Ostrich Fiduciaries-Can We Get Their Heads Out of the Sand?

                                                                                              By Carol Buckmann                                                                                                  

Ostriches are notorious for their amusing habit of thinking we can’t see them if they poke their heads into the sand.  But, of course, while this habit may make them less anxious, it doesn’t change the reality that they are visible.  It seems that a similar practice has been followed by plan sponsor fiduciaries, many of whom deny that they have fiduciary responsibilities. In fact, on that front, we seem to be sliding downhill.  I write periodically about surveys that show that many plan sponsors are clueless about their fiduciary status, but the results of the latest Alliance Bernstein report are something of a shocker.  49% of plan sponsors surveyed, 39% of investment committee members and 22% of administrative committee members didn’t understand that they are fiduciaries. In past surveys, 39% and 30% of plan sponsors were unaware of their fiduciary status, so there has actually been a marked decline in fiduciary awareness. How do we account for this? It may be that all of the discussion of the Fiduciary Rule and whether brokers are fiduciaries has given some people the impression that a fiduciary is some third party you hire. But that is just speculation. It may also be that it is just impossible to reach some of these people in the current environment where many plans outsource their plan operations to the Fidelitys and Vanguards and vendors aren’t required to clearly inform adopting employers of the responsibilities employers take on under the agreements that they sign.  Whatever the reason, this cluelessness has significant repercussions for plan participants.  A clueless fiduciary may be: •    Failing to monitor high plan fees, which cut into account growth in 401k plans •    Putting plan investments in a “set it and forget it” category, and failing to replace underperforming funds or provide good current investment choices •    Not checking what the vendors are doing, so that mistakes go uncorrected •    Not picking the best outside advisers or, worse still, laboring under the impression that they don’t need outside advisers •    Failing to understand that the plan can’t be operated like their business-plans must be run solely in the interest of participants and beneficiaries •    Missing reporting deadlines or unaware that forms must be filed.  •    Engaging in prohibited transactions Is there a solution? Obviously there isn’t an easy one, and the fiduciary education programs we have either aren’t as effective as they should be or made readily available to the people who most need them.  Here are a few suggestions: •    Vendors should ask: Who will be the fiduciary or fiduciaries at your company who will take on the company’s responsibilities under this agreement? They should also provide a list of those responsibilities to adopting employers. •    Advisers and attorneys should strengthen their fiduciary training programs and encourage at least one person from each plan sponsor to attend regular training sessions. •    Require that the names or positions of company fiduciaries be reported as part of Form 5500 or in summary plan descriptions, with a note that at least one name MUST be identified for each single employer plan. •    Beef up the employer education sessions provided by the Department of Labor and publicize them more. These would be a start, but there isn’t any magic solution here.  The plan sponsors who need enlightening the most are probably the ones who don’t hire outside advisers in a misguided attempt to save money. This group may not learn until they are audited, have to settle a compliance action, or lose a lawsuit that they don’t need to understand that they are fiduciaries in order to have fiduciary liability.  Maybe the best push towards fiduciary awareness would be to better publicize what happens to clueless fiduciaries who get caught. ·       

Ostriches are notorious for their amusing habit of thinking we can’t see them if they poke their heads into the sand.  But, of course, while this habit may make them less anxious, it doesn’t change the reality that they are visible.  It seems that a similar practice has been followed by plan sponsor fiduciaries, many of whom deny that they have fiduciary responsibilities. In fact, on that front, we seem to be sliding downhill. 
I write periodically about surveys that show that many plan sponsors are clueless about their fiduciary status, but the results of the latest Alliance Bernstein report are something of a shocker.  49% of plan sponsors surveyed, 39% of investment committee members and 22% of administrative committee members didn’t understand that they are fiduciaries. In past surveys, 39% and 30% of plan sponsors were unaware of their fiduciary status, so there has actually been a marked decline in fiduciary awareness.
How do we account for this? It may be that all of the discussion of the Fiduciary Rule and whether brokers are fiduciaries has given some people the impression that a fiduciary is some third party you hire. But that is just speculation. It may also be that it is just impossible to reach some of these people in the current environment where many plans outsource their plan operations to the Fidelitys and Vanguards and vendors aren’t required to clearly inform adopting employers of the responsibilities employers take on under the agreements that they sign.  Whatever the reason, this cluelessness has significant repercussions for plan participants.  A clueless fiduciary may be:
•    Failing to monitor high plan fees, which cut into account growth in 401k plans
•    Putting plan investments in a “set it and forget it” category, and failing to replace underperforming funds or provide good current investment choices
•    Not checking what the vendors are doing, so that mistakes go uncorrected
•    Not picking the best outside advisers or, worse still, laboring under the impression that they don’t need outside advisers
•    Failing to understand that the plan can’t be operated like their business-plans must be run solely in the interest of participants and beneficiaries
•    Missing reporting deadlines or unaware that forms must be filed. 
•    Engaging in prohibited transactions
Is there a solution? Obviously there isn’t an easy one, and the fiduciary education programs we have either aren’t as effective as they should be or made readily available to the people who most need them.  Here are a few suggestions:
•    Vendors should ask: Who will be the fiduciary or fiduciaries at your company who will take on the company’s responsibilities under this agreement? They should also provide a list of those responsibilities to adopting employers.
•    Advisers and attorneys should strengthen their fiduciary training programs and encourage at least one person from each plan sponsor to attend regular training sessions.
•    Require that the names or positions of company fiduciaries be reported as part of Form 5500 or in summary plan descriptions, with a note that at least one name MUST be identified for each single employer plan.
•    Beef up the employer education sessions provided by the Department of Labor and publicize them more.
These would be a start, but there isn’t any magic solution here.  The plan sponsors who need enlightening the most are probably the ones who don’t hire outside advisers in a misguided attempt to save money. This group may not learn until they are audited, have to settle a compliance action, or lose a lawsuit that they don’t need to understand that they are fiduciaries in order to have fiduciary liability.  Maybe the best push towards fiduciary awareness would be to better publicize what happens to clueless fiduciaries who get caught.

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Should Your 401k Plan Provide Hurricane Relief?

                                                                                                                      By Carol Buckmann                                                                                                                       carol@cohenbuckmann.com You don’t have to have employees in the disaster areas to be able to provide relief for victims of the 2017 hurricanes through your 401k plan.  IRS announcements and a new law enable participants to take withdrawals to help relatives who were seriously impacted by hurricanes Harvey, Maria and Irma if their plan permits hurricane distributions. Special rules also  allow plans to permit loans for relief even if the plan terms don’t currently provide for loans. However, the agencies in charge aren’t making it easy for plan sponsors who want to help. Recent legislation signed by President Trump in October further eases up on these rules, but we still have no official interpretation of the new law, which provides substantial tax benefits to recipients of these distributions.  And it wasn’t until very recently that we got guidance from Puerto Rico’s Hacienda, which must be consulted by dual-qualified plans as well as plans that are qualified only in Puerto Rico. Here is a summary of the situation for plan sponsors who want to help. Who is Eligible? Participants, regardless of where they live or work, may get hardship distributions without having to satisfy the usual hardship standards (and without having future contributions suspended temporarily) if the distributions are to help themselves or a spouse, dependent, parent, grandparent or child who lived or worked in a disaster area and was impacted by the hurricanes. Employers are allowed to rely on participant representations about need and aren’t required to investigate.  The IRS administratively allows such distributions through March 15, 2018, but the new legislation permits distributions through 2019.  Puerto Rico permits special distributions through June 30, 2018 but a sworn statement from the participant giving particulars is required. Tax Treatment. IRS so far has said that in addition to regular tax, the 10% penalty on early distributions may apply, but the new law says that it will not. (Like regular hardship distributions, these distributions are not eligible to be rolled over.) The new law also permits participants to spread the tax liability over 3 years and gives them a time-limited right to recontribute the distribution to the plan. We have no guidance explaining how that will work.  Puerto Rico has determined that qualifying distributions will not be subject to tax at all if they don’t exceed $10,000, and can be subject to a flat 10% tax if they don’t exceed $100,000 and withholding is made. What about Loans?  IRS says that you can make a loan for hurricane relief even if your plan doesn't currently provide for loans. The new law would increase the permissible loan amount from $50,000 to $100,000 and provide that payments could be waived during the first year. Puerto Rico says that loan repayments may be modified.  Are Amendments Required?  Employers who choose to provide hurricane-related relief will have until 2018 (2019 under the new law) to adopt formal plan amendments. Still confused? You are not alone. The IRS chose to issue recent Maria relief that doesn’t reflect or mention the existence of the new law. It is important for the agencies issuing guidance to acknowledge the overriding provisions of the new law and try to make their rules consistent. I hear that some vendors are refusing to apply the new provisions due to the lack of guidance, which is frustrating the intention of the relief.  While we couldn’t change the path of the hurricanes, this lack of coordination and up-to-date guidance is a situation the agencies can fix.

                                                                                                                      By Carol Buckmann

                                                                                                                      carol@cohenbuckmann.com

You don’t have to have employees in the disaster areas to be able to provide relief for victims of the 2017 hurricanes through your 401k plan.  IRS announcements and a new law enable participants to take withdrawals to help relatives who were seriously impacted by hurricanes Harvey, Maria and Irma if their plan permits hurricane distributions. Special rules also  allow plans to permit loans for relief even if the plan terms don’t currently provide for loans. However, the agencies in charge aren’t making it easy for plan sponsors who want to help.

Recent legislation signed by President Trump in October further eases up on these rules, but we still have no official interpretation of the new law, which provides substantial tax benefits to recipients of these distributions.  And it wasn’t until very recently that we got guidance from Puerto Rico’s Hacienda, which must be consulted by dual-qualified plans as well as plans that are qualified only in Puerto Rico.

Here is a summary of the situation for plan sponsors who want to help.

Who is Eligible?

Participants, regardless of where they live or work, may get hardship distributions without having to satisfy the usual hardship standards (and without having future contributions suspended temporarily) if the distributions are to help themselves or a spouse, dependent, parent, grandparent or child who lived or worked in a disaster area and was impacted by the hurricanes. Employers are allowed to rely on participant representations about need and aren’t required to investigate.  The IRS administratively allows such distributions through March 15, 2018, but the new legislation permits distributions through 2019.  Puerto Rico permits special distributions through June 30, 2018 but a sworn statement from the participant giving particulars is required.

Tax Treatment.

IRS so far has said that in addition to regular tax, the 10% penalty on early distributions may apply, but the new law says that it will not. (Like regular hardship distributions, these distributions are not eligible to be rolled over.) The new law also permits participants to spread the tax liability over 3 years and gives them a time-limited right to recontribute the distribution to the plan. We have no guidance explaining how that will work.  Puerto Rico has determined that qualifying distributions will not be subject to tax at all if they don’t exceed $10,000, and can be subject to a flat 10% tax if they don’t exceed $100,000 and withholding is made.

What about Loans?  IRS says that you can make a loan for hurricane relief even if your plan doesn't currently provide for loans. The new law would increase the permissible loan amount from $50,000 to $100,000 and provide that payments could be waived during the first year. Puerto Rico says that loan repayments may be modified. 

Are Amendments Required?  Employers who choose to provide hurricane-related relief will have until 2018 (2019 under the new law) to adopt formal plan amendments.

Still confused? You are not alone. The IRS chose to issue recent Maria relief that doesn’t reflect or mention the existence of the new law. It is important for the agencies issuing guidance to acknowledge the overriding provisions of the new law and try to make their rules consistent. I hear that some vendors are refusing to apply the new provisions due to the lack of guidance, which is frustrating the intention of the relief.  While we couldn’t change the path of the hurricanes, this lack of coordination and up-to-date guidance is a situation the agencies can fix.

401k and 403b Contributions Still on the Chopping Block-Why It Matters

                    By Carol Buckmann                                     carol@cohenbuckmann.com 

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Many of us were breathing a sigh of relief that the House tax bill did not cut back on pre-tax 401k contributions as had been threatened.  We soon learned that the threat to retirement savings hadn’t ended, it was just coming from a new front.  The Senate is now considering cutting back on contributions under 401k, 403b and 457 plans, which remains bad retirement policy for many reasons, but mostly because we know that Americans are not saving enough for retirement as it is.  (See my recent blog for Penchecks- http://www.penchecks.com/wrong-policy-wrong-time-save-401k-contribution/- for some sobering information about the retirement savings gap.) If these provisions make it into a final bill, we don’t know where the conferees will come out on this.  

Here’s what is now under consideration:

·       The maximum catchup contribution would be increased to $9000, but catchup contributions would have to be made on a ROTH basis.  This would apply to all plans with age 50 catchup contributions, not just to 401ks.

·       No catchup contributions would be permitted for employees earning more than $500,000.

·       Catchup contributions for pre-retirees and long service employees under 403b and 457 plans would be eliminated.

·       Special post-termination employer contributions for 403b plan participants would be eliminated.

·       The rules permitting contributions to a 457(b) plan in addition to maximum 401k and 403b contributions would be eliminated.

The whole point of catchup contributions is to allow participants approaching retirement to make up for any deficit in their retirement savings by making bigger contributions in their pre-retirement years.  We all know that this deficit exists.  Statistics also show that participants don’t make much use of ROTH contributions when they are available. These changes, if enacted, would take retirement policy in the wrong direction.  Tax policy should encourage retirement savings, not make it more difficult to fund a secure retirement.

 

I'm Not A Fiduciary-It's That Other Guy

                                                                                  By Carol Buckmann

 We are stuck at 43%.  A 2017 defined contribution plan survey by J.P. Morgan indicates that there has been no improvement in this percentage of corporate plan decision-makers who don’t understand that they are fiduciaries.  17% even thought that they could pass on all of their fiduciary responsibilities to third parties such as their provider, recordkeeper or investment adviser.  Not surprisingly, the survey also indicated that those who were aware of their fiduciary status were more confident in their processes, more aware of fiduciary protections and more likely to follow best practices.

What are we to make of this?  It appears that all of the recent publicity about the Fiduciary Rule and the role of advisers hasn’t made any impression on this group.  Nor have the statements in the service contracts they sign which either acknowledge that the provider is not a fiduciary or provide that the adviser will be a “co-fiduciary” for investments.  What do they think the “co” means? While it may be that some of these clueless fiduciaries won’t get the message until they are audited or sued, this survey provides a compelling reason to expand fiduciary education efforts.

Overcoming Resistance.  The first reaction of busy executives to the suggestion that they need fiduciary education is usually “I have to run my business. I don’t have the time.”  This is a good opportunity to explain the concept of personal liability for fiduciary breaches, which usually gets their attention.  It is also a good time to explain how good processes and procedures, as well as delegation to other professional fiduciaries, can limit their liability exposure.  Decision-makers who don’t know they are fiduciaries probably also don’t have fiduciary insurance covering their plan activities, and understanding available protections can also be a selling point for fiduciary education.  Finally, while fiduciary education isn’t legally required by any specific rule, Department of Labor auditors do look to see if there has been fiduciary education as part of their audits. This makes sense, as it is unlikely that company insiders are effectively fulfilling their fiduciary responsibilities if they don’t know what they are.

Topics to Include.  Start with bonding.  Even today, I find plan fiduciaries who don’t understand that they need to be bonded for losses caused by fraud or dishonesty.  If they haven’t complied, they can be required to personally make up losses that should have been covered.  In addition, good education should include discussion of the following:

·       Safe harbors, including ERISA 404 (c) and qualified default investment alternatives

·       Outsourcing to fiduciary investment managers and professional plan administrators

·       Sharing responsibilities with co-fiduciaries

·       The importance of written policies and procedures

·       Monitoring plan providers

·       What auditors look for

The bottom line is that corporate decision-makers need to be made to understand that “the buck stops here.”