Beginning in 2017 the IRS will only permit plan sponsors of individually designed plans to submit their plans for a determination letter for initial qualification. 
This recently IRS announced change has the following practical consequences for plan sponsors:

• The once every five years determination letter process goes away.
• Amendments required by law or regulation can be made retroactively effective as is currently the case. But the timing requirements for making them changes significantly; amendments will have to be made no later than the due date including extensions of the plan sponsor's tax return for the year the change is effective.
• Post-determination letter discretionary amendments falling in the gray areas of statutory and regulatory interpretation will become more risky because there will be no determination letter process available for them. 
• IRS's shifting views on various topics may have retroactive effect on plan language on audit, putting plan sponsors in an uncertain and vulnerable position.
  
• IRS examinations are likely to increase as personnel now involved in the determination letter program are moved into examinations.
• Reliance on knowledgeable and expert service providers and attorneys will become more critical.

Annual Review of Plan Amendment Status
Annual review of plan amendment status is of the five pillars of best practice plan management described in The Fiduciary Responsibility eSource. This task is even more critical, as closer attention must be paid to changes in the law and regulations requiring plan amendments.

Future IRS Guidance
The IRS says that it will be issuing additional guidance including model amendments that can be used for compliance purposes and permitting plans to incorporate new legal requirements by reference to the applicable statutory or regulatory provision.

For the IRS announcement of this change, use this link.

A few weeks ago the IRS made changes in its Employee Plans Correction Program (EPCRS) procedures (Rev. Proc. 2015-27) that ostensibly makes life easier for retirement plan sponsors. These changes allow sponsors to skip recoupment of overpayments to participants and to make contributions to their plans to make them whole.

This development sounds like a good thing for plan sponsors.
Sponsors after all, do not want to have to chase down typically small overpayments or subject former employees (who have relied on the benefit calculations of the plans’ service providers) to the hardship of returning to the plan years of overpayments.

But plan sponsors opting for the contribution (in lieu of recoupment) approach should exercise caution. 
In fact, making a contribution without first seeking recoupment is problematic. Arthur A. Marrapese, III, Employee Benefits Practice Leader of the law firm of Hodgson, Russ in Buffalo, New York remarks “ the prudent person rule requires a fiduciary to attempt to collect an overpayment. 

The minimum effort and process that is required.
This effort should include, at a minimum, notice to the participant of the determination to collect overpayments and of the participant’s right to dispute the determination under the plan’s regular claims procedures, but would not necessarily include litigation.” Mr. Marrapese also warns “failure to seek recoupment could set a bad precedent in future overpayment situations.”

Failure to seek recoupment may also have a negative impact on the plan’s ability to achieve recovery from the service provider whose miscalculations caused the overpayment. 

Summing it Up
A “make the plan whole” contribution should be preceded by an effort to recapture the overpayments that is well documented, applies the rules of the plan uniformly and consistently, and provides participants with their full ERISA rights. Such an approach will be consistent with one’s fiduciary obligations and protective of the plan’s ability to recover overpayments from plan service providers.

For years there’s been a mostly silent battle around the question whether a top hat plan can cover employees who are not part of a “select group of management” or are not highly compensated. 

The question is important because a top hat plan does not have to comply with ERISA’s funding, vesting and participation rules.

The latest skirmish in this battle is Dennis Walter Bond, et al. v. Marriott International, Inc., Case No. 10-CV-1256-RWT, 04-30-2014. The plaintiff/employees in that case filed an appeal to the U.S. Court of Appeals for the Fourth Circuit on the lower court’s decision that the Marriott’s Deferred Stock Incentive Plan is a top hat plan and that as a consequence those employees were not entitled to the ERISA protections mentioned above.

Labor Department Amicus Brief
Into the fray comes the U.S. Department of Labor with an amicus brief arguing that the law and the Labor Department’s position have been clear for some time. And that is: 

A plan is not a top hat plan if it covers evens one employee who is not part of the select management group or is not a highly compensated employee. 

Who is in your Plan?
This case and the brief, perhaps, are a reminder to employers to re-examine the eligibility provisions of their non-qualified deferred compensation plans. Are employees appropriately in the plan, consistent with the top hat rules? What employees can safely be considered highly compensated or part of a select management group?  Is the plan skating on thin ice?  

As to the reference to the “whale” in the title of this blog, it’s part of a prepositional phrase modified by an adverb --- really! So dust off your grammar books, prime yourself for some Shakespeare, and go the Labor Department’s brief to learn more about the Labor Department’s position on the topic.

The Numbers:
81,162              --Number of plan filings with accountant's opinions
31,653               --Number of accountant's opinions with major deficiencies
79%                  --Deficiency rate of audit firms doing the fewest audits
653 billion    --Plan assets at risk
22.5 million --Participants at risk

The Source
The numbers are from a report called  "Assessing the Quality of Employee Benefit Plan Audits." The Report was written by the Office of the Chief Accountant (OCA)  of the Employee Benefits Security Administration and published by U.S. Department of Labor a few days ago. 

OCA Recommendations
 The OCA makes the following recommendations:

•  Target auditing firms with small audit practices and large amounts of plan assets, and firms that perform between 25 and 99 audits per year
  
• Work with the National Association of State Boards of Accountancy (NASBA) and the AICPA to improve investigation and sanctioning process at the state level
• Amend ERISA to apply annual reporting civil penalty (of up to $1,100 per day) against accountants
• Work with AICPA Peer Review Staff to improve the peer review process.

Observations
The Report suggests to me some obvious but important things. There are some folks that ought not be in the business of plan audits; you do not want to hire one of them. Plan sponsors need to have a very careful selection process for hiring an auditor that weeds out the incompetent. Cleaning up the mess left behind by a bad audit is time consuming and expensive. Why not do all you can do to avoid that possibility?

To learn more about plan audits  and how to hire an auditor, get a subscription to the Fiduciary Responsibility eSource at ERISApedia.com.

Secretary of Labor Peretz, in a letter sent to a group of Democratic senators, said that DOL has extended the public comment period for its conflicted advice rules package 15 days, to July 21. In addition, he said a public hearing on the package will be held the week of August 10, after which DOL will re-open the public comment period for an additional 30 to 45 days. 

Summer Plans?
For those of you with nothing better to do, you now have additional time to spend in the office writing comments and to make your reservations for the public hearing in August. Going to the beach is a nice option too.

The Conflicted Advice Rule in a Nutshell
As has been well publicized and reported, the DOL package consists of revised rules, a new prohibited transaction exemption, and amendments to several existing exemptions. In some ways the DOL proposal leaves existing structures in place --- the sale of of participant directed account investment platforms is one example. In others, the sale of variable compensation investment products to plan participants taking distributions and to IRA owners, the DOL proposal is likely to significantly change existing service models. 

Finalization - The Smart Money Prediction
The smart money right now is on DOL getting the package finalized in something like its current form with some adjustments. But as Yogi Berra once said, commenting on baseball (I think),  "It ain't over till it's over."

Enjoy the summer whether you are writing comments to DOL or not!

Every plan sponsor should ask this question.  
The good thing is that there is no one right answer. Your response depends on who you are and what you have --- your facts and your circumstances. 

First, what are PACs and PICs? A PAC is my shorthand for a plan administration committee. Similarly, a PIC refers to a plan investment committee. 

Why have a PAC or a PIC?
Why establish a PAC or a PIC? There are at least two good reasons. Committees are an excellent way to establish accountability and control over important plan processes. They can also be effective way of spreading around plan work to folks with the skills  and ability to handle that work. 

But PACs and PICs are not for everyone.
Small employers such as sole proprietors may not have the person power or tolerance for the formalities of a committee structure. They’re likely to want something a bit simpler, such as calendars and checklists.
Larger employers may find the PAC and PIC structure quite valuable for the aforementioned reasons. Some will opt for both a PAC and PIC. Others may reason that a PAC is all they need or can stand and wrap investment oversight/management responsibilities into the one committee.

What structure you decide on should be the one that best helps you protect your interests and the interests of your employees.

If you are a plan sponsor, have a conversation with your adviser and discuss with them what is best for you.  If you are an adviser, make the question an item of discussion with your clients. 

Last week the Labor Department published a comprehensive proposal package for changes in the definition of an investment-advice fiduciary under ERISA. The package would expand the range of advice relationships that are treated as fiduciary relationships, substantially revising rules that have been in existence for 40 years.

Plan sponsors and advisers must examine their practices and consider how to adjust their behaviors and their agreements to conform to the new rules. 

In addition to redefining what is an “investment-advice” fiduciary, the Labor Department has included in the package helpful “carve outs’ from the definition, new prohibited transaction exemptions, and proposed amendments of several existing prohibited transaction exemptions. Surprisingly many existing types of arrangements with 401(k) plan sponsors will continue under the new rule, with only minor adjustments. Other arrangements, in particular, one-on-one advice relationships with plan participants or IRA owners may require substantial adjustments in service models.

Comment Period and Hearing

The proposal package is subject to a 75-day public comment period that ends in June 2015 and there will be a public hearing. These procedural steps will lead to one of three results: (1) publication of the package as proposed; (2) publication of the package with changes; or (3) withdrawal of the package.

Applicability Date
If finalized, the new rules will go into effect eight months after they are published in the Federal Register.


For more detailed information on the Labor Department proposal, see The Fiduciary Responsibility eSource at erisapedia.com.

Since the annual participant fee and investment disclosure requirements first effective in 2012 401(k) plan sponsors have had to live with a rule that if literally applied imposes heavy administrative burdens. So applied,  plan sponsors must deliver current year disclosures within “exactly” 365 days of the prior year's disclosure.  

The rule can produce notice creep.
For example, an initial disclosure delivered to a participant on June 23, 2013 requires under the rule that the next year’s disclosure to be delivered on June 23, 2014 or earlier. If the plan sponsor delivers the disclosure earlier, for example, on May 30, 2014, the 2015 disclosure would have to be provided no later than May 30, 2015. And so it goes.

In 2013 DOL acknowledged that plan sponsors could have applied a good faith interpretations of the rule different from the “exact date” interpretation described above, and it announced that it was reviewing the rule. At the time of this announcement, it also provided plan sponsors with a temporary opportunity to delay issuing the disclosures for up to 18 months in certain situations.

DOL guidance fixes the problem
Last week the Labor Department (“DOL”) fixed the problem by allowing in direct final and proposed rules the plan sponsor to provide the information at least once in any 14-month period. This means plan sponsors now will have a period of 14 months from when the last annual disclosures were provided to provide the current year disclosure. Referring to the example above, disclosures made on June 23, 2014 can be made as late as August 23, 2015 without advancing the next annual disclosure date.

Coordination of disclosure with other required notices is now possible.
In addition to fixing the notice creep problem, plan sponsors may now be able to better coordinate this disclosure with other required disclosures such as qualified default alternative (“QDIA”) and safe harbor notices, and they will not be compelled to track specific disclosure dates participant-by-participant.

Effective Date and Current Reliance
The new rule becomes effective on June 17, 2015, although DOL is allowing plan sponsors to rely on it now. For a deep dive into the disclosure timing requirements, see the Direct Final Rule and Proposed Rule. 

 

Richard Carpenter ‘s recent post, “Nightmare on TPA Street,” provides clear warning to third party administrators that protecting client information is no laughing matter. Plan sponsors tasked with fiduciary responsibilities for their plans should also heed his warnings and act defensively.

Among the important recommendations in his piece:

• Train employees on the risk of data security breaches
  
• Monitor and maintain hardware and software on a regular basis
  
• Consider purchasing cyber security insurance
  
• Encrypt data
  
• Do national background checks on your employees (existing staff and new employees)
  
• Use proven data security technologies
  
• Make sure your vendors are taking the same precautions you would take. 

Review Your Own and Vendor Practices 
Plan sponsors should engage in a review of their own practices and those of their vendors and obtain appropriate assurances and representations from them.

Thank you, Richard, for sharing this information and important advice.

Last week my son-in-law, a very fine and intelligent young man, uttered a word I have never heard spoken spontaneously by anyone not in our business. That word is “fiduciary.”  In that moment I realized the President’s remarks at AARP on the DOL conflicted advice rule had reached not just my son-in-law but also many others in the greater, investing public.

It’s black and white now
That word "fiduciary" that I have struggled so mightily to explain to clients over the years is now in the public lexicon and, I might add, very effectively contrasted by the President against the black and white language of “conflicted advice” and “hidden and backdoor fees.”  This is language the average investor can understand.

A shift in the battleground
So the battleground has shifted for an industry that already has a troubled history. It remains to be seen how all of this work out, especially when there are so few details about what is in the proposal (We will not have these details until OMB finishes its review.). But one thing is clear. The President has very effectively communicated to the investing public the industry is working against its interests. As John Bogle sarcastically put it, "I didn't realize there were a lot of people who don't want to put their client's interests first."

A word of unsolicited advice to those fighting the rule
I wonder if the current industry moaning and wailing, and gnashing of the teeth works against it. Would it not it be better to wait for the details of the proposed rule before blasting away at it? And would it not be better, if only for cosmetic reasons, to express a willingness to work with the Labor Department to achieve a rule all can live with?