
— to determine a path for strategic
planning to maintain the passion.
Notice I did not say, “develop a
plan,” but rather determine a path for
the planning. As passionate as our LC
members are (and believe me, there
is no shortage of passion during our
meetings), they also have day jobs,
and the important work involved in
understanding what motivates our
members cannot be done in a couple
of phone calls. And it is important.
We are trying to figure out how this
incredible association can keep its
passionate energy going for many
years to come.
So as we continue to celebrate our
50th anniversary, think about what
drives your ASPPA passion. Share your
thoughts with me at joeactuary@
gmail.com. And think especially
about how (or if ) that passion changed
throughout your career, either within
the same firm or as you moved from
firm to firm.
Most of all, thank you, everyone,
for your ASPPA passion!
Joseph A. Nichols, MSPA, ASA, EA,
MAAA, is ASPPA’s 2016 President. A
senior director with FTI Consulting’s
Pension Consulting Services group, he
has provided pension actuarial services
to a wide range of plan sponsors for
more than 25 years. PHILADELPHIA
CHICAGO
MAY 19–20, 2016
JUNE 16–17, 2016
MARRIOTT DOWNTOWN
HOTEL CHICAGO
REGIONAL
CONFERENCES
AMERICAN SOCIETY OF
PENSION PROFESSIONALS
& ACTUARIES
BOSTON
CINCINNATI
HILTON BACK BAY
NORTHERN KENTUCKY CONVENTION CENTER
JULY 14–15, 2016
NOV. 16–17, 2016
UPCOMING CONFERENCES
MAY 2016
May 19–20
ASPPA Regional
Conference: Philadelphia
Philadelphia, PA
JUNE 2016
June 6–9
Women Business
Leaders Forum
New Orleans, LA
JULY 2016
July 14–15
ASPPA Regional
Conference: Boston
Boston, MA
July 19–22
Western Benefits
Conference
Seattle, WA
AUGUST 2016
August 12–13
ACOPA Actuarial
Symposium
Chicago, IL
OCTOBER 2016
Oct. 23–26
ASPPA Annual
Conference
National Harbor, MD
NOVEMBER 2016
Nov. 16–17
ASPPA Regional
Conference: Cincinnati
Covington, KY
June 16–17
ASPPA Regional
Conference: Chicago
Chicago, IL
WWW.ASPPA-NET.ORG
7
REGULATORY/
LEGISLATIVE
UPDATE
Cross-Tested Plans in
the Crosshairs (Again)
A new proposal from the Treasury Department is a step
in the wrong direction — and needs to be rejected.
BY BRIAN H. GRAFF
S
mall business retirement
plans are again under
attack. Buried in a Treasury
Department proposal to
make it easier for large
corporations to close their
defined benefit plans to new
entrants is a provision that will make
it harder for small businesses to form
new retirement plans or maintain
their current ones.
The proposal imposes a
new “reasonable classification”
requirement on highly compensated
employee rate groups that will make
it significantly harder for plans that
allocate these rate groups on an
individual or specific basis to pass the
general nondiscrimination test used
for cross-tested defined contribution
plans under Section 401(a)(4) of the
Internal Revenue Code.
There are major problems
with this new requirement.
First, determining “reasonable
classification” is inherently a
subjective process based on the facts
and circumstances of each business in
question. This subjective test removes
the objective purely numerical
nondiscrimination testing regime
that has been in place for more than
two decades. The result is to increase
the uncertainty and complexity of an
already complicated process.
Second, the new requirement
unfairly burdens small businesses
because they will likely have very
small rate groups. So Treasury is in
essence forcing small businesses to
test on a ratio percentage basis rather
than an average benefits basis, which
8
would impose new costs on the small
businesses that have these plans and
scare away small businesses that are
considering adopting these plans.
These cross-tested plans are
some of the most popular defined
contribution plan designs being
used today in the small plan market.
Needlessly damaging this effective
plan design ultimately hurts the rankand-file employees who have access
to these plans. Remember, rank and
file workers enjoy meaningful benefits
under the current nondiscrimination
rules — which have been in place
for more than 10 years — since
cross-tested plans need to satisfy the
minimum allocation gateway rules.
The gateway allocation rules
require that non-highly compensated
employees get an annual contribution
of 5% of pay in a defined contribution
plan (or one-third of the allocation rate
of highly compensated employees).
Additionally, if a company has a
defined benefit plan in combination
with a defined contribution plan,
this minimum rate increases on a
sliding scale up to 7.5% of pay (also
depending on the allocation rate
of highly compensated employees).
Therefore, rank-and-file workers
get more employer cash under these
widely used arrangements — which
are now seriously at risk — than they
do under the common safe harbor
plan designs that are not subject to
nondiscrimination testing.
The Treasury proposal flies in the
face of the Obama administration’s
effort to increase retirement plan
coverage in the private sector
workforce. It’s jarring that this
proposal was unveiled the very same
week that the Obama administration
publicly came out in support of
another proposal to open up private
multiple employer plans to any
unrelated employer, ostensibly
to encourage small businesses to
adopt retirement plans and increase
retirement plan coverage in the
private workforce.
As the Obama administration
notes, millions of private sector
workers do not have access to a
retirement savings plans provided
through the workplace. And
moderate-income workers without
access to a workplace based retirement
savings plan rarely save for retirement.
Small businesses employ many of
these workers.
We need to do everything we
can to increase access to retirement
plans at work, especially among small
businesses. The Treasury proposal is
a classic case of the left hand of the
federal government not knowing
what the right hand is doing. This
proposal is a step in the wrong
direction — and needs to be rejected.
Brian H. Graff, Esq., APM, is the
executive director of ASPPA.
THE
2016
ERISA
OUTLINE BOOK
Print & Online Editions Available
Sal L. Tripodi, J.D., LL.M.
www.asppa.org/EOB
800.308.6714
WWW.ASPPA-NET.ORG
9
LEGISLATIVE
Year-End Tax
and Spending Bill
Has Retirement
Implications
H.R. 2029 affects IRAs, church plans and more.
O
n Dec. 18, 2015, President Obama signed into law
H.R. 2029, a massive year-end spending and tax
bill containing a number of provisions affecting
health and retirement plans.
H.R. 2029 includes both an omnibus
appropriations bill that funds the government
through Sept. 30, 2016 (the Consolidated
Appropriations Act, 2016, or “CAA”) and an
“extender” (in some cases, a permanent one)
of a large number of expiring or expired tax
incentives (the Protecting Americans from Tax
Hikes Act of 2015, or “PATH Act”). While most
employers have probably focused on aspects like
the legislation’s two-year delay of the high-cost
employer-sponsored health coverage excise tax
(a.k.a. the “Cadillac tax”), H.R. 2029 also includes
the following retirement-related provisions.
CHARITABLE DISTRIBUTIONS FROM IRAs
The PATH Act permanently extends the ability
of individuals at least 70½ years of age to exclude
from gross income qualified charitable distributions
from IRAs, effective for 2015 and later years.
However, that exclusion may not exceed $100,000
per taxpayer in any tax year.
10
CHURCH PLAN CHANGES
The PATH Act includes a long-pending package of
church plan changes, including:
• a provision that the IRS cannot aggregate certain church
plans together for purposes of the nondiscrimination rules;
• flexibility for church plans to choose other church plans
with which they associate;
• prevention of certain grandfathered church defined benefit
plans from having to meet certain requirements relating to
maximum benefit accruals;
• allowing defined contribution church plans to offer
automatic enrollment;
• streamlining the rules for merging and reorganizing
church plans; and
• allowing church plans to invest in 81-100 collective trusts.
ROLLOVERS TO SIMPLE IRAs
The PATH Act allows participants to roll over their
accounts from an employer sponsored retirement plan to a
SIMPLE IRA, provided the participant’s SIMPLE IRA is
at least two years old. Previously, SIMPLE IRAs were not
permitted to accept such rollovers at all.
The PATH
Act includes
a longpending
package of
church plan
changes.”
EXTENDED EARLY
WITHDRAWAL RELIEF FOR
PUBLIC SAFETY OFFICERS
should make U.S. real estate
investments more attractive to nonU.S. pension plans.
The PATH act extends the current
relief from the 10% penalty on early
withdrawals from retirement plans and
accounts for qualified public safety
employees to include nuclear materials
couriers, U.S. Capitol Police, Supreme
Court Police, and diplomatic security
special agents of the State Department
for withdrawals made after 2015.
FOREIGN INVESTMENT IN
REAL PROPERTY TAX ACT
(FIRPTA)
The PATH Act adds an
exemption to withholding under
FIRPTA for the disposition of
U.S. real property held directly (or
indirectly through one or more
partnerships) by certain foreign
pension funds and made after
enactment. This new exemption
The ASPPA History Site
is Now Online
AIRLINE EMPLOYEE IRA
ROLLOVERS
The PATH Act corrects an
effective date problem affecting
rollovers to IRAs of amounts received
by qualified airline employees as a
result of certain airline bankruptcies.
Those distributions generally may
be rolled over within 180 days of
receipt or, if later, within 180 days of
the Dec. 18, 2014 enactment of the
changes.
FILING OF WAGE
REPORTING FORMS
Beginning with the 2017 tax year,
Forms W-2, W-3 and 1099-MISC
must be provided no later than Jan. 31
of the year following the calendar year
to which the tax return applies.
A new website dedicated to ASPPA’s rich history at the
forefront of the retirement industry is now online!
asppa50.org
Featuring videos, photos from the ASPPA archives and documents from past presidents, members and other sources,
the ASPPA history website celebrates our contributions to the pension and retirement industry and the actuarial
profession – and the people who made it all happen. It’s designed to complement the ASPPA history book currently in
progress, and includes photos and documents uncovered in the course of researching, writing and editing the book.
Photos from ASPPA Annual
Conferences going back to the 1974
conference, held a month after ERISA
was signed into law, and more.
Documents from the ASPPA archives
and other sources, including the 1966
certificate of incorporation, ASPPA
Presidents’ speeches, scripts of tributes
to Chet Salkind and Ed Burrows, articles
from The Pension Actuary by prominent
leaders of the past, and more.
Videos starting with ones marking
ASPPA’s 25th anniversary in 1991
(and featuring founder Harry T.
Eidson) and previewing this year’s
50th anniversary celebration.
You’ll also find a little background on the work-in-progress ASPPA history book, Leading the Evolution: ASPPA’s 50 Years at
the Forefront of the Retirement Industry, coming in October.
Check it all out at asppa50.org/, or click on “ASPPA History” in the “About” section of the ASPPA Net nav bar.
WWW.ASPPA-NET.ORG
11
COMPLIANCE
A Fresh Look at
After-Tax Contributions
Like they say, what’s old is new again.
BY KELSEY N.H. MAYO AND KELLY MARIE HURD
T
12
hese days, most of the attention on post-tax
contributions is focused on Roth contributions.
Newer consultants in our industry may never have
heard of (or certainly never worked with) traditional
after-tax contributions. However, traditional aftertax contributions have started to get a bit more
attention recently.
In this article, we will review the renewed
interest in after-tax contributions and the types of
taxable contributions before discussing the pros and
cons of after-tax contributions and closing with
strategies for using after-tax contributions.
RENEWED INTEREST IN
AFTER-TAX CONTRIBUTIONS
Part of the recent interest in
after-tax contributions comes
from IRS Notice 2014-54, which
offered guidance on the processing
of distributions from retirement
plans. This guidance made it easier
to continue the advantageous tax
treatment of after-tax contributions.
In short, the IRS has rules concerning
distributions, including that each
distribution is a proportionate share of
the participant’s pre-tax and aftertax amounts and the entire amount
distributed at any one time is a single
distribution. This single distribution
rule led to confusion about how to
roll over a distribution that was a mix
of pre- and post-tax amounts. Notice
2014-54 made it clear that the aftertax portion of the distribution could
be rolled into a Roth IRA and the
taxable portion could be rolled into a
traditional IRA.
Secondly, and perhaps more
importantly, the recent addition of
in-plan Roth conversions has led
to a renewed interest in after-tax
contributions. With this option,
introduced in the 2012 “fiscal
cliff” legislation, non-Roth funds
(including after-tax contributions)
may be converted into Roth funds
within the plan. As discussed below,
this results in significantly more
favorable tax treatment for the
converted after-tax contributions.
TAXABLE CONTRIBUTIONS
As a brief review, there are two
types of taxable contributions that
employees can make to retirement
plans. The newest and most common
of these, as we are now familiar,
are Roth contributions. Roth
contributions were allowed into
401(k) and 403(b) plans starting
Jan. 1, 2006. Although Roth IRAs
are widely available, a Roth feature
in the qualified plan is often more
advantageous because the qualified
plan permits more Roth contributions
than a Roth IRA. The maximum
Roth IRA contribution is $5,500
in 2016 ($6,500 with catch-up if at
least age 50), whereas the maximum
Roth deferral to a qualified plan is
$18,000 ($24,000 with catch-up if at
least age 50). In addition, Roth IRAs
are not available to high-income
earners (for 2016, individuals who
earn over $132,000 or joint filers over
$194,000), but there is no income
limit for a Roth feature in a qualified
plan.
There also are the seemingly
ancient after-tax contributions
(also known as voluntary
employee contributions or posttax contributions). These after-tax
contributions were developed as a way
for employees to make contributions to
employer sponsored retirement plans
from their paychecks and predate the
current 401(k) regulations.
Like Roth contributions, aftertax contributions are included in the
employee’s taxable income when
deferred into the plan, and the
amount will grow with investment
gains without taxation. The
difference between Roth and aftertax contributions lies at the time
of distribution. In either case, the
original contribution, or basis, is not
taxed when distributed from the plan.
However, the investment earnings on
after-tax contributions are taxed as
ordinary income, while investment
earnings on Roth contributions are
distributed tax-free (assuming it is a
qualified distribution).
Consider the following example:
An employee defers $10,000 in
after-tax contributions. That
$10,000 is included in the employee’s
ordinary income. That amount
grows to $50,000 by the time that
employee retires. The $10,000
basis is not taxable. However, the
$40,000 investment gain is included
as ordinary income with any and
all distributions from the plan. If
that contribution had been a Roth
contribution instead of an after-tax
contribution, the entire amount could
be distributed tax-free (assuming the
Roth rules for a qualified distribution
are met).
The math underlying this
scenario is provided in Table 1. As it
illustrates, an employee might end up
paying five times more in taxes with
the after-tax contribution — $15,000
in taxes vs. $3,000. So one can clearly
see the advantage of using Roth
contributions to reduce taxation.
TABLE 1: ROTH VS. AFTER-TAX CONTRIBUTIONS
After-tax Contribution
Roth Contribution
Contribution
$10,000
$10,000
Tax on Contribution
$3,000
$3,000
Total Initial Investment
$13,000
$13,000
Investment Gains
$40,000
$40,000
Tax on Investment
Gains
$12,000
$0
Net Distribution at
Retirement
$38,000
$50,000
Total Tax Paid
$15,000
$3,000
WWW.ASPPA-NET.ORG
13
THE ADVANTAGES OF AFTERTAX CONTRIBUTIONS
THE DISADVANTAGES OF
For starters, after-tax
contributions are not subject to
the Code Section 402(g) limit.
Participants may contribute the
maximum elective deferrals ($18,000
+ $6,000 catch-up in 2016) plus aftertax contributions above that amount,
only subject to the Section 415 limits.
This allows participants who are able
to defer income to save significantly
more each year. An example is
illustrated in Table 2.
Allowing for after-tax
contributions in a plan also opens
up the option of recharacterizing
contributions in a testing failure
situation. In this situation, pretax elective deferrals, which are
generally included on the ADP test,
may be recharacterized as after-tax
contributions, which are included
on the ACP test, to allow a plan to
improve testing results.
A consultant who is familiar with
after-tax contributions might be able
to use these strategies to help clients
find the best solution for retirement
savings and/or keep a plan in the best
testing position possible.
Naturally, there are also
disadvantages to using after-tax
contributions. The ACP test applies to
after-tax contributions and is required
even if the plan is safe harbor and
would not otherwise be subject to
testing. Because of the less favorable
taxation associated with the after-tax
contributions, participants will likely
be less likely to utilize the after-tax
feature (particularly if a Roth option
is also available under the plan).
Therefore, it is likely that only HCEs
may take advantage of the after-tax
feature in order to defer more than
the limits on standard pre-tax and
Roth contributions. With low or no
NHCE participation and significant
HCE participation, the after-tax
feature is often destined to result in a
testing failure.
Consider a plan with an HCE
deferring the maximum $18,000
with a $10,600 match (and no aftertax contributions), the HCE has a
total annual contribution of $28,600
and an ACR of 4%. As shown in
Table 3, if that HCE contributed
enough after-tax contributions to
TABLE 2: THE ADVANTAGES OF
14
After-tax Permitted
Not Permitted
Pre-tax Deferrals
$8,000
$8,000
Roth Deferrals
$10,000
$10,000
Matching Contribution
$7,000
$7,000
After-tax Contribution
$28,000
$0
Total Contributions
$53,000
$25,000
Investment Gains
$212,000
$100,000
Total Account at
Retirement
$265,000
$125,000
If the in-plan
Roth conversion
is not an option,
consider an
in-service
distribution and
a rollover.”
meet the $53,000 Section 415 limit,
an additional $24,400 contribution,
her ACR would increase to 13.21%.
Assuming a NHCE ACP of 4% (safe
harbor matching formula) we can
predict a potential refund of $19,100
to the HCE, because she would be
maxed out at a 6% ACP contribution
rate to pass testing.
ACP TESTING STRATEGIES
While each situation is unique,
there are a few strategies to consider.
For starters, encouraging the NHCEs
to participate through communication
and even not providing a Roth
feature may improve testing results.
One might also consider the toppaid group election, which might,
with the right demographics, bump
some of individuals who would
otherwise be HCEs (and who might
be participating in the after-tax
feature) into the NHCE testing group
and improve testing results. Also,
limits could be placed on the after-tax
contributions administratively, such
as by projecting and communicating
a permissible limit based on current
trends or prior year testing, which
might help to reduce or avoid large
refunds after year end.
With low or no NHCE participation and
significant HCE participation, the aftertax feature is often destined to result in a
testing failure.”
TABLE 3: AFTER-TAX CONTRIBUTIONS’
IMPACT ON ACR
Compensation
Deferral
Match
After-tax
Total
ACR
$265,000
$18,000
$10,600
$0
$28,600
4.00%
$265,000
$18,000
$10,600
$24,400
$53,000
13.21%
ADDITIONAL STRATEGIES
FOR USING AFTER-TAX
CONTRIBUTIONS
If a plan can overcome the
obstacles to using after-tax
contributions, participants can
contribute a significant amount of
money to the plan. However, they are
still confronted with the less favorable
taxation associated with after-tax
contributions. One option, of course,
is to simply do nothing, and accept
that taxation is what it is. However,
consultants may be able to add value
by suggesting strategies to improve
the tax result.
First, an in-plan Roth conversion
may be attractive. In a Roth
conversion, the amount converted
to Roth is taxed to the participant
as though it were a distribution, and
the future investment earnings on
that amount are not taxed (assuming
the distribution is a qualified
Roth distribution). When aftertax contributions are converted to
Roth, those amounts are not taxable
to the participant. Therefore, the
participant is able to convert aftertax contributions to Roth at no
additional cost and reap benefits of the
significantly better tax treatment on
subsequent earnings.
If the in-plan Roth conversion
is not an option, consider an inservice distribution and a rollover.
A participant can defer an after-tax
amount and quickly take an inservice distribution which is rolled
into a Roth IRA. At that point, there
would not be any significant taxable
earnings, and the future earnings
would grow tax free in the Roth
IRA.
In conclusion, although there
are significant obstacles in using
after-tax contributions, a consultant
who is familiar with after-tax
contributions might add significant
value by identifying the clients that
can use these strategies to maximize
retirement savings.
Kelsey N.H. Mayo, J.D., is a
partner with Poyner Spruill
LLP, a law firm based in
North Carolina. She
routinely represents clients before the
IRS and DOL and has extensive
experience in virtually all aspects of
qualified plans, welfare plans, fringe
benefit plans, and executive
compensation arrangements.
Kelly Marie Hurd, ERPA,
CPC, QPA, QKA, is a senior
retirement plan consultant
and team leader for DWC
ERISA Consultants, LLC, based in
North Carolina. She works with a
broad range of qualified plans and has
a passion for helping clients optimize
their plans to meet their retirement
goals.
WWW.ASPPA-NET.ORG
15
ACTUARIAL
Coping with the
Changes to ASOP 35
The calendar year 2015 cycle is the first one subject to the revised
ASOP 35 principles. Are you up to speed?
BY WILLIAM G. KARBON
16
W
e are now at that time of year when pension actuaries focus
on providing services to clients with calendar plan/fiscal
years. In doing so, an actuary needs to be aware of the
revised principles now imposed by the Actuarial Standard
of Practice (ASOP) No. 35, Selection of Demographic and
Other Noneconomic Assumptions for Measuring Pension
Obligations.
ASOP 35 affects the selection of demographic
assumptions such as retirement, termination of
employment, mortality and mortality improvement,
disability and disability recovery and the election of
optional forms of benefits.
To provide some history, in September 2013, the
Actuarial Standards Board (ASB) issued an exposure draft
of ASOP No. 35. Following comments on this exposure
draft, the ASB issued the final revision of ASOP 35 during
their September 2014 meeting.
The final revision to ASOP 35 is effective for any
actuarial work product with a measurement date on or after
June 30, 2015, which means that 2015 is the first calendar
year cycle subject to the revised ASOP 35 principles.
SIGNIFICANT CHANGES
The most significant revisions to
ASOP 35 address the following:
• The guidelines for a reasonable
assumption are now consistent with
the guidelines contained in ASOP
27, Selection of Economic Assumptions
for Measuring Pension Obligations.
• The requirement to disclose the
rationale for the demographic
assumption selection.
CONSISTENCY WITH ASOP 27
Section 3.3.5 of ASOP 35, which
addresses the selection of a reasonable
assumption, is now consistent with
ASOP 27. Under this section, an
assumption is reasonable if it has the
following characteristics:
• It is appropriate for the purpose of
the measurement.
• It reflects the actuary’s professional
judgment.
• It takes into account historical and
current demographic data that is
relevant as of the measurement
date.
• It reflects the actuary’s estimate of
future experience, the actuary’s
observation of the estimates
inherent in market data (if any) or a
combination thereof.
• It has no significant bias (i.e., it
is not significantly optimistic
or pessimistic), except when
provisions for adverse deviation or
plan provisions that are difficult
to measure are included or when
alternative assumptions are used for
the assessment of risk.
In selecting assumptions, the
actuary needs to ensure that the
combined effect of all nonprescribed
assumptions selected by the actuary
(both demographic and economic
assumptions) are reasonable.
DISCLOSING RATIONALE FOR
ASSUMPTION SELECTION
In an effort to create greater
transparency, the ASB has imposed
more robust communication standards
with respect to the selection of
demographic actuarial assumptions.
Section 4.12 of ASOP 35 details
the new requirements for disclosing
the rationale used in demographic
assumption selection:
The actuary should disclose the
information and analysis used in
selecting each demographic assumption
that has a significant effect on the
measurement. The disclosure may be
brief but should be pertinent to the
plan’s circumstances. For example,
the actuary may disclose any specific
approaches used, sources of external
advice, and how past experience and
future expectations were considered. The
disclosure may reference any actuarial
experience report or study performed,
including the date of the report or
study. This section is not applicable to
prescribed assumptions or methods set by
another party or prescribed assumptions
or methods set by law.
Furthermore, the actuary should
include an assumption as to expected
mortality improvement after the
measurement date. This assumption
should be disclosed even if the actuary
concludes that an assumption of zero
future improvement is reasonable.
The new disclosure requirements
imposed by ASOP 35 are only
imposed on assumptions that
have a significant impact on the
measurement. An assumption
would have a significant impact
on a measurement if its omission
or misstatement could influence a
decision of the intended user. If there
is doubt as to the significance of an
assumption, it would be prudent to
treat it as significant in order to avoid
any questions regarding transparency.
Though the ASOP has always
required the disclosure of the
rationale for assumption changes,
the actuary should refer to Section
4.13 of the ASOP regarding the
communication of any changes in
assumptions. In communicating
assumption changes:
• The actuary should disclose
any changes in the significant
demographic assumptions from
those previously used for the same
The ASB has
imposed
more robust
communication
standards with
respect to the
selection of
demographic
actuarial
assumptions.”
type of measurement. The general
effects of the changes should be
disclosed in words or by numerical
data, as appropriate.
• If the assumption is not a prescribed
assumption, a method set by
another party or a method set by
law, then the actuary should include
an explanation of the information
and analysis that led to the change.
• The disclosure may be brief, but
it should be pertinent to the plan’s
circumstances and may reference
any actuarial experience report or
study performed.
EXAMPLE
The normal retirement age for the
XYZ Pension Plan is age 65. The plan
also provides for early retirement after
attainment of age 62 with 20 years of
service. The early retirement benefit
is the accrued benefit reduced 2% for
each year the early retirement age
precedes the normal retirement age.
Furthermore, the employer provides
post-retirement medical benefits from
the time that participants reach early
retirement age until they become
eligible for Medicare.
The actuary assumes the
following retirement probabilities:
Age 62 Age 63
Age 64
Age 65
30%
20%
10%
100%
WWW.ASPPA-NET.ORG
17
How does the actuary disclose
the rationale for this assumption as
required by Section 4.12 of ASOP 35?
If the plan is large and the
retirement rate assumption is based
on a recent experience study, then the
actuary should disclose the date of
the experience study and the fact that
the assumption is based on the results
of the experience study. Absent an
experience study, the actuary could
state that professional judgment was
used to set the retirement probability
assumption. The judgment should
be based on the plan design, the
availability of income from social
programs such as Social Security and
other post-retirement benefits that are
available to the retiree.
The actuary may also disclose the
sources of any external advice and
how past and future experience was
considered.
A sample rationale for this
assumption for a small plan could be
as follows:
Professional judgment was used to
develop the retirement probabilities. It
is anticipated that the highest rate of
retirement will occur at the point that the
early retirement benefit has the greatest
actuarial value and medical benefits are
available to the retiree. It is anticipated
that the retirement rates will decline
until full normal retirement benefits are
provided by the plan.
SHARING THE CHALLENGE
As we move forward to comply
with the revised ASOP 35 principles,
ACOPA members are encouraged to
share their rationales for assumption
selection on the ACOPA listserv.
Sharing the challenges of meeting
the revised ASOP 35 principles as
we work on plans of varying size,
plan design and type of plan sponsors
would be a benefit to all ACOPA
members.
Bill Karbon, MSPA, CPC,
QPA, is a senior vice
president, director of
compliance with CBIZ
Benefits & Insurance Services, Inc. in
Lawrenceville, N.J. He currently serves
as the 2015-2016 executive vice
president of the ASPPA College of
Pension Actuaries (ACOPA).
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19
LEGAL
What’s Next for
Pre-approved
Plan Documents?
A look at five key factors that will affect the process going forward.
BY DAVID N. LEVINE
P
20
lan consultants play many roles for their clients. A core service is helping
them with the design of their plans and implementation with their third-party
administrators and recordkeepers of their choice. As anyone who has ever dealt
with design and implementation can attest, it can seem easy but can be full of
pitfalls. Each year that passes, the pre-approved plan process gets more and more
complex. Why is this the case? A few of the reasons are:
• The IRS is exiting the world of individually designed plan determination
letters and is encouraging plan sponsors to move to pre-approved plan
documents, driving more complex plans into this world.
• In many cases, pre-approved plan documents are a low-margin business where
recordkeepers are already pressed on their margins, thus creating a significant
need for plan consultant advice.
• Progressive features, such as automatic enrollment and automatic increase,
require significant coordination between sponsors, payroll systems providers,
recordkeepers and TPAs — which can lead to significant liabilities.
• Litigation continues to spread across the retirement landscape.
• Open multiple employer plans hold the potential to add a whole new layer of
complexity to pre-approved plans.
Let’s walk through each of these items.
END OF THE IRS
DETERMINATION LETTER
PROGRAM
Over the past year, the IRS has
been discussing and increasingly
laying out its plan to eliminate
the individually designed plan
determination letter process. A key
portion of this discussion has been the
IRS’ efforts to encourage sponsors of
individually designed plans to preapproved plan documents. Although
a majority of plans are already using
pre-approved plans, the decision to
transition potentially more complex
plans from individually designed
plans to pre-approved plans presents
significant risks. Recognizing
that adoption agreements are
often long, complex documents,
carefully coordinating this transition
(including from one pre-approved
plan document to another) carries
significant risk of error and will
require great care.
BUSINESS REALITIES
RELATING TO PRE-APPROVED
PLAN DOCUMENTS
As the data show, the costs of
running a retirement plan continue
to decline — especially in the
area of TPA and recordkeeping
fees. One item that is often a
commoditized part of this process,
and frequently outsourced by TPAs
and recordkeepers, is the core preapproved plan document. With these
cost pressures, these documents,
while maintained diligently by many
providers (especially for Internal
Revenue Code compliance items as
part of the pre-approved plan process),
do not always contain the level of
detail in their fiduciary language
often seen in complex individually
designed plans. This distinction
means that it is more important than
ever, especially in a volume submitter
world, that fiduciaries be properly
identified in plan documents and that
additional fiduciary provisions, as
necessary, be considered for inclusion
in supplemental provisions addendums
as permitted under relevant preapproved plan documents.
Each year that
passes, the preapproved plan
process gets
more and more
complex.”
INCREASED USE OF
PROGRESSIVE FEATURES
A key retirement focus in recent
years has been to expand coverage
and contribution levels through
the use of automatic enrollment
and automatic increase features.
These features require significant
coordination between service
providers, often through a plan
consultant, and can definitely achieve
the coverage and contribution goals
of many plan sponsors. In a preapproved plan world, plan documents
are drafted to provide a wide range
of options, but reconciling elections
with payroll processes and legal notice
requirements holds the potential for
significant operational failures. For
example, employer payroll systems
may not always align with how the
adoption agreement provisions for a
pre-approved plan apply the timing
and manner of auto-escalation or
auto-enrollment.
MORE LITIGATION
Given the significant liabilities
that can result from inconsistencies
between plan documents and
plan operations, plan consultants
implementing pre-approved plan
documents will continue to face the
threat of additional claims for liability
when inevitable disconnects occur.
Although service agreement terms
and conditions may, in some cases,
limit a plan consultant’s potential
exposure, the continued focus on
errors will likely increase risk to plan
consultants and service providers.
OPEN MEPs
Open multiple employer plans
are on the horizon that hold the
potential to dramatically affect a
large user of pre-approved plans —
small employers. At first blush, one
would assume that open MEPs will
make utilizing pre-approved plans
easier. In some ways they will make
pre-approved plans easier because
many of the core options selected by
smaller employers will be selected by
default by an open MEP provider.
However, there are other challenges
that plan consultants will need to
work through with open MEPs. As
smaller employers outsource more of
their plan activities, it will be more
important than ever to ensure that
the features elected align with their
automated systems.
WHAT’S THE FUTURE HOLD?
Recognizing that there are
opportunities and challenges as
part of the increasing complexity of
pre-approved plans, where will the
pre-approved plan program itself be
headed?
A regular feature of IRS
presentations is that the IRS’
employee plans resources have
become extremely limited. The
individually designed determination
letter program was one of many
first casualties of these resource
limitations. However, pre-approved
plans may not be immune from the
reduced resources available to the
IRS as the years continue to pass. The
exact path forward is unclear, but it
is definitely clear that interaction and
resources from the IRS will continue
to wane.
Plan consultants will need to
be nimble and adapt to the complex
challenges ahead. The future for
many plan sponsors lies in preapproved plans, but strong guidance
from plan consultants will be more
necessary than ever.
David N. Levine is a
principal with the Groom
Law Group, Chartered, in
Washington, DC.
WWW.ASPPA-NET.ORG
21
RECORD
KEEPING
Key Issues in 403(b)
Plan Takeovers
A look at three important concepts: eligible employers,
ERISA exemptions and investment restrictions.
BY JOHN JEFFREY
22
I
n recent years, 403(b) plans have grown more similar
to 401(k) plans as a result of changes in the Internal
Revenue Code. However, it’s a faulty assumption to view
a 403(b) plan as just another tax deferred savings option.
The Code and ERISA still provide unique twists to
403(b) administration and plan design. While covering
all of them is beyond the scope of this article, we’ll focus
on three basic concepts relevant to every 403(b) new
business client: employer eligibility, ERISA exemptions
and investment restrictions.
EMPLOYER ELIGIBILITY
The Code defines the categories
of employers who may sponsor a
403(b) program. If an ineligible
employer offers a 403(b), its employees
are taxed on contributions and
earnings. Eligible employers1 include:
1.educational organizations of a state,
a political subdivision of a state or
its agency or instrumentality, and
2.charities qualifying under IRC
501(c)(3)
Employers in the first category
are relatively easy to identify.
They include state-sponsored
universities and colleges as well
as local public school districts. All
are educational organizations that
are instrumentalities of a state or a
political subdivision.
On the other hand, charities may
raise complications, including:
• Not all non-profit entities are
charities. The Code provides
tax exemption to numerous
organizations such as labor unions,
chambers of commerce, real estate
boards, fraternal organizations,
etc. These entities are exempt
from income tax, but they are
not charities as defined under
Code Section 501(c)(3). Generally,
a “charity” must be organized
exclusively for religious, charitable,
scientific, literary or educational
purposes. Other tax exempt entities
are not eligible to offer a 403(b).
For example, a golf course is
incorporated as a non-profit entity.
It may be exempt from income
taxation under Code Section 501(c)
(4). However, the entity does not
meet the Code Section 501(c)(3)
definition of a charity and is not
eligible to offer a 403(b) plan.
• Some governmental entities
may be charities. The IRS
has expanded the definition
of a charity to include certain
government-related entities with
charitable purposes. These entities
It’s a faulty
assumption to
view a 403(b)
plan as just
another tax
deferred savings
option. The Code
and ERISA still
provide unique
twists to 403(b)
administration
and plan design.”
may offer 403(b) programs. The
organization must be separate
from the government and may not
have regulatory or enforcement
authority. Examples include county
hospitals and libraries.
• For-profit subsidiaries
cannot offer 403(b) plans. A
taxable subsidiary of a 501(c)(3)
organization cannot offer a 403(b)
plan. A subsidiary that generates
nonrelated business income must
have its own “for-profit” plan, such
as a 401(k). For example, assume
that Hospital A owns Gift Shop
B, Inc., which generates unrelated
business income through the sale
of merchandise. The employees of
Gift Shop B cannot participate in
Hospital A’s 403(b) plan.
Practice Pointer: Your service
agreement should confirm the new
client’s eligibility to offer a 403(b).
If the client’s status is not clear, ask
for its 501(c)(3) determination letter.
Most nonprofit entities (other than
churches) have obtained an IRS
determination letter confirming their
tax exempt status. The letter will
identify whether the entity qualifies
for exempt status under Code Section
501(c)(3) or some other Code section.
ERISA EXEMPTIONS
Certain 403(b) plans are
exempt from ERISA. Sponsors of
these plans avoid many ERISAimposed obligations, including the
need to file Form 5500, large plan
audits, ERISA 404a-5 participant
disclosures, minimum age/service
requirements and vesting restrictions.
The following plans are exempt from
ERISA coverage:
• Government-sponsored 403(b)
plans. Congress excluded the
federal government, states, their
political subdivisions, agencies and
instrumentalities from ERISA.
This exemption is most frequently
used by state colleges, universities
or local school districts. Also, a
state- or county-affiliated hospital
may fall under this exemption. Each
is considered an instrumentality of
the state.
• Nonelecting church plans.
ERISA excludes retirement
plans established and maintained
by a church or church-related
organization. These employers
may opt in to ERISA coverage by
making a one-time irrevocable
election under the Code.2 All other
plans are exempt from ERISA and
appropriately referred to as “nonelecting” church plans.
• Minimal employer involvement
(“deferral-only plans”). ERISA
applies to retirement plans that are
“established or maintained” by an
employer. But does mere payroll
deduction constitute establishment
or maintenance of a plan? The
DOL has addressed this question
through a regulatory safe harbor.3 A
plan is exempt from ERISA if all of
the following criteria are met:
1 I n addition to these two categories, the Code includes a special category for religious ministers. They may defer income under section 403(b) regardless of whether their
church sponsors a 403(b) program.
2 IRC §410(d).
3 DOL Reg. §2510.3-2(f ).
WWW.ASPPA-NET.ORG
23
• Deferral only: The plan cannot
have a company match or
nonelective contribution,
direct or indirect. Match
contributions to a separate
401(a) plan causes the 403(b)
plan to lose safe harbor status.
• Totally voluntary: Employees
must be able to opt out of
participation.
• Participant enforcement rights:
All rights under an annuity
or custodial account must
be enforceable solely by the
employee.
• Limited employer control over
vendors: For administrative
ease, an employer may
designate a list of 403(b)
vendors from which employees
may choose. However, if the
employer limits employees to
a single vendor, it may lose the
safe harbor protection.
• Limited employer discretion:
The employer may not
exercise discretion over plan
operations such as hardships,
distributions, loans or QDRO
determinations. These
discretionary decisions must
reside with either the plan’s
investment vendor or thirdparty administrator.
If the plan fails to meet the above
criteria, it loses the presumption that
it is exempt from ERISA. However,
it does not automatically create an
ERISA plan. In that case, the employer
must prove it has not “established or
maintained” a plan based upon the
facts and circumstances surrounding
the employer’s involvement and plan
design.
Employers relying upon the
safe harbor should consider ERISA
implications any time they change
plan design or operation, but
especially when:
• adding a company match or nonelective contribution;
• moving the plan to a single
custodian/vendor; or
• assuming control over hardships,
distributions, loans and QDRO
determinations.
Keep in mind that the safe harbor
does not affect governmental and
non-electing church 403(b)s. These
plans are excluded from ERISA
coverage by a statutory exemption
based upon the status of the employer
(i.e., government entity or church)
and not the employer’s involvement in
the plan.
Practice Pointer: Your service
agreement should state whether the
plan is exempt from ERISA and if so,
the basis for the exemption. You should
inquire about the plan’s ERISA status
early in the new business process before
discussions ensue about plan changes.
If the plan relies upon the deferral-only
safe harbor, encourage the employer to
consult legal counsel if changing plan
design or operation. The employer
should understand the administrative
and legal implications of moving from a
non-ERISA plan to an ERISA plan.
Also, many service contracts require
the employer to determine eligibility
for distributions, hardships, loans and
QDROs. If the employer relies upon
the deferral-only safe harbor, either
you or some other third party (e.g., the
annuity provider) must assume this
responsibility.
INVESTMENT RESTRICTIONS
Three types of funding vehicles
may be offered in a 403(b) plan:
annuities, custodial accounts and
retirement income accounts. Each
funding arrangement comes with its
own considerations.
• Annuities. Annuities must be
offered by an insurance company
and may consist of either group or
individual annuity contracts. Four
questions should be top of mind:
• Do participants have control of the
transfer decision? Many annuity
contracts require participant
consent to liquidate. In that
case, unlike a 401(k) plan,
the employer cannot trigger
the liquidation and wholesale
transfer of plan assets. Each
participant has control. If the
participant doesn’t consent,
the annuity remains with
the insurance company. The
employer can prevent future
contributions to the annuity, but
it is still a plan asset.
• Do the terms of the annuity prohibit
transfer? Some annuity contracts
contain provisions requiring
liquidation over time. Even
if the participant intends to
transfer the proceeds to the
new vendor, the contract can
prevent it. For example, the
annuity may require transfers
to occur in installments over 10
years. Participants could transfer
one-tenth of the contract value
in Year 1, one-ninth in Year 2
and so on. The balance would
remain locked up with the
insurance company until the end
of the transfer period.
• Will “stranded contracts” require
an information sharing agreement?
Whether the participant or
the annuity terms prevent
liquidation and transfer, the
result is the same. The annuity
is left behind with the original
insurer. Unless it falls within an
exception, the annuity is a plan
asset requiring administration
and an “information sharing
agreement.”4 The agreement
establishes procedures for
sharing information between
the employer and the insurer
related to employment status,
distributions, loans and tax
reporting obligations. Often it
will designate the new vendor
as the party to coordinate this
information.
• Are there surrender charges?
Annuity contracts may have
charges triggered upon
liquidation of the contract.
4 I RS Rev. Proc. 2007-71 provides exceptions to the information sharing agreement requirement. Generally, the exception applies to annuity contracts that have not
received contributions since Jan. 1, 2005, and to certain other contracts issued between Jan. 1, 2005 and Jan. 1, 2009.
24
The amount and triggering
events changes will vary and
are included in the contract
language. Often the charge will
be a percentage of contract value
and will trail off over time. For
example, the charge may be 7% in
Year 1 and lessen by a percentage
point over the next 7 years.
Practice Pointer: You should
inquire about the existence of
annuity contracts early in the new
business process. If they exist,
encourage the employer to pose
written questions to the insurer
regarding the ability to transfer
plan assets, the need for participant
consent, the restrictions on transfers
and surrender charges, if any. Upon
request, many insurers will estimate
the surrender charges prior to actual
liquidation of the contract.
Do not suggest methods to avoid a
surrender charge. Often, contracts
will have complex provisions,
including “look-back” periods
designed to prevent participant
end-runs. You may think that
you understand the exceptions to
the charge, only to be surprised at
the time of transfer. Leave contract
interpretation to the insurer or the
plan’s attorney.
If annuities require individual
participant consent to transfer,
then obtain information regarding
surrender charges, distribution
forms and transfer procedures from
the insurer. Making the transfer
more understandable and easier for
participants will limit the number of
“stranded” contracts.
Identify which non-transferable
contracts may require an information
sharing agreement. Consider the
added costs and logistics of handling
the “stranded” contracts and
price accordingly in your service
agreement.
• Custodial Accounts. The
Code allows a 403(b) plan to use
a custodial account similar to a
401(k) trust account if the plan
only invests in registered mutual
funds. This requirement poses a
challenge when seeking a stable
value product, especially when
moving a plan from an annuity
to a custodial arrangement. The
annuity will often have a “fixed”
account with a stated rate of interest
and guaranteed principal. Unlike
in a 401(k) takeover, the custodial
account cannot use a stable value
fund as a replacement for the fixed
account. A stable value fund is a
collective trust, not a registered
mutual fund.
Some advisors may point out that
a 2011 Revenue Ruling5 permits
the use of collective trusts for 403(b)
custodial accounts. However, that
ruling requires the collective trust
to only invest in mutual funds. A
traditional stable value fund invests
in non-mutual fund assets such as
Guaranteed Investment Contracts
(GICs) and GICs with insurance
wrappers (synthetic GICs). Thus, it
is not permitted in a 403(b) custodial
account.
• Retirement Income Accounts.
Retirement income accounts may
only be offered by church plans.
The account must be maintained
pursuant to a separate plan stating
that it intends to constitute an
income retirement account.
The account is not subject to
the restrictions of an annuity or
custodial account. For example,
unlike a custodial account, the
income retirement account may
invest in assets other than registered
mutual funds. In addition, the
employer may commingle the
retirement income account in a
common fund with other church
assets so long as there is a separate
accounting and the fund is used
solely for benefit payments.
Practice Pointer: Some 403(b)
prototype-like documents may have
language addressing a church plan
with a retirement income account.
Nevertheless, because of its unique
nature, encourage attorney review of
the plan document and investment
line up to assure the plan’s continued
ERISA exemption and Code
compliance.
CONCLUSION
Practice Pointer: Custodial
accounts may need to offer a
money market fund as the plan’s
stable value investment alternative.
However, a money market fund will
have lower returns than most fixed
accounts.
In the alternative, the plan could
use a fixed annuity for the stable
value investment alternative. The
balance of the account would use
mutual funds in a custodial account.
Logistics in participant trading may
be an issue, but some insurance
companies have addressed the
problem by designing a stable value
annuity that trades similar to a
stable value fund.
Employer eligibility, ERISA
exemption and investment restrictions
are three of the many issues that
remain unique to 403(b) plans.
Having a general understanding of
these areas will avoid surprises for
the employer and assure a smoother
transition for your new business
403(b) client.
John Jeffrey is the corporate
counsel for Alerus Retirement
Solutions, a division of
Alerus Financial, N.A. As a
national bank, Alerus provides trustee
and custodial services, record keeping
and third party administration to plans
nationwide.
5 Rev. Rul. 2011-1.
WWW.ASPPA-NET.ORG
25
FEATURE
Plan Takeovers and Conversions:
Pitfalls and Pointers (Part 2)
Editor’s note: This is the second of a two-part series of feature
articles. Part 1 was published in the Winter 2016 issue.
BY ROBERT E. (BOB) MEYER, JR.
O
ne of the certainties in the life of every plan is
a change in providers, whether an investment
advisor, custodian, recordkeeper or TPA. The
purpose of this two-part article is to provide guidelines for
TPAs going through the lengthy and detailed process of
working with plan sponsors to effect a seamless transition.
In Part 1 of this series, we looked at the takeover
process in terms of the TPA communicating with the
sponsor and investment advisor and requesting the legal
document, participant indicative information and plan
financial records. In Part 2, we will examine how having
this information plays out in the “life cycle” of a plan
takeover.
There are three stages in the life cycle of a takeover:
remote preparation, proximate preparation, and immediate
preparation.
REMOTE PREPARATION
Remote preparation begins when
the plan sponsor has committed to
migrate the plan to a new provider.
A good sign that the work is about to
begin is the receipt of all the service
agreements and fee schedules. The
TPA makes the initial request for legal
documents, census information and
plan records.
In this stage, many other
important questions and issues have to
be resolved, even as the information
requests are being made and followed
up on. The sponsor, investment
advisor and existing service providers
must understand their roles in the
transfer of the plan and know the
answers to a number of questions,
including the following:
1. Is everyone in agreement on the
transfer date?
2. Have the prior providers (TPA
and custodian) been notified?
3. What are the old TPA’s fees for a
plan deconversion and how will
they be paid?
4. Are there any issues with specific
investments, such as guaranteed
investment contracts or stable
value funds, that might affect the
transfer of the plan?
5. Does the prior custodian have a
time standard, such as 45 or 60
days from date of notification,
that will affect when the plan can
be transferred?
6. If a blackout is necessary, when
will the blackout period start and
end?
7. Who will be responsible for
drafting and distributing the
notice?
8. Will the assets be liquidated or
transferred in-kind?
9. Will holdings be “mapped” from
one fund to another or invested
according to investment elections
set by the participant?
10. What is the lag time between the
final liquidation of the assets and
the wire transfer of the proceeds?
11. When will the final records be
provided and to whom?
12. If there are any assets to be
It could be
a daunting
task to get
the records
and reports,
especially if
the relationship
of the TPA
with the plan
sponsor is
strained.”
transferred in-kind, what forms
need to be executed and by
whom?
13. In the case of a transfer at or
near the end of a plan year, who
will perform recordkeeping and
compliance services?
Successful takeovers require
a good working relationship with
the prior TPA. Knowing who
is providing recordkeeping and
compliance services can make the
takeover simpler. As the takeover
specialists grow in their experience,
they get a feel for the quality of data
provided from the various vendors,
and this knowledge assists in the
budgeting of time for the takeover
and how it affects scheduling other
takeovers that are in the pipeline.
With every new takeover project, the
TPA should be given the information
on who currently holds the assets and
who is performing recordkeeping and
compliance services.
It is important for the successor
TPA to know how the conversion
data will be given to them. Ideally,
the existing TPA can produce a test
file with all the data that will be
provided when the transfer occurs.
Many providers will do so at no
charge to the plan sponsor, and will
disclose it in their deconversion
agreements. If it is possible for the
information to be sent electronically,
the test data should include a map of
the files that are sent.
Very seldom will the existing
provider not be able to generate and
send electronic records; however,
there are still some that will only
produce hard copy reports. If the
TPA designate knows this sooner
rather than later, then necessary
modifications to the schedule can be
made with a minimum of dislocation
and stress. If necessary, the sponsor,
RIA and other interested parties
should discuss any changes to the
takeover schedule and negotiate fee
alterations due to this situation.
It could be a daunting task to get
the records and reports, especially
if the relationship of the TPA with
the plan sponsor is strained, but
most TPAs are willing to assist their
successors, as they may have to come
looking for information from them on
a takeover going the other way.
A valuable benefit that can be
realized from a working relationship
with the existing TPA is obtaining
the previous year’s valuation reports.
By comparing the census information
in them to the census information
given by the plan sponsor, terminated
participants who still have plan
balances can be identified earlier in
the takeover process.
Special difficulties are
encountered when the plan has
outside brokerage accounts (often
referred to as the “brokerage
window”) as part of its investment
lineup:
1. There is no possibility of
obtaining these reports in a single
electronic or hard copy file.
2. All of the individual brokerage
statements from the beginning of
the plan year have to be obtained,
and the TPA is charged with
reconstructing the plan year
for each participant and each
brokerage account they have.
3. The brokerage statements do
not report activity and balances
in each source of funding. It is
imperative, then, that the new
TPA receives not only all of
WWW.ASPPA-NET.ORG
27
Knowing what the sponsor knows
about the plan is crucial to reduce
the stress and anxiety that goes
along with any change.”
the brokerage statements, but
also the following information
so that accurate records will be
established and maintained.
Overcoming these difficulties
requires the following:
1. The prior year-end valuation
report in order to establish the
beginning balances for each
participant in each source.
2. A reconciliation of the balances
reported on the year-end
brokerage statements to the value
reported on the valuation report,
to account for any receivables or
payables due at year end.
3. A report from the plan sponsor that
details all the contributions and
distributions made in the current
plan year for each participant and
each source of money.
All the parties involved in
the asset transfer will also need to
understand how this affects the timing
of the takeover and the fees that will
have to be charged. A takeover of
an individually directed brokerage
account cannot be automated — it
is a completely manual process, and
therefore requires additional time
and effort to complete. The blackout
notice may need to be modified,
as well as any fees quoted with the
takeover.
In addition to the information
the TPA can obtain from the sponsor
and prior providers, other sources can
provide valuable information helpful
for the takeover. The Department
of Labor’s EFAST website, with its
database of 5500 filings since 2009,
will have much valuable information
to assist the TPA in setting up the
plan on the new recordkeeping
system, such as the following:
28
1. The exact plan name.
2. The name, address and telephone
number of the plan sponsor.
3. The EIN of the plan sponsor.
4. The NAICS code (if required
for setting up the sponsor on the
system).
5. The 5500 filing number.
6. The effective date of the plan.
7. Plan characteristics.
8. Value of plan loans.
9. Large plan 5500 filings have
detailed information on the plan
through the supporting schedules.
10. Look for certain “inconsistencies”
in the filing, such as a small plan
filing a Schedule I (which would
indicate that there are unusual
assets held in the plan).
As noted in Part 1, the plan
sponsor or its payroll service also
should have indicative information.
It is a good idea to compare this
information against the records
supplied by the prior TPA; any
inconsistencies should be put before
the plan sponsor for resolution.
PROXIMATE PREPARATION
It is difficult to state exactly when
the period of proximate preparation
begins. A good estimate is when all
the agreements and schedules have
been set and requests for information
have been made.
As noted previously, the prior
provider of document services may
no longer support the document
because of the termination of services.
If this is the case, a restatement of
the document on the new provider’s
prototype or volume submitter
document would be required.
An excellent practice is to
review all of the provisions of the
existing document with the plan
sponsor in order to confirm their
understanding of the plan’s provisions
and to ascertain whether the plan is
being administered in the way the
document is written. This review can
be quite beneficial if the individual
designated by the plan sponsor for the
maintenance and reporting of payroll
records is not very comfortable with
retirement plan operation.
Occasionally, this individual
does not make the qualified plan
a priority in their duties, and may
actually be more comfortable dealing
with other employer benefits or
simply payroll processing. Another
situation frequently encountered
is the “revolving door” of plan
administrators designated by the
plan sponsor, each one having their
own understanding of qualified
plans. Over time, this can result in
disparities between the form of the
plan and its operation, including, but
not limited to, the following:
1. Failure to observe the
requirements for eligibility and
plan entry.
2. Inconsistency in the funding
frequency of employer
contributions (e.g., match
contributions being funded only
at year end, in violation of the
document’s provision that the
match be computed and funded
each pay period; similarly, if the
document requires a true-up
contribution for match at year
end, is the sponsor following this
requirement?).
3. Failure to apply the requirements
for receiving an allocation of
profit sharing contributions.
4. Not following the rules for
receiving a distribution upon
termination of employment.
5. Vesting errors.
6. Ignoring the rules for involuntary
distributions to terminated
participants.
7. Misapplying rules for forfeiting
non-vested balances.
8. Missed required minimum
distributions.
9. Retaining forfeitures instead
of applying them to pay plan
expenses or reduce employer
contributions.
If any of these or other
inconsistencies are discovered, ask
whether the plan has been amended,
and for any copies of executed plan
amendments.
The document review should
also include a confirmation of
the understanding of some of the
more technical aspects of the plan
document, such as the definition of
compensation and the method of
computation of service (elapsed time
or equivalencies or actual hours).
These questions can be taken
as an annoyance, and, in some
cases, construed as an accusation of
misadministration in the past. In
instances such as these, obviously a
lot of diplomacy and tact have to be
exercised. The TPA designate must
do a sales job to the RIA and the
sponsor that what is being sought is
to improve retirement plan services,
and knowing what the sponsor knows
about the plan is crucial to reduce
the stress and anxiety that goes along
with any change.
The TPA can and should take
advantage of the document review to
propose improvements to the plan to
be written into the restatement, such
as safe harbor 401(k) provisions and
alternate forms of allocating profit
sharing contributions. Many sponsors
are not aware of the benefits that these
arrangements can provide, and it can
enhance the stature of the TPA as a
“value-added” provider of services.
Usually the new investment
advisor conducts enrollment and
educational meetings on site as part
of the proximate preparation for the
takeover. This is seen most commonly
in plans that are migrating to a daily
trading and valuation platform.
During these sessions, the participants
make their investment allocations
using the new menu of funds
developed by the investment advisor.
If the TPA provides the trading
platform, it is critical that all this
information be provided as quickly
as possible. A very good practice is
for the participants to be introduced
to the new website and create their
own user ID and password for access,
and input their instructions for the
amount they choose to have withheld
from their checks on a pre-tax or
Roth basis. Finally, participants
can enter their instructions for the
allocation of their contributions and
transfer balances while online with
the investment advisor.
All of this assumes that the
investment advisor has provided the
TPA with the fund menu, and the
TPA has established the plan and
made it “live” on their system. The
TPA must also code the website
to accept participant inputs of
information on contributions and
investment allocations. If there are
any “glitches” in the operation of the
website, they should be corrected
before the meetings are scheduled by
ongoing testing of the plan’s website
in the TPA’s recordkeeping system.
IMMEDIATE PREPARATION
In the immediate preparation
stage of the takeover, the TPA should
be ready to accept the final reports,
and the custodian should be ready to
accept the assets. If everything in the
remote and proximate stages has gone
smoothly, the actual takeover of the
plan should be completed with very
little difficulty.
Nevertheless, there could be issues
that might hold up the completion of
the takeover. The one that arises most
frequently is a mismatch between
the value of the assets received and
the final reports provided by the old
recordkeeper. When the transfer is
done by a liquidation of the plan’s
assets followed by a wire transfer, the
variance may be most likely found in
a wire fee or final fees being taken
from the plan after the liquidation but
prior to the transfer.
In-kind transfers usually take
more time due to issues with
reregistering assets; not all the
assets transfer at the same time, and
occasionally it could take up to
six weeks for the reregistration of
all positions to be completed. For
this reason, the blackout notice for
transfers of this sort should set the
date the blackout is lifted well after
the actual agreed-upon transfer date.
Self-directed brokerage accounts
must be considered as not transferred
until all of the statements have been
received and values brought forward
to the date of the statement right
before the stated transfer date.
Once again, the measure of
success for a takeover is how easily
the permanent administrator finds the job
of recordkeeping and compliance for the
year of the takeover. If an oversight is
discovered after the takeover has been
completed, the takeover specialist has
to be called in, usually months after
they have closed the book on the job,
to research and report on the reason
for the issue and to propose a solution
for it.
As with any project, detailed
checklists and records of all the
processes and activities have to be
developed and maintained, and the
status of the takeover at every stage
has to be communicated to the plan
sponsor and investment advisor.
Plan takeovers always pose
challenges that require the
takeover specialist who is adept at
administration and willing to wear
a marketer’s hat. Primarily, they are
project managers, willing and able to
work simultaneously on several fronts,
and coordinate the actions of several
individuals to bring the takeover to a
successful conclusion.
Robert E. (Bob) Meyer, Jr.,
QKA, coordinates the
conversion, takeover and
deconversion of plans for
TPP Retirement Plan Specialists, LLC,
of Overland Park, Kan. He has been an
associate of TPP and an ASPPA
credentialed member since 1998.
WWW.ASPPA-NET.ORG
29
COVER STORY
30
It’s important to connect with all
generations of plan participants.
Here’s how.
BY CAM MARSTON
WWW.ASPPA-NET.ORG
31
T
The term “generation gap” was coined
in the turbulent 1960s to describe the
gulf between young people and their
parents regarding culture, political
views and values. To these Baby
Boomers, their parents represented
antiquated ways that were seen as
something to rebel against, not follow.
Differences exist between every
generation, of course. Each generation
has its own reference points forged
by a confluence of factors, including
culture, technology and current
events. These differences are the
causes of different generations’
struggles to connect. For example,
chances are that most of your friends
are of your generation. There’s a
comfort level there, developed from a
shared culture and history.
Likewise, as a pension
professional, it may be easier to
communicate with members of
your own generation. It’s also
common to get crossed signals when
communicating cross-generationally.
Communication styles and forced
attempts to connect expose generation
gaps that could cause you to lose a
plan sponsor client or not get one in
the first place.
When it comes to saving for
retirement, each generation has
different investing styles and financial
outlooks according to their career/
life stages and experiences during
economic upswings and downturns.
Living through prosperous times
might make a Baby Boomer more
confident, while a Gen Xer, raised
in a rockier financial climate, may
be distrustful of the market and leery
of traditional financial instruments.
Many Millennials are drawn to online
robo-advising services, which present
a viable and appealing alternative
to these digital natives who are
distrustful of financial institutions.
Understanding and reacting to all
these differences is key to establishing
cross-generational relationships.
FROM HI-FI TO WI-FI
There are three major
generations in today’s workplace:
32
Baby Boomers, Gen Xers and
Millennials. As Boomers steadily
retire from the workplace,
Millennials, born between 1980 and
2000, are flooding the workforce
in unprecedented numbers. They
are the largest generation overall,
with a population of 85 million,
surpassing the 80 million Baby
Boomers. In 2014 they became the
largest generation in the workplace.
In between these two generational
behemoths is the smaller and
somewhat overlooked Generation X.
People’s generational attitudes
are shaped as they “come of age”
between the ages of 17 and 23. What
they experience during that period
shapes their attitudes for decades to
come. Consider that the first wave
of Boomers turned 17 in 1963. That
year, high-fidelity sound systems
played hits by Peter, Paul and Mary,
the country was entangled in Vietnam
and John F. Kennedy was assassinated.
In contrast, the first Millennial
turned 17 in 1997, as Bill Clinton
started his second presidential term,
the United States was in peacetime,
and the Dow Jones Industrial average
closed above 7,000 for the first time.
“I Believe I Can Fly” was one of the
top songs of the year.
THE BABY BOOMERS
Born between 1946 and 1964,
the Baby Boomers got their name
from the remarkable “boom” in the
birth rate following World War II.
Prior to the arrival of the Millennials,
they were the biggest generation
and, today, they certainly are the
wealthiest.
This massive generation is often
subdivided into two sub-generations,
“leading” and “trailing.” There
are currently 39.7 million trailing
Boomers, those born between 1956
and 1964. While they share some of
the same formative experiences and
attitudes, trailing Boomers differ in
many ways from leading Boomers.
Significant historic, social and
cultural events in the teen and adult
years of leading Boomers helped shape
9 Ways to Connect
with Baby Boomers
• Relationships — Invest in
relationships with Boomers. Satisfy
their need for face time with meetings.
• Communication — Most Boomers
prefer face-to-face communication
to the electronic kind. While
communications can include electronic
communication, relationships are
driven and enhanced with interpersonal
communication. Think eyeballs and
voices.
• Feature trusted names — When
it comes to DC investments, brandname funds and endorsements from
well-known publications go a long way.
Longevity and proven success mean
a lot.
• Show optimism — Boomers are
largely upbeat and prefer optimistic and
upbeat people.
• Be a team player — Boomers value
teamwork, so conduct yourself as a
member of their team. Deemphasize
transactions and emphasize a longterm team approach.
• Don’t make them feel old —
Boomers think of themselves as at least
15 years younger than they are.
• Visible rewards — Boomers
respond well to rewards like gifts,
acknowledgements, tokens, etc.
• Find the right level of technology
— Most Boomers are adept at
technology, but still value the human
touch. Don’t assume, but don’t
patronize either.
• The kids are alright — On an
individual participant level, be
respectful of the involvement and input
of Boomers’ children in their financial
decisionmaking, including saving for
retirement.
their values and viewpoints. These
include the Vietnam War, the belief
that protest could produce change,
civil rights legislation, the Great
Society and the rise of the women’s
movement.
Each
generation
has its own
reference
points forged
by a confluence
of factors,
including
culture,
technology
and current
events.”
For the trailing Boomers, events
conspired to promise a more clouded
future rather than a rosy one, such as
a messy ending to the Vietnam War,
Watergate, the resignation of Richard
Nixon and the energy crisis. As
such, the trailing Boomers share the
cynicism and skepticism of Gen X.
The term “Me Generation”
was coined to describe the Baby
Boomers. Unlike their parents, who
experienced the privation of the Great
Depression, most Boomers grew up
during prosperous times. They came
of age in an era of full employment,
modest inflation and real wage
growth. Their expectations were that
these good times would continue.
In general, Boomers have retained
the idealism of their youth and
the optimism bred by a lifetime of
entitlement. They are competitive
and they had to be, with so many
competing for the same positions and
resources. Still, they are team players
and believe that building relationships
is the way to get things done.
Boomers are young at heart
and believe they can defy the aging
process. They proudly call themselves
workaholics and indulge in the
spoils of their success. But they are
short on their retirement savings,
and many will postpone retirement.
A recent Gallup survey found that
most Americans expect to continue
working after the age of 65.
Many find themselves
“sandwiched” between two
generations, helping their children
while providing financial assistance
to aging parents who have outlived
their savings. That longevity means
that for many Boomers, their
expected inheritance is shrinking or
nonexistent.
Though they wear a brave face,
they are anxious and uncertain.
The Boomers’ finances, including
their retirement savings, took a
hit in the Great Recession and
many don’t have enough working
years left to recoup their losses.
More than a third say they are now
uncomfortable making financial
decisions for themselves, yet they
don’t know where to turn for advice.
Many say they no longer trust the
financial services industry.
GENERATION X
Nirvana’s 1991 hit “Smells Like
Teen Spirit” has been called the
anthem of Generation X. According
to author Maxim Furek, the song is
“a celebration of all things wrong,
a recognition of the gloom and
pessimism… of Generation X.”
Numbering 60 million,
this generation, born between
1965 and 1979, grew up in the
shadow of the Baby Boomers.
The Boomers’ optimism gave way
to the scandals, inflation, world
crises and the recessions of the 70s
and 80s, resulting in widespread
pessimism and cynicism. Starting
with Watergate, Gen Xers watched
scandal after scandal. As a result,
they are skeptical of authority figures
and those who represent large
institutions.
Bookended by two much larger
generations, they are the demographic
bridge between the mostly white
Baby Boomers and the more diverse
Millennials. Their smaller size
means they are often overlooked
by marketers and feel stifled in
10 Ways to Reach
Gen Xers
• Keep it short and simple — Don’t
think that if you spend a lot of time with
them they’re more likely to engage with
you. Be efficient with their time.
• Stay on message — Gen Xers
have little tolerance for idle chatter.
After short pleasantries, get down to
business.
• Authenticity counts — Be who you
say you are. Gen Xers can spot a phony
a mile away.
• Time is money — Gen Xers value
their time more than money and don’t
like to waste it.
• Be online — Have an online presence,
preferably one that facilitates research
and communication.
• Appropriate communication —
Members of Gen X don’t need or want
a lot of face or phone time. Once you’ve
begun working with them, they’ll want
a bit more, but still not as much as the
Boomers.
• Peers carry weight — Peers’
opinions will go a long way.
• Options and back-up plans —
Address their innate skepticism and
cynicism by emphasizing plan options
and provisions.
• Hand them the reins — Gen Xers
want to be involved in the planning
process. For example, having some
research to do makes them feel
involved.
• Don’t be aggressive — After you
have provided information, leave the
ball in their court. Follow up with them,
but don’t push too hard.
their professional opportunities,
sandwiched between Boomers
who refuse (or cannot) retire and
Millennials who are surging into the
workforce.
Gen Xers were the original
latchkey kids, growing up in
households with divorced parents
WWW.ASPPA-NET.ORG
33
No one can assume that younger
generations will make the same
choices as their parents or
grandparents. In fact, they
probably won’t.”
or two working parents. They are
accustomed to being left to their
own devices and figuring things out
for themselves. This resourcefulness
belies their label as “slackers.”
Gen Xers generally shoulder the
responsibility for their own well
being.
They were the first to grow up
with MTV, and the advent of the
personal computer and Internet
during their youth made them the
first tech-savvy generation. Measured
in the number of degrees and years
spent in high school and college, they
are smart and more educated than any
generation before them. And they are
willing to educate themselves about
retirement.
Gen X was also the first
generation raised more as their
parents’ friends than as subordinates.
This lack of deference to older
authorities means they tend to engage
everyone, regardless of age, authority
or expertise, as peers.
Their innate skepticism makes
them tough customers, not believing
anything unless it’s backed up with
facts. They know a phony when they
see one.
Financially, Gen X is playing
catch-up. According to a 2013 Pew
Charitable Trusts survey, they were
the hardest hit generation during
the Great Recession, losing almost
half their net worth when the stock
market slumped, compared with
about 25% for Baby Boomers.
Many Gen Xers are still paying
off student loans while raising families
on wages that have barely budged in
recent years. Due to all these factors,
34
Gen Xers are falling behind in
retirement savings, despite retirement
targets that are substantially higher
than that of Baby Boomers.
Gen Xers are guarded about their
personal information, but tend to be
loyal. Once a relationship or service
gets their hard-won seal of approval,
they’ll stick with it.
MILLENNIALS
This demographic juggernaut,
born between 1980 and 2000, is the
largest generation yet, at 85 million
strong. Due to their age, they don’t
have as much accumulated wealth as
the Baby Boomers or as much earning
power as Generation X — yet. But
by the end of this decade, that will
change.
Like Baby Boomers, Millennials
are often accused of being entitled.
Raised by “helicopter” parents and
encouraged by teachers, coaches
and others who reinforced their
uniqueness, they came to believe that
they were the center of the universe.
This belief that they are special means
that they will be drawn to offerings
that can be customized or tailored to
recognize their individuality.
These “Echo Boomers” are
mainly children of Baby Boomers.
They spent most of their youth
in a time of broad economic and
technological expansion, until the
Great Recession hit.
They share the optimism
and idealism of the Boomers, but
have a heightened sense of social
responsibility. According to a 2011
study by ad agency network TBWA/
Worldwide and TakePart, 7 in 10
9 Tips for Reaching
Millennials
• Act your age — Genuineness and
sincerity matter most. Be yourself, be
natural, and don’t try too hard to be
young and hip unless you are young
and hip.
• Text messaging — Millennials are
notoriously impatient. Give them a bitesized message they can digest. To you
it may seem impersonal, but to them
it’s table stakes.
• Common cause — Millennials will be
interested in businesses with altruistic
aspects. If you have a cause that you
champion, make sure to let them know.
Don’t boast or draw unnecessary
attention to it, but do mention it on your
website.
• Freebies — Millennials love free stuff,
like a financial calculator. Allow them
to create retirement saving scenarios
for themselves and see how those
scenarios may play out over time.
• Reputation matters — Manage your
firm’s reputation, especially online and
in social media. Know what’s being said
about you.
• Feed their self-esteem — Build
rapport with Millennials by recognizing
their individuality and accomplishments.
For example, start a meeting with a
Millennial participant by asking, “What
do I need to know about you?”
• Peer pressure — Create case studies
of typical Millennial participants,
including their retirement saving goals
and how you’re helping them achieve
those goals.
• Latest technology — Make sure your
website is up to date, well-designed
and full of valuable information.
• Digital communication —
Millennials like to communicate using
text messages, instant messages,
social networks and email, in that
order. Find a way to be relevant in each
of these spaces.
Millennials share the optimism
and idealism of the Boomers,
but have a heightened sense
of social responsibility.”
young adults consider themselves
social activists. Therefore many are
embracing socially responsible, issueoriented investing.
This is a diverse generation,
with 41% identifying themselves
as Hispanic or nonwhite. They are
educated, globally aware and socially
liberal.
They are hugely influential, not
only because of their size but because
of their dominance of the technology
marketplace. Facebook’s Mark
Zuckerberg is one of the most famous
Millennial faces.
This generation is shaping both
the hardware and software of Internet
commerce, affecting the way we do
business online.
Their mastery of social media
is also steering conversations and
influencing brands. Millennials will
decide which industries and firms
are “with it” and relevant, and the
marketplace at large will follow. And
since they rank peers as their number
one source of information in many
categories, they can make or break
one idea, product or song through
social media connections within a
matter of hours.
Millennials are also delaying
marriage, childbearing and the
traditional markers of adulthood until
later than any previous generation
did. They have more disposable
income, but they’re not likely to save
much of it. But when they do save,
they tend to be risk-averse, shying
away from the stock market. They
also are “under-banked” and are
choosing to use financial convenience
products rather than traditional
banking services.
As technophiles, they are
the natural audience for roboinvesting, willing to put their faith in
algorithmic investing versus human
financial advisors who sometimes
act in their own self-interest. As of
now their assets aren’t tremendously
significant in terms of dollars saved
towards retirement. How they’ll
behave when their assets become
an amount that is truly significant
to them is uncertain. Money, like
relationships, is a deeply personal
subject. One school of thought is that
when the dollar amounts become
significant, the Millennials, like
generations before them, will want
the personal advice and assurances
that advisors offer. Throughout
history, people seek counsel for big
decisions and for deeply personal
topics. There is no reason to expect
this to be different today with the
Millennials. Two variables will
determine if this is the case: the
amount of money saved and time. In
other words, we’ll have to wait and
see.
and growth of any business. Now
more than ever, no one can assume
that younger generations will make
the same choices as their parents or
grandparents. In fact, they probably
won’t.
For pension professionals who
are unwilling to change, this
dynamic poses a threat. But for
those who are willing to change and
adapt, it represents an opportunity to
prosper.
Cam Marston is a leading
expert on the impact of
generational change and its
impact on business. For more
than 16 years, Marston and his firm,
Generational Insights, have provided
research and consultation on
generational issues to hundreds of
companies and professional
associations. He is the author of several
books on the generations, and has been
featured in The Wall Street Journal,
The Economist, the Chicago Tribune,
BusinessWeek, Fortune, Money and
Forbes, as well as on Good Morning
America, CNN International and the
BBC.
CONCLUSION
Reaching out to the next
generation of clients — especially
participants in workplace retirement
plans — is crucial to the survival
WWW.ASPPA-NET.ORG
35
FEATURE
50 Years
as a Pension Actuary
A past president looks back on
how his 50 years in the industry
intertwined with ASPPA’s history.
BY HOWARD M. PHILLIPS
Editor’s note: This article is part of
an ongoing series of feature articles
on ASPPA history that will continue
throughout 2016, as we celebrate the
organization’s 50th anniversary.
I
became a pension actuary in
1966, which means that my 50th
anniversary as a pension actuary
(I’m now semi-active) coincides
with ASPPA’s 50th anniversary. I
thought that an historical review of
one member’s experiences, especially
one whose career spanned the same
50 years, might be of interest to Plan
Consultant readers.
Highlights — some of which may
be better characterized as “lowlights”
— included:
• Nixon freeze on pay and pensions
(1972)
• ERISA (1974)
• Defined benefit Keogh plans (1974)
• TEFRA (1982)
• DEFRA (1984)
• REA (1984)
• TRA ‘86
• Age weighted allocations in profitsharing plans (1992)
• Our first glimpse of cash balance
plans (1995)
• SBJPA (1996)
• EGTRRA (2001)
• PPA (2006)
• WRERA (2008)
• PRA (2010)
• MAP-21 (2012)
• EPCRS (2013)
• HATFA (2014)
Today we have a new glossary:
target normal cost, funding target,
AFTAP and segment rates, just to name
a few. And we anxiously await the
new definition of a fiduciary and the
impact on the industry evolving from
the implementation of state-sponsored
retirement plans.
GETTING STARTED
In 1961, this recent Rutgers
graduate with a B.S. in math
fortunately found employment at a
large New York life insurance company
as an actuarial student. Placed in the
company’s Group Department, I got my
first taste of retirement plan operations.
Ruth Frew,
Ed Burrows
and I were
the pension
section of
the ABCD
for most of
the next six
years.”
Six years later I learned from my
colleagues in the Group Department
(who had sources in the international
office of the Society of Actuaries) that
I had successfully passed Parts 8 and
10 of the SOA exams, completing my
required 10 actuarial examinations —
making me a Fellow of the Society of
Actuaries.
Having had various responsibilities
as a pension actuary during the years
of my exam taking, I was promptly
promoted to 2nd Vice President in the
Group Department and assigned to
pension operations.
BUILDING A BUSINESS
Not long after that, projecting
the negatives of my life in a large life
insurance company, I made a move
to a small pension consulting firm in
New Jersey. Here is where I learned
the real deal — interacting with
clients, installing and administering
retirement plans and supervising
people.
It didn’t take too long to realize
that I could do on my own what I
was doing in that consulting firm. So,
with another actuary, we formed our
own pension consulting firm, also in
New Jersey.
One rainy Wednesday afternoon
in October 1970, a CPA friend of
mine called and asked if I could meet
him at his client’s office to discuss the
installation of a new retirement plan.
This was our first client: a profitsharing plan for which we paid a
temporary secretary to type the plan
document and attendant resolutions.
It took her 4 days.
Our two-man firm grew to 50
employees and 2,000 clients; although
I am no longer a shareholder, the firm
still exists and I am still affiliated with it.
As time marched on, my work
career changed from rainmaking
actuary in my own firm to selfemployed actuarial expert (for the last
25 years) in all matters pertaining to
retirement plans, including:
• dividing retirement plans in a
divorce;
• calculation of losses from wrongful
death/disablement;
• assistance to pensioners where the
plan of reference seeks recoupment
for an error in payment calculation;
and
• various litigation involving plan
sponsors, participants and plan
advisors.
GIVING BACK TO THE
PROFESSION
After getting our growing firm
steady on its course to success, I began
to dedicate a good deal of my time to
the profession — at ASPA (chair of
GAC, chair of Education Committee,
vice-president and president); on the
Academy Board; and as a member and
vice-chair of the Actuarial Board for
Counseling and Discipline (ABCD).
I co-authored and published my
first book, So You Think You Have
A Pension Plan, in 1973. My second,
All You Need To Know About Defined
Benefit Keogh Plans, was published
in 1981. It was followed by “The
Professional Corporation,” a chapter
in the Symposium on Business
Management for the Dental Clinics
of North America; by a booklet,
Retirement Parity: Keogh and Corporate,
in 1985; and many articles published
from 1987 thru 2012, ending in
2013 with my latest booklet, Dividing
Retirement Plan Assets in a Divorce.
WWW.ASPPA-NET.ORG
37
I was convinced that ASPA would be the
right association for my growth in the
pension arena.”
MOMENTS IN TIME
There were many memorable
moments along the way. Here are the
few that were especially memorable
(excluding only for purposes of
this article my 55-year marriage
to Carol, who lived through the
actuarial exams, the career building,
the current ongoing projects and
the births of our children and
grandchildren):
• Sitting at my desk in the summer
of 1967 in that large life insurance
company’s Group Department
when there was a large bang at
the door. Two or three of my
supervising actuaries came in,
screaming to me that I had passed
both Parts 8 and 10 of the SOA’s
actuarial exams. My annual
September-May 800 hours of study
per exam were finally over — my
FSA was achieved.
• Making the decision in 1967 to
leave the life insurance industry
and seek a career in the world
of pension consulting. Possibly
more important, keeping a serious
eye out for membership in a
professional society other than the
SOA (since their focus at that time
was on life and health).
• After dedicating most of the 1970s
to building our pension consulting
firm, I joined ASPA in 1979. I was
convinced that ASPA would be the
right association for my growth in
the pension arena.
• My growth in ASPA through
committee chairs to the presidency
in 1989.
• As ASPA president, overcoming the
challenge of obtaining recognition
for ASPA by the other North
American Actuarial Societies. That
success was very visible — I was
38
the first ASPA president to chair a
periodic meeting of the Council
of Presidents (COP) of the North
American Actuarial Organizations.
• Taking the microphone one Sunday
evening in 1992 at an ASPA
Annual Conference to announce
to the 600 people in attendance
that we can now allocate profitsharing contributions using age
and pay, per the new Section
401(a)(4) Regs (with Jim Holland’s
publicly announced agreement to
my announcement the following
Wednesday during our IRS Q&A).
• My selection as one of the
profession’s pension representatives
on the ABCD in 1999. Ruth Frew,
Ed Burrows and I were the pension
section (the entire pension section
was from ASPA) of the Board for
most of the next six years. The last
two of my six years on the ABCD
were as its vice-chair. I continue to
serve the Board as an investigator
when they need me.
I also recall with some angst a
job I accepted as a director of the
Academy. There was some discussion
in the Council on Professionalism
that credentialed members of
the actuarial profession might be
worthy of the PhD credential. The
subject was provoked by the lack of
professional papers being submitted
from the profession, and that could be
remedied by linking our professional
societies with universities that offered
programs in actuarial science. My
proposal to those universities was to
offer a PhD in actuarial science to
actuaries with credentials gained by
examination if the candidate would
author a thesis in actuarial science that
could be published.
Why my angst? Although I did
get some positive responses from
university deans of actuarial science
to my proposal, there were a few who
told me (one very vehemently) I could
not compare a student in an actuarial
science program in a university
setting to an exam-successful actuary.
CONCLUSION
So what has ASPPA meant to me,
and to the profession? Three things
come to mind:
• No other organization provides
support (via education, legislative
influence and instantaneous input)
to the pension professional.
• No other organization facilitates
an interaction between actuaries,
consultants and administrators,
all resulting in the betterment of
the pension professional and the
services rendered to clients.
• ASPPA’s conferences, webcasts,
ASPPA asaps and ACOPA’s e-mails
are the best in the industry.
These days, work for me is more
like a hobby. I look back on my 50
years as a pension actuary with much
gratification from the professional
relationships and friendships I have
had — and in many cases, still have.
Moreover, I really enjoy being the
only one in a room full of social
friends who can answer the question,
“What’s the probability that two
people in this room have the same
birthday?”
Howard M. Phillips, MSPA,
FSA, FCA, MAAA, EA, is
past president of Consulting
Actuaries Incorporated, a
past president and director of ASPPA, a
past director of the Academy and a past
vice-chair of the ABCD.
WOMEN BUSINESS LEADERS FORUM
NEW ORLEANS, LA • RITZ-CARLTON
The Women Business Leaders Forum will focus on HR issues, business development, leadership
and ethics. It will be a mix of general sessions and roundtables with plenty of time to network
with your peers.
Oh, we’re also having ghost tours, one of the best cooking classes New Orleans has to offer,
and much more. You won’t want to miss this conference!
WWW.ASPPA-NET.ORG
39
FEATURE
IRS Employee Plans
— the ‘New Normal’
Restructuring and
budget cuts bring
changes.
BY RICHARD A. HOCHMAN
T
he last two decades have been
marked by a cooperative
and cordial relationship
between managers and staff in the
IRS’ Employee Plans Division and
the retirement plan community they
oversee. That relationship, however,
may be challenged as a result of
changes at the IRS. Budget cuts,
reductions in staff, organizational
restructuring, shifting responsibilities
and new ones — as well as the
departures of experienced officials
— have combined to create a “new
normal” at the IRS. (For more
information about some of those
changes, see the sidebar, “Changes at
the IRS Since 2010.”) These changes
will profoundly impact the manner
in which qualified plan professionals
interact with the IRS in the years
ahead.
Most of the
questions
ASPPA
members
would like to
ask the IRS
don’t have
easy answers
that are found
on the IRS
website.”
was to make sure that qualified plans
provide reasonable benefits for the
rank-and-file employees benefitting
under them.
BACKGROUND
The IRS Employee Plans
Division was created in 1974 after
the passage of ERISA to help protect
the retirement benefits of employees.
From its earliest days, Employee Plans
always had a different purpose and
way of doing things than the rest of
the IRS.
In its primary role, the IRS is
charged with the mission of collecting
the tax dollars owed. Thus, it is
engaged in a zero-sum game. But the
Employee Plans Division is not, and
has never been, about collecting tax
dollars. In the retirement industry
we do not work in a zero-sum
environment. So at the end of the
day, Employee Plans should not look
like the rest of the IRS, operating
the same way and having the same
necessarily adversarial vision.
For both the private retirement
plan industry and the IRS Employee
Plans Division, it should be about
making sure that plans operate in
a proper fashion and are not tax
avoidance schemes for business
owners. While we have not always
agreed with the regulations and the
guidance that Employee Plans issued,
we understood that the shared goal
EVOLUTION OF A ‘TEAM’
APPROACH
In the mid-1990s, industry
practitioners and the IRS developed
a working relationship in which
we worked not as adversaries,
but as a “team” to bring about a
secure retirement for the American
workforce. While clearly we didn’t
always agree, there was a healthy
dialogue and a mutual respect
between the staff at the Employee
Plans Division and many of the
industry’s leading practitioners.
One of the earliest examples of
this “team” cooperative approach was
the 1991 release of the Administrative
Policy Regarding Sanctions (APRS),
the precursor of today’s Employee
Plans Compliance Resolution System
(EPCRS). The APRS program
recognized some contradictory facts:
first, that compliance with all the
rules and regulations under Code
Section 401(a) was not easy and
there was a lot of room for error;
and second, that most plan sponsors
were trying to do the right things to
enhance their employees’ retirement
rather than game the system. The IRS
wanted to provide procedures so that
when the inevitable administrative
errors were found, employers
didn’t have to operate within a
confrontational environment, but
rather one that allowed problems to
be resolved easily.
Prior to the APRS, examinations
agents did not have a lot of flexibility
with regard to how administrative
and document errors would be
corrected. The complexity of the
relatively new, but blossoming, 401(k)
plan market was not helping matters.
If nothing else, the APRS set the
tone for a transformative relationship
between the staff at Employee Plans
and the practitioner community
representing plan sponsors. This
relationship allowed more plan
issues to be discovered and corrected
without the need for Employee
Plans staff to actually find them.
This cooperative approach brought
about better operational compliance
throughout the industry.
So much for history. What is the
current lay of the land?
RULEMAKING SHIFT TO CHIEF
COUNSEL’S OFFICE
In early 2014, we were advised
that organizational changes were
being made at the IRS. The
Employee Plans and Exempt
Organizations units are both part
of the agency’s Tax Exempt and
Government Entities (TE/GE)
Division. There were issues in the
Exempt Organizations unit beginning
in approximately 2010 that resulted
in congressional hearings. As a result,
changes were made to the structure
of the Exempt Organizations segment
that also resulted in an evaluation
of how other segments within the
division were structured.
Of special significance was a
change in how future guidance will
be issued regarding Employee Plans
issues. In the past, Employee Plans’
guidance resulted from coordination
among the Division’s technical staff,
the IRS Chief Counsel’s Office and
the Treasury Department. This meant
that the staffers in the field that we
WWW.ASPPA-NET.ORG
41
Changes at the IRS Since 2010
REDUCED RESOURCES
AND SERVICES
INCREASED
RESPONSIBILITIES
• Funding down 18%
• Overall staffing down 14% (13,000
employees)
• Enforcement staff down 20%
(10,000 employees)
• Individual tax returns filed up 7
million (5%)
• Foreign Account Tax Compliance Act
(FATCA) administration
• Affordable Care Act administration
• 700% increase in identity theft cases
Note: Numbers reflect changes from 2010-2015, except for individual tax returns
(2014) and identity theft (2013).
Source: Center on Budget and Policy Priorities analysis of IRS, TIGTA and CBO data.
dealt with had input into the guidance
being promulgated. However, that
was not the way it was done elsewhere
in the IRS; for the other divisions,
guidance was generated exclusively by
the Chief Counsel’s Office.
As part of the reorganization
affecting the Employee Plans
Division, many of the attorneys who
were employed there were shifted to
the Office of Chief Counsel, which
will now be taking the lead on
guidance affecting qualified plans.
Treasury Department officials and
staffers from Employee Plans will
continue to participate, particularly
with respect to actuarial matters.
Craig Hoffman and other
American Retirement Association
(ARA) staff have worked diligently to
foster an expanded relationship with
the Chief Counsel’s Office to ensure
that the ARA has the same type of
cooperative working relationship
with Chief Counsel staff that it has
had with Employee Plans staff. The
ARA and its Government Affairs
Committees, including ASPPA GAC,
will continue to remain active in
filing comment letters and otherwise
representing the views of our
members.
42
DETERMINATION LETTER
CHANGES
In mid-2015, the IRS announced
that other changes were necessary:
determination letters were requiring
too many resources and taking too
long to process. The IRS estimated
that the average determination letter
took 321 days to process. Due to
budget cuts dictated by Congress, the
IRS has been hamstrung in trying
to address the backlog indicated
by this statistic. So a decision was
made to eliminate the five-year
cycle for individually designed plan
restatements, as of the next Cycle
B in February 2017. The IRS will
continue to issue determination letters
for terminating plans and new plans
that never received them before, but
nothing in between unless the IRS
decides there is a reason to look at a
particular issue or amendment.
So for now, the old five-year
restatement cycle is in place until
February 2017. Plans can only be
submitted on the appropriate cycle
determined by the last digit of the
sponsoring employer’s taxpayer
identification number. So the question
became: Could plans be submitted
off cycle? We got the answer in July
2015, when the IRS announced that
effective immediately, they would no
longer allow off-cycle submissions.
(It is important to remember that
prototype plans have generally not
been allowed to file for determination
letters since May 1, 2013; volume
submitter plans have been limited as
well.)
END OF PHONE AND EMAIL
RESPONSES
In July 2015 we were advised
that, as of Oct. 1, 2015, Employee
Plans staff would no longer take
phone calls or answer e-mails from
the practitioner community. The
rationale was twofold: (1) that is not
an appropriate or efficient use of
resources; and (2) Employee Plans
staff should not be answering “oneoff” questions about how guidance
affects individual plans. The new
standardized response to email
questions — provided in the nearby
sidebar, “IRS Email Response” —
refers inquiries to information that
can be found on the IRS website.
Of course, most of the questions
ASPPA members would like to ask
the IRS don’t have easy answers that
are found on the IRS website. Also, it
is important to remember that private
letter rulings (PLRs) now have a user
fee cost in excess of $28,000 — and
that is just the IRS fee; it does not
include the fee for preparing the
necessary paperwork for making the
PLR request. It is not clear how many
employers are going to rush to get
those.
While I understand the IRS’
position that they don’t want staff to
spend time addressing specific fact sets
applicable only to a particular case,
historically that has not been the kind
of question I have sought answers to.
Rather, my questions — and those
of other practitioners like me — can
theoretically affect thousands of plans
or more.
Since pension practitioners have
ready access to their plan sponsor
clients, we can get a message out to
the qualified plan community much
With all the
changes
at the IRS,
today there
is a very real
question
about how
we will
interact
with the
IRS going
forward.”
faster and more efficiently than the
IRS can. This important means of
communication has been lost as a
result of the new IRS policy.
END OF THE ERPA PROGRAM
In late 2015, the IRS announced
they were suspending the Enrolled
Retirement Plan Agent (ERPA)
program. Existing ERPAs will keep
their designation, but as of February
2016, ERPA exams are no longer
being offered.
Where this might cause problems
is with client representation on
exams. Under current rules, only
certain designated professionals may
represent employers on plan audits:
attorneys, accountants, enrolled
actuaries, enrolled agents and enrolled
retirement plan agents.
END OF THE ‘GRAY BOOK’
It was announced in January 2016
that the “Gray Book,” a compendium
IRS Email Response
D
ear Colleague:
Thank you for taking the time to submit a technical question. However,
I am sorry to inform you that I cannot answer it. Effective October 1, 2015, IRS
Employee Plans (EP) will no longer answer technical questions by email, including
questions forwarded from Customer Account Services. This change is due to
realignment of legal work and a number of EP employees to the Office of the
Associate Chief Counsel in January 2015. As a result, EP employees are no longer
authorized to perform research and/or provide answers for legal topics.
Our Customer Account Services employees at 877-829-5500 will continue to
help with:
• Account-specific questions
• Basic information about EP forms
• Status of pending applications
You can also find many answers to retirement plan questions on IRS.gov at
Retirement Plans and Retirement Plan Forms and Publications.
If you have a legal question that needs to be addressed, you may want to
request a private letter ruling (PLR) - a written statement that interprets and applies
tax laws to the taxpayer’s specific set of facts. See Revenue Procedure 2015-1 on
how to obtain a PLR and the applicable user fees associated with this filing.
Thank you.
of questions actuaries pose to the
IRS and the answers to them, will no
longer be produced. The Conference
of Consulting Actuaries (CCA),
which had produced the book with
the American Academy of Actuaries,
made the announcement. The reason
it took this step, the CCA said,
was in part because the IRS and
Treasury Department have reallocated
resources and shifted their priorities.
In addition, it was noted, the agencies
are concerned about the reliance
placed on the answers the IRS was
providing in the Gray Book.
area where we will have significant
interactions with the IRS. Based
on what we are seeing and hearing,
audits seem likely to become
more problematic and likely more
contentious in the future. Needless
to say, ASPPA GAC will continue to
represent and convey to the IRS the
concerns of our members in matters
regarding qualified retirement plans.
We will also work on Capitol Hill
to restore budget cuts so that greater
resources will be available to meet the
needs of retirement plan sponsors and
practitioners.
CONCLUSION
With all the changes at the IRS,
today there is a very real question
about how we will interact with the
IRS going forward. Clearly, much
of the industry’s contact with the
Employee Plans Division is going to
be reduced.
There is an expectation, however,
that there will still be significant
contact in one area: examinations. In
fact, examinations may be the only
Richard A. Hochman, APM,
is the managing director at
McKay Hochman Consulting.
He is ASPPA’s President-Elect.
WWW.ASPPA-NET.ORG
43
WORKING WITH
PLAN SPONSORS
Operational Self Audits:
How to Avoid the Financial Pitfalls
of Qualified Plans
A little bit of proactive internal governance can, and typically will, help
sponsors avoid costly corrective actions and penalties in the future.
BY JOEL SHAPIRO
44
O
ver the last decade, the vast majority of attention and scrutiny focused
on plan sponsors has revolved around litigation concerning breaches of
fiduciary duties. These lawsuits garner the biggest headlines because big
companies are involved, meaning that big recoveries, big settlements and
large class actions result.
Stock drops, excessive fees, imprudent investments, failure of duty
of loyalty — these have received the lion’s share of industry-related press
coverage, and thus have attracted the most attention of plan sponsors
and fiduciaries. Without a doubt, these are important, seminal cases that
warrant attention. But should they be the primary focus of plan sponsors
and fiduciaries? I would argue no.
Granted, these lawsuits have resulted in some very large dollar
amounts sure to strike concern, if not full-blown fear, in the minds of
plan sponsors. But these numbers are driven by large organizations with
large plans and large dollars at stake — the primary targets of class action
plaintiffs attorneys. Most small and mid-sized employers and plans aren’t
the “low-hanging fruit” favored by such attorneys.
Now, this is not to say that plan
sponsors should not take heed of the
lessons to be learned by these lawsuits
— they should. But primarily, they
should pay attention to potential
dangers that are much more likely to
hit them in the corporate accounting
department: operational issues.
How many small and mid-sized
plans end up on the receiving end
of these lawsuits? A few. How many
small and mid-sized plans end up
paying thousands, tens of thousands,
and even hundreds of thousands of
dollars as the result of inadvertent
plan governance, administrative
or operational issues? Thousands
each year. Some pay via regulatory
voluntary compliance programs (both
the Department of Labor and the
Internal Revenue Service provide
such programs); many others pay
the corrective amounts, and often
penalties thereon, when these issues
are discovered upon regulatory
investigation or audit.
So while it is of great importance
for plan sponsors to stay attuned
to the legal outcomes of industry
lawsuits, it is imperative that they
self-regulate or self-audit the internal
processes regarding administration
and operation of their qualified plans.
Retirement plans have many moving
parts. And while most plan sponsors
can rest somewhat comfortably relying
upon top tier recordkeepers and
third party administrators to handle
most of their responsibilities for those
myriad moving parts, they still need
to recognize the responsibilities they
retain, failure of which can result in
significant expenses.
Following are two areas in which
the need for proper administrative
practices on the part of the plan
sponsor is especially keen: timely
remittance of contributions and the
definition of compensation.
TIMELY REMITTANCE OF
CONTRIBUTIONS
Most plan sponsors are
conscientious about getting
contributions from Accounting to
How many
small and midsized plans
end up paying
thousands
of dollars as
the result of
inadvertent plan
governance,
administrative
or operational
issues?”
their plans’ trusts in a timely manner.
But many don’t realize that they
may not be remitting them quickly
enough. Dollars taken from paychecks
are immediately considered plan
assets, even if they have not yet been
transmitted to the plan trust. If there
is a delay in remitting these amounts,
it is treated as if the plan sponsor has
taken a loan from the plan. That’s a
prohibited transaction. It is reportable
on Form 5330 and has penalties
attached. Yet few plan sponsors realize
this, and even fewer understand what
constitutes a “late” or “untimely”
remittance.
The rule under ERISA is
that plan sponsors must remit
contributions as quickly as
administratively feasible, but no
later than the 15th day following
the month in which the deferral
was deducted from the paycheck.
Seems like plenty of time, right?
Unfortunately, many plan sponsors
have historically hung their hat,
and based their process, upon the
latter portion (i.e., “no later than the
15th day of the month following
the month in which the deferral
was taken”). However, the DOL
concentrates on the first part (“as
quickly as administratively feasible”).
That means that historically most plan
sponsors have probably been late in
making remittances.
In our experience over the
years, “as quickly as administratively
feasible” has meant one of two things:
(1) the quickest the sponsor has ever
transmitted contributions, or (2) the
quickest that the DOL determines
the sponsor should be capable of
transmitting. If a sponsor is even a
day later in transmitting than their
quickest turnaround, the DOL is
likely to find a delay and therefore a
prohibited transaction. And because
of alternative 2 above, a plan sponsor
can’t game the system by purposefully
delaying their remittance on a regular
basis.
So what’s a plan sponsor to do?
Well, small plan sponsors (those filing
Form 5500 as small plans) have a
7-day safe harbor during which to
make remittances. So they have a bit
of wiggle room. Large plan sponsors
don’t have the protection of this
7-day safe harbor, so absent evidence
of necessary administrative delay,
they will be held to a very short time
frame for remittances.
In both instances, it behooves the
plan sponsor to take several actions:
1.Review internal processes and
determine how best to streamline
so that dollars reach the plan as
quickly as possible.
2.Create redundancy processes so that
accidental scenarios (e.g., the payroll
manager tasked with transmitting
contributions goes on vacation or
gets sick) don’t disrupt the regular
process.
3.If an administrative circumstance
arises (e.g., a new pay type that
requires additional internal review)
that reasonably causes a delay, create
an internal memo documenting the
reasonable administrative delay and
why it may or may not continue
with future payrolls.
WWW.ASPPA-NET.ORG
45
It is imperative
that plan
sponsors
self-regulate
or self-audit
the internal
processes
regarding
administration
and operation
of their qualified
plans.”
4.Regularly review the timing of the
steps that are required to make sure
it remains consistent. If there are
discrepancies, examine why they
exist, whether they were reasonable
and whether there is a more
efficient manner in which quick,
consistent timing may be achieved.
DEFINITION OF
COMPENSATION
All plan sponsors understand
that they have to follow the deferral
election of their participants (or of
the plan document if auto features
are included in the plan). They
understand that if a participant elects
to defer 5% of their pay and the
sponsor inadvertently defers only 3%,
the sponsor will be on the hook for
correcting the error. (The IRS has
specific corrective action for such
failures.) What comes as a surprise to
many plan sponsors, though, is that
many participants experience a failure
to fully defer based on less obvious
failures.
46
Every plan document includes a
definition of compensation that is to
be used in determining contributions.
Typically this definition is very
technical, since it derived from Internal
Revenue Code Section 415. The
technicalities of the definition are
often missed by Human Resources,
but even more importantly (perhaps
“insidiously” would be more apt),
they may not be conveyed to Payroll
accurately. And they are virtually never
regularly reviewed by Payroll staff.
Why this is important should
be obvious. If Payroll inadvertently
leaves out a pay type from the
calculation of compensation for
purposes of determining deferrals,
then participants lose the ability
to defer on the portion of their
compensation that they should be
legally allowed to defer. Guess who
is on the hook for those missed
opportunities? The plan sponsor must
make corrections.
How does this happen? It’s easy.
As noted above, the definitions of
compensation tend to be technical
in nature, but the components can
also be broad. Marry the definition
with most companies’ payroll norms
— “evolutionary” lists of pay codes,
many of which may have been
conjured up on the spot to account
for some form of money flow to
employees that didn’t fit into any
ordinarily recognized pay code —
and you have a formula for confusion
and the potential for a significant
financial impact. Now add the fact
that many plans were designed before
current personnel (in both HR and
Payroll) joined the company, and
you’ve exacerbated the potential
impact.
In all instances, plan sponsors
should take the following steps:
1.Review the terms of the plan
document. What does the
definition of compensation
mean? Consider engaging the
organization’s tax department or
outside tax experts to fully ferret
out the meanings of some of the
components of the definition.
2.Make sure that Payroll personnel
review and understand the
definition of compensation.
3.Have the individual(s) with the
most plan knowledge and the
Payroll personnel responsible for
contributions conduct an internal
audit of all paycodes against the
definition of compensation to
ensure that each is fully determined
to be included or excluded as
appropriate.
4.On an annual basis, go back and
review any paycodes that may have
been added during the past year
and determine whether they were
properly included or excluded for
purposes of the plan.
CONCLUSION
As noted above, there are quite a
few moving parts in a retirement plan.
The experts that plan sponsors hire
to assist in plan administration can
shoulder the heavier burdens, but the
sponsor will almost invariably retain
some responsibilities. If those day-today responsibilities are not handled
appropriately and efficiently, there is a
much greater likelihood of a negative
financial impact on plan sponsors than
there is in a big class action lawsuit.
So while it is important that
plan sponsors strive to meet their
fiduciary responsibilities, it is of
equal consequence that they pay
special attention to the internal
administration and operation of their
plans. A little bit of proactive internal
governance can, and typically will,
help sponsors avoid costly corrective
actions and penalties in the future.
Joel Shapiro, JD, LLM, is a
senior VP at NFP, where he
heads up the NFP service
team as well as the ERISA
teams for NFP, the Retirement Plan
Advisory Group and flexPATH
Strategies LLC. Joel began his career
practicing ERISA law with Fennemore
Craig in Phoenix and as a legal plan
consultant with Hewitt Associates.
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via Plan Consultant Quizzes
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corresponding continuing education quiz?
Each quiz includes 10 true/false questions based on articles in that issue. If
you answer seven or more quiz questions correctly, ASPPA will award you
three CE credits. And you may take a quiz up to two years after the issue of
PC is published. This makes Plan Consultant quizzes a convenient and
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WWW.ASPPA-NET.ORG
47
BUSINESS PRACTICES
Mapping Your
Business Workflows
Using value stream and
process mapping to
increase efficiency and
boost client and business
value.
BY GREG FOWLER
48
E
very business, from the brand new start-up company to the wellestablished organization, needs to review its operational processes
and how those processes are delivering (or not delivering) value to
customers. Doing this on a regular basis is necessary to stay relevant
and competitive.
In addition, good companies understand the importance of keeping process
documentation up to date and shared throughout the company. But how should
an organization document their processes?
There are several established methods for documenting the flow of work
in a business — although, in my experience, they are not well known. Many
companies rely on self-taught users of Microsoft Visio to informally diagram
business processes. In my MBA program, I had an Operations Management
course focused on lean thinking and process improvement — but all of the
examples were from the manufacturing industry. I worked with my professors to
apply these principles to a service industry and achieved mixed results — it didn’t
quite fit.
The value stream is made up of multiple
processes, while process mapping is a
detailed view of a single process
and its many steps.”
Recently I discovered two books
by Karen Martin and Mike Osterling,
Value Stream Mapping and MetricsBased Process Mapping, that make the
connection to the service industry.
Martin and Osterling apply lean
principles to the service industry
in a manner that resonates with
me and has resulted in significant
improvements in my organization.
So, what are value stream
mapping and process mapping and
when should you use each one?
• Process mapping is similar to
informal workflows you may have
created in the past but with more
structure, purpose and focus.
• Value stream mapping is a strategic
tool used to change the way
organizations think about the way
they deliver value to both their
customers and themselves as a
company.
The value stream is made up of
multiple processes, while process
mapping is a detailed view of a single
process and its many steps. Let’s take a
closer look at both.
VALUE STREAM MAPPING
Value stream mapping views
work performed by an organization
from a macro perspective with focus
on determining which processes
provide value to the client or the
business, which are waste, and which
are necessary to support the valueadding activities. Value is defined as
something a client is willing to pay
for or creates profit for the business.
Value stream mapping starts by
identifying an executive sponsor
who oversees the entire value stream
and who will be actively involved in
this mapping. Having a high-level
executive sponsor involved is critical
because they need to be supportive
of the process, along with the change
efforts that result.
In addition to the executive
sponsor, a facilitator, a champion and
mapping team members need to be
identified. The facilitator serves as
master of ceremonies and directs the
efforts of the mapping team during
the mapping sessions. The facilitator
also coordinates the details of the
mapping sessions, keeps the team on
track and documents the findings.
The champion is the leader who is
accountable for the performance of
the value stream.
The rest of the mapping team
members should be comprised of
leaders of the organization, regardless
of whether or not they are directly
involved in the process being mapped.
Staff who actually do the work being
mapped are generally not part of the
mapping team. Instead they will be
observed by the mapping team during
the mapping process.
Next the mapping team creates a
written charter outlining what they
expect to achieve from the mapping
process. This helps the team remain
focused on what they set out to do.
Once preparations are complete,
the mapping team embarks on an
intensive, 3-day journey to:
• uncover the true current state;
• design a future state that enhances
value to customers and the business
and eliminates waste; and
• create a plan to transform the value
stream from the current state to the
desired future state.
Day 1 starts with the team
visiting the Gemba — a Japanese
term meaning real place where work
is actually done. This is where the
mapping team observes the front
lines doing the work. The goal of
this first map is to get an unvarnished
and honest picture of what is actually
happening — not what management
hopes is happening.
The tendency is to get down into
the weeds, but the mapping team
needs to stay at a high level. For each
process in the value stream, the team
will calculate process time (actual
time employees spend working on a
particular task), lead time (amount
of time the work is available to be
worked on until it is completed),
and percent complete and accurate
(what portion of the work was both
complete and accurate as determined
by subsequent steps and the customer).
Then the team will create on paper
the current state of the value stream.
After the current state map
is produced, the mapping team
shares this with the frontline team
members to get feedback and ensure
the mapping team understood the
process accurately. This is also a
great opportunity for the frontline
employees to feel connected to
management and to buy into the
process because they see management
finally understands what is happening
on the front lines.
On the second day, the mapping
team crafts a future state documenting
WWW.ASPPA-NET.ORG
49
PROCESS AND VALUE STREAM MAPPING
AT A GLANCE
Value Stream Mapping
Process Mapping
Order
Before Process Mapping
After Value Stream Mapping
Perspective
Macro – interconnected processes
Micro – steps within each process
Who participates
Management heavy
Frontline heavy
Purpose
Strategic improvement
Tactical improvement
Time required to create
At least 3 days
1-2 days
The tendency
is to get
down into the
weeds, but the
mapping team
needs to stay
at a high level.”
what they want the processes to
become. They identify aspects of the
current value stream that create value
and should be leveraged, as well as
places where waste exists that must be
minimized.
On the third and final day, the
team creates a transformation plan.
The team identifies the projects
and tasks required to move from
the current state to the future state.
Assignments are made and completion
deadlines set for each item.
In the weeks and months that
follow, the mapping team meets
50
regularly to provide updates on the
status of their assignments.
PROCESS MAPPING
Value stream maps focus on the
macro level value stream. Sometimes
you need to focus in on one or more
of the processes that make up the
value stream. Process mapping is less
strategic and more tactical in nature.
Process mapping usually involves
mid-level leadership and frontline
staff. Technology plays a key role in
many of the tactical improvements for
service industries, so I recommend
including a representative from the
technology area of your organization.
In process mapping you will
follow work through detailed steps to
create a current and future state map
similar to value stream mapping but
at a more granular level. Process time,
lead time and accuracy are measured
and used to leverage value-adding
steps in the process, eliminating waste.
This is a great opportunity to work
alongside the frontline employees and
have them involved in designing a
solution to the pain points identified
in the value stream mapping process
earlier.
From my experience with both
value stream and process mapping, the
impact on the business goes beyond
the time savings in the process and
the value to the client and business —
the employees’ level of engagement
has increased as they are invited to
participate in the process mapping and
they are able to see that management
actually understands what frontline
employees are doing each day and the
challenges they face. The end goal
is not to have any of these processes
be a one-time event, but rather a
cultural shift to continually looking
to improve.
Greg Fowler, ERPA, QPA,
QKA, APA, APR, AIF®, has
worked for National Benefit
Services, LLC for more than
15 years and is the firm’s Retirement
Vice President. He received a B.S.
degree in accounting from the
University of Phoenix and an MBA
from Brigham Young University.
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Brian Quinn
Darren Recker
William Reinhardt
Terry Rifenburgh
Blayne Rinne
Kim Roossien
Ben Ross
Melissa Sanders
Danielle Savage
Megan Scherrer
Sholom Schneider
Karis Schwent
Shannon Sherman
Marla Shires
Susan Sifford
Maria Silva
Amanda Skeels
Heather Smelley
Andrew Smith
Stacey Snyder
Ben Swearingen
Tu Ta-Wiley
Mary Taschner
Eric Taylor
Chelsea Thode
Kevin Thompson
Margaret Tieber
Travis Trujillo
Amy Unsen
Ashlee Vasquez
Silvana Veit
Adriana B Vergaray Lopez
Lynn Walker
Laura Wallace
Andrew Ward
Eboni Ward
Joyce Warren
Jenna Watson
Tracy Watson
Christi Webster
Brad Wehrfritz
Jonathan Weldon
Robin White
Rebecca Wifler
Melissa Wiler
Lori Wintering
Dave Witt
Katie Wragge
WWW.ASPPA-NET.ORG
51
EDUCATION
Want Your Employees To
Be Productive, Faster?
The answer: the
updated Retirement
Plan Fundamentals
(RPF) course.
BY BRIAN FURGALA
52
D
o you remember how you
first started in the industry?
For many of us, retirement
plan administration was an unknown
field and we just felt our way through
it. Rarely do you hear about someone
taking undergraduate classes on
employee benefits or achieving some
type of certification prior to being
hired. This trend continues for
individuals entering our profession
today. They have no clue about the
retirement plan industry or the role
and functions of plan administration
until they experience it through “trial
by fire.”
ASPPA wants to change the
trend. We reviewed our introductory
education offering, Retirement Plan
Fundamentals (RPF), to answer
the question, “What should newly
hired individuals understand as
soon as possible about retirement
plan administration?” The result is a
substantially revised RPF course which
ensures that newly hired employees are
productive as quickly as possible.
We kept some important criteria
in mind during the restructuring
process. First, we knew that the
individuals would have little or no
prior knowledge of anything related
to retirement plan administration. As
such, we didn’t want to present too
much, too fast. Topics needed to be
presented in stages and the amount of
detail gradually increased in each stage.
Second, the content needed to
be divided into topic areas more
in tune with current practices and
having a better application to today’s
job functions. Employers may need
to prioritize certain topics based
on relevance or impact to their
employees’ current responsibilities.
Third, we should enhance
learner interactivity. We wanted
to offer a more engaging learning
experience for learners and more
immediate and targeted feedback for
both the learner and the employer.
And finally, we needed to take
advantage of current technology.
To do so we would utilize diverse
media and technologies to allow for
flexible instructional strategies and
accommodate a variety of learning
arrangements.
With these criteria in mind,
the new and improved RPF course
targets newly hired individuals
who need a practical and brief
introduction to the retirement plan
industry. We replaced the old twopart course with a six-part modular
course. The six modules in the new
RPF course are:
• Lifecycle of a Plan: an
introduction to the industry of
retirement plan administration
• Contributions: covering
eligibility, entry, enrollment and
processing contributions
• Distributions: explaining
distribution rules and processing
of distribution requests
• Participant Loans: presenting
basic rules and procedures for
participant loans
• Testing: describing testing rules
and performance of plan testing
• New Business: focusing on
new business implementation,
specifically the takeover of
new business and investment
conversions
By delivering the content in
these shorter modules, the employer
and candidate have more flexible
training options. More experienced
individuals can complete all modules
at once to quickly earn the RPF
Certificate. Newer employees can
take the Lifecycle of a Plan module
immediately and gradually complete
the remaining modules as they gain
experience. The redesigned RPF
course complements instructor-led
training, allowing an organization’s
training department to create different
learning programs depending upon
the employee’s department.
The new online RPF course
offers improved self-paced study, with
a built in pretest, practice activities,
and feedback to help candidates assess
their own progress as they learn. This
maximizes time spent for both the
new employee and the supervisor.
For example, a new account manager
may be instructed to complete the
RPF course while shadowing another
account manager.
In order to enhance the
candidate’s learning experience, each
module is divided into smaller units.
Due to the broad range of topic areas
covered, each module does not have
the same number of units. Breaking
each module down into these units
allows for shorter learning activities.
Now a candidate can complete a
unit in a reduced amount of time
and then return to study at a later
occasion. The completion of each
unit also provides more immediate
and targeted feedback as compared to
waiting until the end of the module.
Each of the six modules contain
the following instructional strategies
to provide the best learning
experience:
• Pretest: Each RPF candidate
brings a different level of
experience and knowledge with
them when they begin the course.
The pretest helps candidates
identify which areas of the content
require the most study for them.
The pretest can also be retaken as
practice for the final exam.
The new and
improved RPF
course targets
newly hired
individuals who
need a practical
and brief
introduction to
the retirement
plan industry.”
• Study Guide: The text has been
completely rewritten to include
a wealth of practical scenarios,
guiding questions, explanatory
text and examples. Delivered in
PDF form, the text is accessible on
most devices but can also be easily
printed for those who prefer hard
copy.
• Instructional Activities: The
course includes a set of online
interactive questions and activities
to reinforce and practice the skills
and knowledge after they have
been presented. This aids with
retention and helps candidates to
focus on the most important parts
of the material. These activities
provide additional practice for
the exam questions and provide
detailed feedback to help learners
understand why their answer
was right or wrong. The practice
activities may be paused, resumed
or repeated as often as needed.
• Additional Resources: Each
module contains links to additional
information online, handouts and
references. These resources can be
used to enhance studying or as a
helpful tool on the job. This ensures
that learning doesn’t end with the
course, but is transferred to on-thejob performance.
When the candidates are ready
to finish a module, they complete
an online exam. The modules have
differing numbers of exam questions
based on the amount of content.
While the New Business module has
15 questions, the Testing module has
40 questions. Three exam attempts
are included in each module to
allow candidates to learn from their
mistakes and improve their scores.
Finally, and maybe most
importantly, the new RPF course
utilizes the latest technology to
provide for a variety of learning
arrangements and offers the flexibility
needed for today’s workforce. The
new RPF course is compatible on a
wide variety of devices. This gives
the candidates more opportunities
to practice skills and provides more
timely and focused feedback.
ASPPA wants to change how
employees are introduced to
retirement plan administration.
Newly hired individuals shouldn’t
have to “feel their way through”
for a number of years or be subject
to “trial by fire” learning. The new
RPF course provides your employees
the opportunity to learn about the
industry quickly, easily and fully.
For more information about the new
RPF modules, go to asppa-net.org/
Education/RPF-Modules.
Brian Furgala, Esq., CPC,
QPA, represents private and
public sector employers, as
well as tax-exempt
organizations, in achieving their
retirement plan, fringe benefit or
executive compensation objectives
while satisfying the applicable laws and
regulations. He also provides technical
advice and consulting to TPAs,
investment advisors, accountants and
actuaries.
WWW.ASPPA-NET.ORG
53
ETHICS
Reporting Professional
Misconduct (Part 2)
What does the American Retirement Association Code say about the duty to
report another pension professional’s misconduct?
BY LAUREN BLOOM
I
54
n Part 1 of this two-part series, published in the Winter
2016 issue, we looked at some of the ethical challenges
that pension professionals can face when they learn of a
colleague’s apparent misconduct. To recap the example
used in Part 1, American Retirement Association (ARA)
member Jean learned, while working for a client that was
the sponsor of a defined benefit plan, that the client had
been mishandling participants’ 401(k) funds in violation
of federal law. It appeared that another ARA member,
Paul, had advised the client that its 401(k) practices, while
unorthodox, were unlikely to result in any serious penalty.
Jean believes that Paul acted unprofessionally in giving the
client that advice. She also suspects that the client might
have paid Paul extra for an opinion that would support its
practices if they were ever challenged.
As we saw, Jean may be required
by law if she is an attorney or by
the ARA’s Code of Professional
Conduct if she is an attorney or
actuary to report Paul’s apparent
failure of professionalism to the ARA
and, perhaps, the Internal Revenue
Service. Let’s presume, however,
that someone beat her to the punch.
Shortly after discovering what Paul
had done, Jean receives a letter
from ARA’s Professional Conduct
Committee. The letter states that
a complaint has been filed against
Paul, and that Jean was identified as
someone who might have knowledge
or information concerning Paul’s
actions. The committee is conducting
a fact-finding inquiry into the
complaint, and asks Jean to provide
whatever information she can to
support its investigation.
What should Jean do now?
Her immediate reaction might
be not to respond at all. Jean thinks
the client would probably consider
information about its 401(k) practices
and Paul’s opinion confidential. She’s
concerned that asking the client for
permission to share information with
the Professional Conduct Committee
will damage her relationship with
the client. She’s also worried that, if
she says or does anything that appears
critical of Paul, he’ll file a retaliatory
complaint against her with the
Professional Conduct Committee, or
even take her to court for defamation.
Having been contacted by the
committee, however, Jean has a
professional obligation to make an
appropriate response. Section 13 of
ARA’s Code of Professional Conduct
provides in pertinent part:
A Member shall respond promptly in
writing to any communication received
from a person duly authorized by
American Retirement Association
to obtain information or assistance
regarding a Member’s possible
violation of this Code. The Member’s
responsibility to respond shall be
subject to Section 5 of this Code,
“Confidentiality,” and any other
confidentiality requirements imposed
by Law. In the absence of a full and
timely response, American Retirement
Association may resolve such
possible violations based on available
information.
Section 13 makes clear that
Jean should not simply ignore the
committee’s letter. But how much can
she say? Jean might refer to Section
5 of the ARA Code of Professional
Conduct, which states, “A Member
shall not disclose to another party any
Confidential Information obtained
in rendering Professional Services
for a Principal unless authorized to
do so by the Principal or required
to do so by Law.” Under Section
5, Jean cannot disclose information
which she has reason to believe
her client “would not wish to be
divulged” (part of the definition
of “Confidential Information” in
Section 1 of the Code).
Sections 5 and 13 may seem to be
in conflict. However, it is possible to
harmonize them. Jean should answer
the committee’s letter, but not in a
way that violates her duty to respect
her client’s confidential information.
There are at least two ways in which
she can do this.
Jean can inform the client that
she has received an inquiry from the
committee and request permission
to disclose what she learned about
Paul. (She doesn’t know that the client
will refuse. The client might have
innocently relied on Paul’s advice,
and could be receptive to correcting
its practices.) While the client’s initial
response may be negative, Jean can
describe the confidentiality of ARA’s
investigative process and explain its
importance to the employee benefits
community. Pension professionals’
work supports the financial security
of millions of Americans, and their
integrity is fundamental to the success
of the U.S. retirement system. If
Jean can help the client understand
why employee benefits professionals
need to be held to high professional
standards, the client may authorize
Jean to disclose what she has
learned to the Professional Conduct
Committee.
But if the client refuses, Jean can
still fulfill her responsibilities under
Section 13. She can prepare a short
letter or e-mail to the committee
explaining that any information she
has about Paul is confidential, and
under Section 5, cannot be disclosed.
That response will allow the
committee to refocus its investigation.
It will also demonstrate Jean’s
commitment to the integrity of the
ARA process.
If Jean remains concerned about
what Paul might do, she’d be smart
to consult a lawyer to make sure that
her response to the committee is
truthful, factual and lawful. Paul may
not like being investigated, but ARA’s
discipline process is not designed to be
defamatory or unnecessarily punitive.
If Jean responds appropriately to
the committee’s inquiry, she’s likely
to face little legal risk, Paul will
be instructed in better professional
practice, and Jean will have made a
positive contribution to the integrity
of ARA’s discipline process.
Lauren Bloom is the general
counsel & director of
professionalism, Elegant
Solutions Consulting, LLC,
in Springfield, VA. She is an attorney
who speaks, writes and consults on
business ethics and litigation risk
management.
WWW.ASPPA-NET.ORG
55
SUCCESS STORIES
QACAs: Making
Retirement Veggies
More Than Palatable
How a large equipment
rental firm boosted its
401(k) participation rate
from below 60% to over 95%.
BY JOHN IEKEL
56
D
o you like brussels sprouts? Does anyone, really? For many
employees, retirement plans are like brussels sprouts — while
participation in a workplace retirement plan may be unpalatable,
it is good for their financial health and future.
The Department of Labor quantifies that sentiment, saying that
approximately 30% of eligible workers do not participate in an employerprovided 401(k). Is there some kind of ingredient that will make retirement
brussels sprouts more than simply palatable?
Enter the automatic feature.
According to the DOL, automatic enrollment can cut that rejection rate
by more than half. And one of those is the qualified automatic contribution
arrangement (QACA), an automatic enrollment 401(k) plan that automatically
passes certain kinds of annual required testing. The plan must include certain
features, such as a fixed schedule of automatic employee contributions, employer
contributions, a special vesting schedule and specific notice requirements.
Do QACAs accomplish the intended goal
of helping transform what is unattractive
to some a delicacy instead?”
The DOL requires that under
a QACA program, the initial
automatic employee contribution
must be at least 3% of an employee’s
compensation. Contributions may
have to automatically increase so
that, by the fifth year, the automatic
employee contribution is at least 6% of
compensation.
The automatic employee
contributions cannot exceed 10%
of compensation in any year. An
employee may change the amount of
his or her employee contributions or
choose not to contribute, but must do
so by making an affirmative election.
An employer must at least make
either:
• a matching contribution of 100%
for salary deferrals up to 1% of
compensation and a 50% match for
all salary deferrals above 1%, but no
more than 6% of compensation; or
• a nonelective contribution of 3% of
compensation to all participants.
An employer also may make
additional contributions to employees’
accounts, and has the flexibility
to change the amounts of those
additional contributions each year,
according to business conditions.
Do QACAs accomplish the
intended goal of helping transform
what is unattractive to some a
delicacy instead? Randall Riggins,
CEP, CSA, RFC, AIF, PRP,
C(k)P, a financial advisor with
Oxman, Riggins & Associates, LLC,
offers the experience of one of his
clients as an illustration.
The client, a construction
equipment rental company — the
second-largest company of its kind in
market share in the United States, and
with 9,000 employees — had plenty
of brussels sprouts haters. According
to Riggins, the participation rate in
the company’s 401(k) was below 60%.
Many employers could address a
low participation rate by providing
traditional on-site education and
information to their employees. But
Riggins’ client is not one of them
— it has more than 500 locations
across the United States, with 10-15
employees at each; not only that, very
few of those employees stay on-site on
any given day.
That means that the client had to
use other means to get the employees
to eat their retirement veggies.
Riggins’ recipe: instituting a QACA.
“We presented it to the managers
at a managers’ meeting and explained
why we were taking this approach,”
says Riggins. The response? “They
embraced it,” he reports, adding that
they were enthusiastic. Particularly
important, he said, was having the
CEO’s buy-in. That, says Riggins,
“was the key.”
The client’s officers had the
employees in mind, Riggins
says: “The company expected their
employees to work hard for them and
they are well paid, but exhibited poor
financial behavior. Their work life
is physical and the officers wanted to
do everything possible [to make sure]
that they will retire with a decent
amount of money.” The officers
take a lot of pride in helping their
employees, he adds.
Under the company’s QACA
program, after one year of service,
employees are sent an enrollment
package with a memo explaining
that unless they indicate that they
do not want to participate, they
will be automatically enrolled at
3% of pay. The contribution will
automatically escalate by 1% per year
to a maximum of 12% of pay. Since it
has a decentralized structure, the firm
educates employees about QACAs via
information sent them by mail and
videos posted on its websites.
It is unlikely that his client will
change its QACA program, Riggins
says, although it is possible that the
initial contribution rate may be
increased from 3% to 6%.
So is it working?
In spades, according to Riggins,
who says it is “a huge success.” And a
participation rate in the client’s 401(k)
above 95% backs that up.
Not only that, its employees like
it. “We had many comments thanking
us. Very few complaints,” reports
Riggins. And it’s been a boon to the
client, too. “The provider takes on a
lot of the admin burdens: eligibility
tracking and sending the enrollment
booklets, etc.,” he says.
So this client had a good
experience — but what about other
employers? Riggins indicates that this
client’s experience is not an isolated
instance. “I have never experienced
where a client has used auto features
where it didn’t work,” he says. “It
leverages human nature,” he adds.
Not everyone may share his
client’s enthusiasm for adding a
QACA to its plan and looking out for
employees in that manner, Riggins
indicates. “Some companies feel
that a 401(k) plan is a benefit to
check off the box as an offering but
are not interested in the results,” he
observes. But, he adds, “If the goal
of the retirement plan is to help and
participate with the employee, and a
successful outcome is important,” it
will be willing to take a look.
WWW.ASPPA-NET.ORG
57
TECHNOLOGY
B Y YA N N I S P. K O U M A N T A R O S A N D A D A M C . P O Z E K
> 01
G
Teleport» TeleportApp.co
et your friends delivered. Not in a “sneakattack, bag-over-the-head, dropped off at
some clandestine location” sorta way; but in
a “they haven’t cottoned-on to technology
so you’re doing it for them” sorta way. Think
of Teleport as Uber in reverse.
Say a client/colleague/prospect is in town and is
staying at a hotel across town where you have to be
lucky to catch the one taxi that passes by every three
hours. Your client/colleague/prospect isn’t all that
into apps and such but has a smartphone. Teleport
him or her to that great restaurant just down the
street from your office to meet for dinner. Instead of
something businessy, maybe it’s a buddy and a late
night screening of Rocky Horror that you just saw on a
marquee. Works the same either way.
Simply launch Teleport and search for your
friend’s contact info (pulled from your contact list)
and send them a request. Yes, it’s a request they have
to accept; otherwise we’re back at that sneak-attack
thing, which we’re pretty sure might get you arrested.
Your friend doesn’t even need to have Teleport or
Uber accounts; they just click on the weblink, follow
the prompt to drop a pin with their location to
summon whatever level of Uber you authorized (X,
Black car, SUV, etc.) The link even includes a map of
where you are and an ETA.
Teleport works wherever Uber does, and they add
an additional markup of 0% to the regular Uber fare.
That no-extra-fee thing is nice since the teleporter
gets to pick up the tab.
58
>02
P
LastPass» LastPass.com
asswords are a pain in the neck… completely
necessary in our constantly connected world,
but still a pain. What are the options to keep
up with all of them? Just go with the ubiquitous
“password” or “12345”; use the same two
or three combinations for everything; keep a
spreadsheet called Password.xls to make it easy to find
them if your computer gets hacked? And what about
remembering to change them on some period basis? Yeah
right!
What about using LastPass and only needing to
remember a single password from now on? Yep, it’s as
good as it sounds. Anytime you go to a website — to pay
bills online, to check your 401(k) balance or to buy tickets
to Burning Man — LastPass will ask you if you want it to
remember the site and your login information for future
use. Once you have a few sites added, it will give you a
security score based on the strength of your passwords
(hint: 12345 is pretty weak) and how often you repeat
passwords. If you want to beef up your score, it will autogenerate passwords for you based on parameters you set
for length and special characters. LastPass will also prompt
you to change your passwords from time to time.
There are versions for all major smartphone platforms
and web browsers, as well as desktop apps for both
Windows and Mac. The basic version is free, but you can
upgrade to the Premium version for only $12 per year to
sync passwords across all your devices. They use state-ofthe-art encryption, so your passwords are safe. The only
one you need to remember is the one to login to LastPass.
That’s the last password you’ll need. Get it? Last password?
>03
I
With both a Cloud version and a local desktop version,
you data geeks and spreadsheet junkies can make all kinds
of visual representations of data on your business. With more
than 40 API connections already established, you can link
Power BI immediately to applications like MailChimp, Google
Analytics, CRM and SalesForce to bring your data to life
visually. Bottom line: If you are paying for Office 365 and not
using Power BI, you are wasting money and time. Get it now,
use it regularly, and improve your business!
>04
Y
Power BI» PowerBI.com
n our last column, we told you that Microsoft was back,
and it is. This time, we will tell you about one of the
hottest Visualization tools for small and medium sized
businesses, which can help you make decisions quicker.
Microsoft created Power BI (Power Business Intelligence),
which is an amazing software application part of the Office
365 system.
As the technology giant touts, “Microsoft Power BI
transforms your company's data into rich visuals for you to
collect and organize so you can focus on what matters to you.
Stay in the know, spot trends as they happen, and push your
business further.”
Mint» Mint.com
ears ago I was all about Quicken and hated on Mint.
However, after several years of migrating my life to
the Cloud, it appears that Mint rules and Quicken
drools. Mint is an online personal finance website and
application that links all of your accounts into one place
so you can track your spending, monitor your credit and see
the big picture of your personal finances.
Since Intuit now owns both Quicken and Mint, they
have really catered Mint to the demographic who likes to
use applications, and Quicken to the folks who like desktop
software. Mint is free, while Quicken has a software licensing
cost, but you get a ton of advertisements on Mint, which I am
okay with. They tell you about credit cards with lower rates,
and all kinds of other things, but the software developers at
Mint have really mastered push or pull notifications.
For instance, I love that Mint tells me if any of my banks
charge me any kind of fee. That way I can call the bank and
ask for an abatement of that fee if something went awry with
my planning. If you ever transfer a balance onto a credit card
with a promotional rate, it will tell you when that promotional
rate changes to the really terrible double digit rate so you
can pay it off or re-transfer. Anyway, sometimes we need to
update our opinions on Cheap Technology because technology
changes very rapidly!
Whether you are a website or app kind of person, if you
don’t use anything to help with your personal finances, Mint
will be a great home run!
Yannis P. Koumantaros, CPC, QPA, QKA, is a
shareholder with Spectrum Pension Consultants, Inc.
in Tacoma, Wash. He is a frequent speaker at national
conferences, and is the editor of the blog and
newsroom at www.SpectrumPension.com.
Adam C. Pozek, ERPA, QPA, QKA, CPFA, is a partner
with DWC ERISA Consultants, LLC in Salem, N.H. He is
a frequent writer and presenter and publishes a blog
at www.PozekOnPension.com.
Adam and Yannis are always on the lookout for new and creative mobile applications
and other technologies. If you have any tips or suggestions, please email them at:
[email protected] and [email protected].
WWW.ASPPA-NET.ORG
59
GAC Update
BY CRAIG P. HOFFMAN
ASPPA Prevails on new Form 5500 Questions
In the end, the IRS’ instructions for the 2015 Form 5500 indicated
that the troublesome new questions would be optional.
A
SPPA’s Government Affairs
Committee (GAC) continues
in its efforts to represent
the interests of our members in
Washington, D.C. I am happy to
report on a recent success that should
be of great interest to all ASPPA
members who work with Form 5500s.
Last fall, I reported on ASPPA
GAC’s efforts with respect to certain
new questions being added to the
Form 5500 for 2015 plan year reports.
These questions were included at
the behest of the IRS in a new form
called the “Form 5500-SUP.” For
those who file through the EFAST
system, however, the new questions
would simply be imbedded in the
existing form and schedules.
The new questions were first
proposed in a Federal Register filing in
December 2014. ASPPA GAC filed
a comment letter in February 2015
suggesting a number of ways the new
questions could be changed to make
the collection of the information
less burdensome. We also strongly
suggested that the new questions
be delayed for at least a year to give
software providers and plan sponsors
time to update their systems.
When the federal government
seeks to collect information from
Americans in the private sector,
provisions of federal law that are
generally referred to as the Paperwork
Reduction Act (PRA) must be
satisfied. The PRA requires approval
by the Office of Management and
Budget (OMB) before a federal agency
seeking to collect information can do
so. The OMB review looks to whether
60
the information is really needed by the
agency and whether there may be less
burdensome collection methods.
The new questions on the 2015
Form 5500 are subject to the PRA and
therefore to OMB review. Accordingly,
the IRS submitted them to OMB in
May of last year. The IRS certified the
information was needed and that the
burdens of collection would be slight.
Upon review by ASPPA GAC, it was
obvious from the OMB filing that
the IRS had completely ignored our
thoughtful suggestions for improving
the questions. As a result, ASPPA
GAC filed a comment letter with
OMB that contested the statements
made by the IRS in their certification.
We told OMB that there were better
ways to collect the information as
indicated in our earlier comment letter.
Additionally, there was no pressing
reason to add the new questions in such
a hurried fashion. We also asserted that
by delaying implementation for at least
one year, the costs and burdens to plan
sponsors and administrators could be
greatly reduced.
After filing the OMB comment
letter, ASPPA GAC continued to press
the issue. A face-to-face meeting was
held in July with officials from the
OMB, the Treasury Department and
the IRS. We reiterated our concerns
and asked for at least a one-year delay.
We also had meetings on Capitol Hill
that resulted in a number of members
of Congress writing to OMB to
express their concern. We also wrote
one last comment letter to the IRS in
September 2015 requesting that at the
very least, the new questions should be
made optional for the 2015 plan year.
As we approached the end of 2015,
ASPPA GAC became concerned since
the final version of the form had not
been released. With filing season only
a month away, we finally got an answer
and it was good news worth waiting
for. On Dec. 1, 2015, the IRS issued
the final version of Form 5500 for the
2015 plan year. The accompanying
instructions indicated that the new
questions would be optional for 2015
(although the IRS recommended that
they be answered if possible).
Needless to say, ASPPA GAC was
very happy to see that the IRS finally
agreed to our request for a delay. The
2015 instructions, however, indicate
that the questions will be mandatory
for the 2016 plan year reports. ASPPA
GAC is now reviewing the 2015 form
and we expect to file another comment
letter that will recommend ways to
improve the questions for 2016. In
the meantime, many commentators
are recommending that since the new
questions are optional, in most cases
they can be ignored, at least for the
time being. Nevertheless, practitioners
and plan sponsors should be preparing
their processes and systems so they will
be ready with answers next year.
Craig P. Hoffman, APM, is
General Counsel for the
American Retirement
Association.
ASPPA’S Retirement Plan Fundamentals Course
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