Retirement Solutions Now Header

 Sponsor News - February 2013

Don’t Let The DOL Regulatory Posse Hang You

Do you own a business and offer an ERISA 401(k) Defined Contribution plan to your employees? If you answered yes, welcome to the new world of fee disclosure. 

Today, 401(k)s are the overwhelming choice for corporate retirement plans. The Department of Labor estimates that there are some 483,000 participant directed plans, covering 72 million participants and $4 trillion in assets.

For a number of years, the DOL and Congress have been increasingly concerned about the lack of fee transparency in 401(k) plans, and believe that too few plan sponsors and plan participants know enough about the fees they are paying and what services those fees cover. In order to address these concerns, the DOL began to make changes to the way plan service providers and plan sponsors are required to disclose information about fees and to require a consistent design format. The first step in the process entailed revisions in the reporting of fees on Schedule C of the form 5500.

Then, in 2010, two new regulations were announced:

  • Disclosure to plan sponsors: ERISA section 408(b)(2) was revised to require plan service providers (Fidelity, Mass Mutual, Principal, etc.) and financial advisors to disclose plan fees and services to plan sponsors.
  • Disclosure to plan participants: ERISA section 404(a)(5) was revised to require plan sponsors to disclose to their participants, fees that are being deducted from their account, both directly and through the management expenses of their plan investments.

The process the DOL generally follows when instituting new rules is to announce them and allow a period of review and public comment. There are often revisions after the comment period and sometimes the implementation date is pushed back. That is what happened in this instance. After a number of revisions, the final disclosure rules were announced and became effective in 2012. For calendar year plans, the effective date for the plan sponsor disclosure was July 1, 2012, and Aug. 30, 2012 for the plan participant disclosure.

What does this mean to you as a plan sponsor and/or plan fiduciary? Well, it means that you had better pay close attention to what's going on in your plan because you could be subject to plan level and even personal financial liability if things go south. According to Benefits Pro, the DOL reported that it had collected more than $1 billion in fines in FY 2010. In addition, some 700 new agents have been hired in order to beef up enforcement and audit efforts.

So, what do you do?

The first thing to do is to read and understand the new rules. Then, determine if you have an ERISA plan and are therefore subject to compliance. If you sponsor a participant directed 401(k) plan, assume you are. If you sponsor a SIMPLE IRA, SEP or IRA plan, you are not. If you sponsor a 403(b) plan you may or may not be, and you should consult your service provider or an employee benefits attorney.
Be sure that your service providers have given you the required plan level information, and make sure that they have the mechanisms in place to support you in providing your participants with the information they must receive.

Understand the definition of "fiduciary" and familiarize yourself with your responsibilities. The ERISA definition provides, in part, that:
Anyone who exercises any discretionary authority or control respecting the management of a plan or management or disposition of plan assets is a fiduciary.

Anyone who has any discretionary authority or discretionary responsibility in the administration of the plan is a fiduciary.

Anyone who renders investment advice for a fee or other compensation with respect to plan assets is a fiduciary.

Establish a due diligence process that includes a formal review of your plan, at least annually. Have written procedures on how you manage your process. Have a written Investment Policy Statement (IPS) and make sure that you are operating your plan according to what it says. Have a fiduciary file with minutes of meetings in order to demonstrate that you are following your process. Being able to hand a DOL auditor a well organized and maintained file will go a long way toward demonstrating that you are fulfilling your responsibilities.

As the plan fiduciary you are required to determine whether the fees you and your participants pay for services rendered are "reasonable." You are not required to have the lowest cost plan; however, the fees must be commensurate with services provided, and you as the plan fiduciary are the representative of your participants. High service levels can command higher fees. One way to make a determination is to benchmark your plan, through an independent source, against other plans of like size and complexity.

It would be a good idea to have a benchmark study done and documented in 2012 as a baseline for how your plan measures up. It will also help determine if you should negotiate reduced pricing with your current service provider and advisor, or find new ones. A benchmarking study should be done every three to five years.

While these new rules bring an additional compliance and cost burden to retirement plan service providers and advisors, shining the light of transparency on what people actually pay for their retirement plan is long overdue.

408(b)(2) Ruminations from the Field

Written by Sheldon Smith and Chris Rylands
Wednesday, October 17, 2012

The regulations mandating that covered service providers disclose information, particularly fee information, required that the first “explosion” of the disclosure information occur by July 1, 2012. Prior to July 1, 2012, we provided lots of information about the disclosure requirements in an effort to assist the fiduciaries in avoiding a prohibited transaction (including some prior blog posts). After July 1, 2012, we followed up and asked if there were questions or if we could assist in any fashion. We have now had three months to take a look at what happened as a result of this first round of plan level fee disclosure and discuss the effort with other advisors. Looking primarily at defined contribution plans, and particularly 401(k) plans and ESOPs, we culled some anecdotal information, and from it, there appear to be a number of pretty consistent patterns and results.

*    Diligent fiduciaries who commonly utilize the services of independent investment advisors engaged the advisors to assist them in reviewing, understanding and acting on the disclosures.
*    These fiduciaries, where advisors are retained, identified the plan’s covered service providers and confirmed that all of them provided disclosures or, where something was missing or incomplete, followed the rules to obtain the disclosures.
*    These same fiduciaries, with the assistance of advisors, reviewed the disclosures and many have taken steps to work with the advisor to determine reasonableness of fees and necessity of services. Some have done comparisons by benchmarking plan fees to assist in determining reasonableness. Some have done a thorough analysis and have memorialized their conclusions.
*    Some diligent fiduciaries have asked their advisors, or their advisors have recommended, that the plan conduct an RFP, a “ghost” RFP, or an RFI in order to do a fee and service comparison. Some are underway at this time, and some have already been finalized.
*    Even where some diligent fiduciaries may have incomplete resources, they still reviewed the disclosures and made earnest efforts to understand their plan’s fee structure.

*    Some plan fiduciaries found the disclosures difficult to review and some may have even ignored the disclosures, especially in situations where an independent investment advisor is not retained.
*    Many of these same fiduciaries have difficulty identifying which of their providers are covered service providers subject to the fee disclosure rules.
*    We have heard of only a few instances where these fiduciaries have been able to engage in a meaningful benchmarking effort.
*    Inertia seems to be a common problem in these cases, and unless the provider does something to upset the plan sponsor, these fiduciaries are not usually persuaded to change the status quo based solely on the disclosures.
*    Some of these fiduciaries contacted advisors to ask questions about the disclosures and what they meant, but it appears that only a few actually went through a process to determine reasonableness of fees even after consulting with advisors.

*    Fiduciaries generally are unable to determine on their own whether or not a fee is reasonable in the circumstances and rely heavily on the advisor, where there is one, to tell them that the fees are reasonable. Some rely on independent advisors and some rely on advice (possibly conflicted) from the firm offering the plan’s investments.
*    Although the “necessity” of a particular service may have been discussed in general terms, anecdotal evidence suggests that there is significant difficulty in drawing prudent conclusions with respect to this requirement. When considering necessity , the fiduciaries rely on the providers, often third party administrators, to “assure” them that the services being provided are necessary for the plan’s participants and beneficiaries.
*    The disclosures were often deemed to be too complex for most of the fiduciaries to understand content and import.
*    We are not aware of any fee or provider changes that have resulted from an analysis of the disclosures.
*    We are aware of only one plan sponsor who made a request of a covered service provider to make further disclosures.
*    Those plan sponsors and fiduciaries who have conducted any sort of analysis seem quite confident that their plan’s fee and service structures already in place are compliant.

What challenges have you faced with the 408(b)(2) service provider fee disclosures? Did you find them helpful? Please post your thoughts in a comment below.

The Easiest Way to Reduce Personal Fiduciary Liability for Plan Sponsors and Other Non-Professional Trustees

By Christopher Carosa, | October 16, 2012

(The following is the first in a five-part series of articles devoted to helping fiduciaries, especially individual trustees and ERISA plan sponsors, best align investment goals with beneficiaries’ needs.)

Congratulations again. You are among the few to be chosen to serve as an individual trustee, director, officer or, more generally, fiduciary. We have discussed the importance of the role (see “The Role and Responsibilities of the Individual Trustee ,” , August 7, 2012). Certainly, we do not need to talk about the prestige of the position. Before we get too consumed with the good news, we need to bluntly reveal the bad news.

If you, as an individual fiduciary, fail to meet the needs of the beneficiaries in any manner, you may be held personally liable for such failure. Remember, as an individual trustee, the most you may be able to do is to share that liability. You may never be able to fully remove your personal liability. In practical terms, your investment adviser may choose to make inappropriate investments and render the trust unable to provide for the beneficiaries as intended. You may think, “Well, that’s the investment adviser’s problem.” Wrong. Sure, the investment adviser may be sued, but nothing prevents the beneficiaries from suing the trustees. After all, the trustees have responsibility for selecting the investment adviser in the first place.

There may be some heartening news. However, beginning in the 1990’s with the advent of the new Prudent Investor Laws as well as certain pronouncements of government regulators (namely, the Department of Labor), individual trustees can greatly reduce or even remove personal liability as it pertains to investment management. In fact, it’s incredibly easy. Given the anxiety caused by selecting investments, it’s clear individual trustees, like, for example, the average 401k plan sponsor, still haven’t grasped just how stress-free they can make their job.
To reduce fiduciary liability in this area, the individual trustee will need to hire a professional investment adviser. After all, you can’t remove fiduciary liability for a particular function if you continue to perform the function. No, that function needs to first be outsourced to a qualified professional. In the case of the Uniform Prudent Investor Act, this generally means hiring a registered investment adviser (RIA). In the case of ERISA plans, the plan sponsor will need to hire a fiduciary, which, given the confusion caused by dual registration, may or may not be a RIA. (One potential way plan sponsors can insure this is not a problem is to only hire RIAs who are not dual registered, but there are plenty of dual registrants who can also act as a fiduciary.)

But the mere hiring of the professional investment adviser does not alone insure a reduction in fiduciary liability. No, the individual trustee must also produce sufficient documentation to provide evidence of proper and comprehensive due diligence in both the initial selection and the ongoing monitoring process. No regulatory body has ever defined the selection and monitoring process. It’s generally understood such documentation must be thoroughly understood by the individual trustee, faithfully executed by the individual trustee and consistently applied by the individual trustee. Certainly, having a structured selection and monitoring process, such as outlined in "Due Diligence: The Individual Trustee’s Guide to Selecting and Monitoring a Professional Investment Adviser" , may prove helpful to the individual trustee. If you work in the non-ERISA world, you may be subject to additional state laws regarding trust. In such cases, it’s always wise to consult a trust attorney familiar with the trust laws in that specific state.

It might seem the job is done once the selection and monitoring process of the RIA has been implemented, but it is not. Whether subject to state trust law or ERISA trust law, the primary duty of a trustee remains to provide for the beneficiaries as defined by the trust document (yes, ERISA plans are trust documents). The (perhaps most important) task for the individual trustee, then, is to best align the appropriate investment goals with the trust’s beneficiaries. In fact, you’d want to have this done either prior to or in conjunction with hiring the RIA.
You may think all you have to do is to follow the instructions of the trust document. Again, this is a naïve notion. Today’s trust lawyers have a greater understanding of the need for flexibility when it comes to investments. More significantly, today’s government legislators understand that very same need. In the past, state governments (state law governs most personal trusts) restricted the types of investments a trust might purchase. For a long time, trusts were not permitted to buy common stocks. This has changed. State and federal laws (federal law governs most employee benefit plans) now permit a broad array of investments. Indeed, Section 404(c) requires all 401k plans to offer at least three options, each with their own “materially different risk and return characteristics.” While this generally refers to investment style – something very different than investment goal – it can also mean investment goal; therefore, a single 401k plan may include investment options support three different investment goals.

With little or no guidance from the law and the trend toward broadly written trust documents, the individual trustee must consciously choose the appropriate investment goal (or goals, in the case of 401k plans). The trust document states the intention of the trust (e.g., to maintain the standard of living for a decedent’s spouse or to pay the ongoing expenses of a non-profit institution or to provide sufficient income in one’s retirement). The individual trustee must determine the investment goal(s) most suitable for meeting the trust’s intention. This documentation is essential for the individual trustee to reduce his personal fiduciary liability. This is the document that becomes the foundation of the trust’s Investment Policy Statement.

Before we begin our discussion of choosing the appropriate investment goal, we will need to explore some common investing mistakes. After all, “winning by not losing” stands out as one of the cornerstones of successful investing. By avoiding the obvious pitfalls faced by investors, the individual trustee will possess an investment portfolio more likely to meet the necessary investment goals.

Fiduciary Responsibilities for a Plan with Self-directed Brokerage Accounts Only

Many small self-directed retirement plans provide each participant with his/her own self-directed brokerage account (SDBA) rather than a platform of funds from which to choose. Plans often use the SDBA approach for participant direction because they have insufficient assets to qualify for a platform of investment. Others choose this approach because it provides the owners more flexibility in selecting investment options. The approach is particularly popular in small professional practices (e.g., doctors). In this Technical Update, we will address the specific issues that apply to a plan that provides the SDBA as the only investment option.

If a plan allows each participant to select his/her own self-directed brokerage account (SDBA), does the plan fiduciary need to be involved in the selection of the brokerage account provider?

Yes. ERISA’s fiduciary duties of prudence and loyalty to participants require the fiduciary to take into account the nature and quality of services provided by the broker. Comment: Fiduciaries for plans that allow a participant to select his/her own brokerage provider will, at a minimum, need to review and monitor the selection of the brokerage provider. Obviously, complying with the disclosure requirements becomes more difficult with more brokerage providers.

Would the plan need to provide disclosures to all participants and beneficiaries with respect to each brokerage account provider?

Yes. Just as a plan cannot limit brokerage account disclosures to participants using the accounts, a plan offering a choice of brokers cannot limit the disclosures to the broker the participant chooses

Can the plan limit the disclosures for a particular brokerage account provider to the participant who actually selected that brokerage account provider?

No. The plan must provide the disclosures to all of the participants to whom the accounts are available.

What fee disclosures must a plan make to participants and beneficiaries with regard to SDBAs?

The plan must disclose the fees that would be charged against the participant’s individual account in connection with the SDBA. This includes (1) set-up and termination fees, (2) ongoing maintenance fees, including fees relating to inactivity or to minimum balance, (3) commissions, fees, and other charges relating to the purchase or sale of securities. It does not include the fees or expenses of the specific investments the participant selects, such as 12b-1 fees.

Is there an alternative method of disclosure to providing the commissions and fees (item 3 in the prior question) with respect to each brokerage account provider to each participant?

Yes. The plan administrator may provide a general statement that such fees exist and they may be charged against the account, and directions as to how the participant can obtain information about such fees in connection with a particular investment (e.g., website address).

Will a plan with SDBAs only be able to qualify for the fiduciary protections of ERISA §404(c)?

Probably. Certainly the plan allows sufficient participant control, offers a broad range of investment choices and allows the participant the ability to make regular investment changes. However, the DOL could contend that the unlimited investment choice makes it too difficult for an unsophisticated participant to select the appropriate investment choice. Furthermore, the DOL may argue that the unlimited investment choices may make it very difficult for the plan to provide appropriate information to educate participants on their investment choices.


Failure to Provide Safe Harbor Notice Correction

Recently, we have learned that the IRS, in audits, has been requesting the employer provide evidence that it provided the safe harbor 401(k) notice to participants. This evidence would include a copy of the notice. If the plan was not able to provide such evidence, the IRS required the plan correct and, in some circumstances, pay a closing agreement sanction. Now that the IRS is enforcing the notice requirement more strictly, a plan sponsor needs to be more vigilant in maintaining documentation that it provided the notice and correcting any failures. A copy of the notice with a date and some form of cover letter probably would be sufficient. For electronically provided notices, the evidence should include a copy of the dated sent email, along with a list of distributees. This Technical Update will provide an explanation of the method for correcting such a failure.

If an employer fails to provide timely the safe harbor notice, is the failure an operational failure correctible under the IRS’s self correction program (SCP)?

Yes. The employer not only is failing the statutory safe harbor 401(k) requirements but is also failing to comply with the terms of the plan.

Does the IRS provide a proposed correction method under the Employee Plans Compliance Resolution System (EPCRS) for a failure to provide the notice?

No. However, the IRS, in its online newsletter and verbally at several conferences, has provided an unofficial recommendation on how to correct the error. We expect the IRS will make their unofficial recommendation an official recommended method of correction when it issues an updated version of EPCRS.

What recommended method of correction has the IRS informally provided with respect to an employer’s failure to provide a safe harbor notice?

The method of correction depends on the whether the participant was informed about his/her eligibility to make deferrals under the plan.

Participant who was aware of his/her eligibility to defer. For a participant who was aware of his/her eligibility to defer, the employer may correct by simply providing the belated notice and modifying its procedures to avoid future failures to provide the notice.

Participant who was not aware of his/her eligibility to defer. For a participant who was not aware of his/her eligibility to defer, the employer may correct by treating the employee as an improperly excluded employee and contributing a QNEC in the amount of 50% of the missed deferral. The employer also would include an earnings factor on the corrective contribution. The missed deferral would be the greater of (1) 3%, or (2) the maximum deferral percentage for which the participant receives a matching contribution of at least 100%. If the plan included a matching contribution feature, the employer would need to make a corrective contribution for the match by applying the plan’s matching formula against the missed deferrals (not 50% of the missed deferrals). If the plan provided a safe harbor nonelective contribution, the correction would include that contribution. With the corrective contributions, the employer also should make a contribution to make-up for the lost earnings. The key to correcting a failure to provide the notice is determining whether a participant was aware of his/her eligibility to defer. Of course, if the employee made elective deferrals in a plan year for which the employer maintained the safe harbor 401(k) feature, the employer should be able to conclude that the participant was aware of his/her eligibility to defer. If the participant did not defer, the employer may still be able to establish knowledge of the plan by demonstrating that the participant deferred in a prior plan year or attended meetings where the plan was explained, or received other enrollment materials. If the employer cannot provide evidence of an employee’s knowledge of the plan, the employer would need to make the corrective contribution.

Example. Company X maintains a calendar year safe harbor 401(k) plan for the owner and 4 participants. The plan provided a safe harbor matching contribution formula of 100% of elective deferrals not exceeding 4%. For 2012, X failed to provide the notice until June 30, 2012. The facts regarding the participants and their awareness of their eligibility to defer are as follows:

  • Ann ($50,000) – deferred 4% in 2012
  • Ben ($40,000) – did not defer in 2012 but deferred in 2011
  • Cathy ($30,000) – Did not defer. X has evidence that she attended a meeting in which plan features were explained and the plan distributed enrollment materials to those in attendance.
  • Don ($20,000) - Did not defer. X does not have evidence that he was aware of his eligibility to defer under the plan.

Since the plan can establish that Ann, Ben and Cathy were aware of their eligibility to defer, X will not make a corrective contribution for them. For Don, X will make a corrective contribution for the deferral failure equal to $200 (50% [4% x $10,000]). To correct the matching contribution, the employer will contribute $400 (100% (4% x $10,000]). X also will make a contribution for the earnings on the corrective contributions. Additionally, the plan administrator adjusts its procedures to make sure the notice is properly and timely delivered, and documents in the file its revised procedures.


Costly Mistakes:  Many plan sponsors get tangled in 401(k) rules and regulations, risking penalties and lawsuits

By Carol Patton
Thursday, December 6, 2012

Ever since the Revenue Act of 1978 introduced a provision, referred to as the Internal Revenue Code (IRC) Sec. 401(k), plan sponsors of 401(k) retirement plans have been treading in deep waters. Such plans are governed by complex federal rules and regulations that often baffle even the largest of plan sponsors.

While most mistakes made by plan sponsors are unintentional, federal courts aren't the forgiving type, requiring some employers to pay millions of dollars in damages. To avoid drowning, HR must reach out to legal and finance departments or consultants to jointly stay on top of changing laws, consistently monitor compliance, pay attention to record-keeper activities and never assume everything is under control.
Consider the adjustments New York-based Dial Global had to make. From 2001 to 2007, it served as plan sponsor of its 401(k) plan. The 11-year-old company, which produces and distributes radio programs to U.S. stations, could have gotten in over its head -- both financially and legally -- if it continued in that role, says Hiram Lazar, chief administrative officer at the 460-employee-nationwide company.

When Dial Global first launched, it only employed 40 people. The small staff didn't generate enough work for a full-time crew of retirement experts. Instead, Lazar says, the company formed a small investment committee whose members lacked experience in finance, retirement or investments. Committee members, his department and HR -- which reported to his department -- were guided by the company's record-keeper, Morgan Stanley, when arranging independent audits and selecting investment options.

But when Dial's workforce reached 100 employees, the cost of administering its 401(k), healthcare and other employee benefits continued to soar. Likewise, because the company was fiduciary of the plan, its responsibilities became more complex as new federal regulations were introduced.

Lazar began seeking more efficient ways to maintain and deliver employee benefits. Five years ago, the company joined forces with Insperity, a Houston-based provider of human resource and business-performance solutions. Lazar says his company saved roughly 40 percent in benefit and administration costs since Insperity buys employee benefits in volume for all of its clients, then passes along the cost savings. That said, Dial was still eager to turn over its fiduciary responsibilities as plan sponsor.

"It does concern me greatly that [a retirement benefit] I'm providing for employees . . . could potentially cause me tremendous damage if something's not done right," Lazar says. "Twenty years from now, people can have millions of dollars in their 401(k)s. If the fund gets messed up or something happens, they [can] sue me for millions of dollars . . . ."

He believes 401(k) plans offer tremendous risk for employers with very little reward. Still, if the company's workforce surpasses 1,000 employees, Lazar says, he suspects it may outgrow the economic advantages offered by its HR provider and hire in-house staff experienced in managing 401(k) plans.

Until then, he's relieved not to have to deal with numerous Employee Retirement Income Security Act laws and potential liability issues that could result from 401(k) mistakes.

"This is something I do not have to spend any time worrying about," says Lazar. "[401(k) plans are] just a huge risk on the employer side."

The Need to Monitor
As managing director of retirement services at Insperity, John Stanton says his own company and other plan sponsors can encounter a wide variety of problems regarding 401(k) plans.

The biggest mistake, he says, usually involves not monitoring employee distributions. Consider an employee who transfers from marketing to sales. If the transfer is not properly coded, it may appear as if the worker was terminated, which would inaccurately entitle him or her to a distribution.

Another area of concern involves medical hardships. "I've had instances where I had to deny hardship withdrawals because it wasn't for something that would meet the qualification," Stanton says, adding that he recently denied a withdrawal for rhinoplasty, which is a nose job. "It's a medical procedure, but isn't covered. . . . We had to make sure we did the proper research on it to make sure it was[n't], in fact, a hardship."

To ensure compliance, his staff routinely works with in-house legal and finance experts. He says three different federal agencies -- the Internal Revenue Service, the U.S. Department of Labor and the U.S. Securities and Exchange Commission -- can each influence the way 401(k) plans are administered.

If HR makes too many chronic and serious errors, watch out. Your company's retirement plan could be disqualified. Stanton compares that to dropping a nuclear bomb.

"Employers could face penalties of up to 40 percent of the plan's assets," he says. "That's why compliance is very huge. Most companies don't want to shell out [millions] . . . not having done things the right way."

Excuses, Excuses
While many mistakes are due to ignorance or misinterpretation of regulations, some plan sponsors get into trouble for doing nothing.
Consider the DOL's recent requirements for participant-fee disclosure, which improve transparency of fees. Many HR professionals believe they're in compliance and don't need to make any changes, says Mark Wayne, CEO at Freedom One Financial Group, a 401(k) plan adviser in Clarkston, Mich.

"We're hearing this quite often," he says. "It's very unusual for those disclosures not [to] be some catalyst for change."

Another example of the do-nothing approach involves plan fees. He says the only way to evaluate fees is through benchmarking.

Consider a 401(k) plan that charges participants 1 percent of their total account balance for record-keeping and other administrative costs. Maybe half of the fee represents administrative services. Through benchmarking, HR may discover that administrative services typically represent one-quarter of the total fee, not half, so participants are actually paying double for that particular service.

"[HR] isn't benchmarking at all or just looking at the top of the tree numbers saying their fees are good," says Wayne, explaining that they need to benchmark each fee, not just the total cost. "You have to look at the underlying pieces and compare apples to apples."

Perhaps no company understands this better than Zurich, Switzerland-based ABB Inc., a global manufacturer of power and automatic equipment. In March, a federal district court in Missouri found that ABB fiduciaries never calculated the amount of record-keeping fees paid to its provider (Fidelity), did not benchmark the cost of those fees and ignored its own consultant's advice that the fees were too high. In its ruling, Tussey vs. ABB Inc., the court delivered a very expensive lesson that day about fiduciary obligations, requiring the company to pay nearly $40 million in damages.

There are plenty of other ways HR can land in trouble. After designating a fund "bad" because of its inability to perform, some plan sponsors fail to take the extra step of informing employees to move their money out of the fund, or actually moving it for them.
"This is a trustee's job," says Wayne, adding that some employers falsely believe that an employee's permission is needed to transfer such funds. "If the employer doesn't move the money out and the fund amount drops, the employer can be sued and will lose, nine times out of 10. [Its case] will be dead on arrival."

Attention to Detail
Although 401(k) plans are audited every year, an independent compliance review is typically not done to the level and degree needed, which may result in an IRS audit and five- or six-figure violations, says Marina Edwards, senior consultant at global professional-services firm Towers Watson's Chicago office.

She says independent reviewers need to read the plan document and procedures manual from the record-keeper and test transactions to verify that they are synchronized and reconciled. Employers may pay penalties if, for example, after employees take a hardship withdrawal out of their 401(k) plan, their contributions aren't suspended for six months as required by the plan.

Problems can also erupt if compliance reviews aren't conducted between six and 12 months after changing record-keepers. She says auditors catch errors that are either passed down from the former vendor to the new one or are implemented by new providers.

One recent trend Edwards has noticed involves employers minimizing their liability by removing their company stock as an investment alternative in 401(k) plans. If the stock plunges, participants can sue the fiduciary of the plan, claiming it was not an appropriate investment. She says it has recently become a hot topic of participant lawsuits. In some cases, she says, employers are limiting the amount of company stock employees can hold in their account to between 10 percent and 20 percent.

Another problem area involves mutual funds as investment options. According to Edwards, such funds fall into different pricing categories. Some, for instance, require participants to pay fees when buying or selling them. The funds, she says, must be the lowest share class available, or the cheapest to purchase in their category for participants. The fiduciary committee must also assess the collective dollar amount in each mutual fund. The higher the balance, the higher the chance of buying the next cheaper share class, she says.

Edwards points to other pitfalls: HR not knowing if it needs to pay exit fees when changing record-keepers or not developing or following written processes for training members of the fiduciary committee.

"These are issues that almost all fiduciaries, regardless of plan size, need to pay attention to or be thoughtful about," says Edwards. "These are topics that I consult with Fortune 100 clients on every single week."

Firms offer advice on Roth 401(k) transfers

By Andy Stonehouse
January 8, 2013 • Reprints

Almost a week after being offered as a welcome spin-off of the government's last-minute, temporary fix to the "fiscal cliff" fiasco, several firms are warning retirement advisors and plan sponsors to be careful when discussing in-plan Roth 401(k) transfers.

The new American Taxpayer Relief Act of 2012 does indeed remove the traditional stipulations which restricted making an in-plan jump from a traditional 401(k) to the pre-taxed Roth 401(k) - leaving a job, retiring, disability or reaching age 59 1/2 - but experts warn that the Act doesn't necessarily create a one-step solution for every 401(k) participant.

Most importantly, a transfer will now no longer be treated as having violated the rules of the plan types sourced for a Roth conversion - the 401(k), 403(b) and the 457(d).

Sungard/Relius's briefing on the change suggests that many of the rules applicable for in-plan Roth rollovers will apply to in-plan Roth transfers, though there will be differences as the rules cover transfers, not rollovers.

"What distinguishes the two provisions is the requirement that the amount converted to Roth contributions be distributable (hence the use of the phrase in-plan Roth rollover); In-plan Roth transfers have not such restrictions and therefore all amounts can be converted to Roth."
According to the brief, early inquiries have suggested the new Roth transfers were probably going to be more popular than rollovers, and questions were raised as to whether or not the IRS will permit safe harbor 401(k) plans to implement and allow in-plan Roth transfers this year, as existing safe harbor notice did not reflect the availability of this option.

Transamerica's Center for Retirement Studies issued a bulletin on the changes and pointed out that more than a few questions remain: Will amounts converted that are not currently eligible for distribution and rollover, continue to be subject to the distribution rules that applied pre-conversion?

While those details are nailed down, the Transamerica Center's general suggestions to plan administrators and recordkeepers is to consider establishing a tracking or recordkeeping mechanism to help differentiate between in-plan Roth conversions made from amounts not currently eligible for distribution and rollover, from those made from amounts that are eligible.

Some of the transfer rules do remain the same. Offering a Roth 401(k) transfer is up to a plan sponsor and isn't necessarily a given (or even a requirement), a technicality participants looking to take advantage of the change need to understand.

Participants who make a rollover conversion are subject to ordinary income tax on the amount covered, but are not subject to the 10 percent early distribution tax.

Conversions are not subject to mandatory or optional witholding. But as the conversion amount is subject to ordinary income tax, the participant should consider increasing their witholding or making estimated tax payments outside the plan to avoid any underpayment penalties.

As well, if the plan was subject to spousal consent requirements, spousal consent is not required for a transfer.

These are just some of the initial reactions to the Roth changes: The best advice, of course, is to consult with your plan administrator and see if there are more specific pieces of advice that can be passed along to participants who may be interested in making a transfer sooner than later.