Compliance April 5, 2016

Deadline Approaching for Pre-Approved Plan Restatements

The IRS is offering a new correction method for retirement plan sponsors that miss the deadline.
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The Internal Revenue Service (IRS) is reminding plan sponsors that April 30, 2016, is the deadline for those using pre-approved retirement plan documents to sign an updated version of their 401(k), profit-sharing or other defined contribution (DC) retirement plans.

April 30, 2017, is the extended deadline for any defined contribution pre-approved plan adopted on or after January 1, 2016, other than a plan that is adopted as a modification and restatement of a defined contribution pre-approved plan that had been maintained by the employer prior to January 1, 2016. This extension is to facilitate a plan sponsor’s ability to convert an existing individually designed plan into a current defined contribution pre-approved plan. The Internal Revenue Service (IRS) announced in July 2015 its intent to eliminate the staggered five-year determination letter remedial amendment cycles for individually designed retirement plans. The IRS also said it would limit the scope of the determination letter program to initial plan qualification and qualification upon plan termination.

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Retirement plan documents must be revised when the law changes. A retirement plan will remain qualified and provide tax benefits only if the plan document is updated for law changes by the required deadline. After April 30, 2016, if a plan sponsor hasn’t adopted a restated plan, the plan does not comply with the tax laws and may be ineligible for tax benefits.

A plan sponsor’s retirement plan provider should have sent a revised plan document, approved by the IRS, which complies with the Pension Protection Act of 2006 (PPA) and other law changes listed on the 2010 Cumulative List of Changes in Retirement Plan Qualification Requirements.

Previously, the only way an employer could correct not signing a pre-approved DC retirement plan by the deadline was to complete a submission under the IRS’ Voluntary Correction Program (VCP). A new option allows the financial institution or service provider to request a closing agreement on a plan sponsor’s behalf.

To reduce employers’ burden of submitting VCP applications, the IRS invites financial institutions or other service providers to submit proposals for umbrella closing agreements that cover individual employers affected by the failure to update their plans by the deadline. These would be similar to a group submission under the VCP, but under these closing agreements the organization doesn’t need to have made a systemic error.

The Markets April 5, 2016

Consultants Suggest Tapping Into Active Management

Firms are seeking investment management that will help mitigate risk, according to a PIMCO survey.
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Active management is still the favored investment approach for most major asset classes and target-date retirement strategies, according to the 10th annual PIMCO Defined Contribution Consulting Support and Trends Survey.

PIMCO surveyed 66 consultant firms, which advise on more than $4.2 trillion in DC assets. More than three-quarters of those surveyed said active management is very important or important for U.S. and global bonds; emerging market and other non-U.S. equity; and U.S. small cap stocks. Just fewer than one-quarter of retirement plan consultants said it’s important for U.S. large cap equities. Consultants recommend that plan sponsors diversify retirement portfolios and complement core bonds with allocations to investment grade credit, high yield, multi-sector and foreign bonds within the core menu and/or custom/white-label strategies.

The survey found that meeting participant income goals for retirement is plan sponsors’ most important consideration. Consultants suggest targeting overall income replacement of 80% of final pay, and three-quarters of that may need to come from defined contribution (DC) plans.

“To achieve that goal, consultants are seeking investment management that will deliver sufficient returns and help manage risk,” says Stacy Schaus, executive vice president and author of the survey. “This includes adding diversifying bonds and tapping into active management.”

Most consulting firms also recommend target-date funds as a retirement plan’s qualified investment default alternative (QDIA). They also rank “maximizing asset returns while minimizing volatility relative to the retirement liability” as the most important objective in glide path design. Consultant firms report total assets under advisement within custom target-date, custom target-risk and custom multi-manager/white label of $195 billion, $39 billion and $333 billion, respectively. They expect growth of 8% to 10% over the next three years.

NEXT: Managing fiduciary riskTo manage fiduciary risk, survey respondents recommend that plan sponsors benchmark plan costs, hire an investment consultant, document investment reviews, conduct fiduciary training and move away from revenue sharing. Most of those surveyed did not suggest including index funds.

Sixty-three percent of consultants said they are likely to recommend a capital preservation alternative to clients invested in a non-government money market fund. Sixty-five percent recommend switching to stable-value funds, while 44% suggest a government money market and half are at least somewhat likely to recommend an ultra-short fixed-income option or one tailored for DC plans.

About two-thirds of consultants also recommend adding TIPS and/or a multi-real asset strategy to the core lineup. Most suggest commodities (84%) and REITs (82%) be added to blended strategies in addition to a multi-real asset strategy and TIPS.

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