Regulators Doing More to Ensure Plan Compliance, Outcomes

Recent actions from regulators show a focus on compliance and improved outcomes for participants.

The Internal Revenue Service’s (IRS) latest area of interest, according to Ilene H. Ferenczy, an attorney with Ferenczy Benefits Law Center, is processes. Processes could include policies, systems, computer programs and activities of the plan sponsor, she explains.

“The IRS believes plans with proper internal controls are better administered; maybe they won’t have to review as much and can get out of reviews faster,” she told attendees of the 2014 Association of Pension Professionals and Actuaries (ASPPA) Annual Conference.

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Ferenczy also noted that “theoretically,” sanctions due to errors found on audit will be lower if plan sponsors have proper internal controls in place, because controls “are an ‘equity’ in the plan sponsor’s favor.” She added that the IRS was going to use information it gathered in its 401(k) questionnaire to issue some guidance about proper internal controls, but that effort will not be executed.

Regulators are also focused on lifetime income. Just last week the IRS issued guidance that allows for deferred annuities to be included in target-date funds’ underlying investments. S. Derrin Watson, an attorney with SunGard, told conference attendees the inclusion of annuities in certain TDF series will mean, for those series, plan participants must select or be placed in the TDF investment corresponding with their expected retirement age or date. “Now, I could invest in a 2040 fund even though that is years from my expected retirement age,” he said. “TDFs with annuities will be more restrictive than this because now the funds with the earliest dates may include longevity annuities.”

In a separate discussion at the conference, speakers noted that an accompanying letter from the Department of Labor shows the DOL obviously understands employer’s concerns regarding fiduciary responsibility if participants are offered annuities. In its letter, the DOL noted that plan sponsors are responsible for selecting the TDF manager, but the TDF manager would have responsibility for selecting the annuity and annuity provider.

Ferenczy and Watson also mentioned a few other items plan sponsors and advisers may look for from regulators. The IRS is working on an updated Employee Plans Compliance Resolution System (EPCRS). The update is expected it to address fixes for automatic enrollment errors, and the ability to self-correct loan errors.

Watson also said he expects to see more adjustments to the 403(b) pre-approved plan program. The IRS has already delayed the deadline for submissions of pre-approved documents, modifying the rules for submitting volume submitter plans.

Ferenczy said DOL Assistant Secretary Phyllis Borzi has announced that plan fiduciaries that perform any misconduct related to retirement plans will soon have a public record for that misconduct. The DOL intends to keep a prohibited persons list that those looking to hire someone to work for their plans may access.

Plan Participation Rate Restarts Slow Climb

The percentage of workers participating in an employment-based retirement plan increased in 2013 for the first time since 2010, according to the Employee Benefit Research Institute (EBRI).

The increased participation rate was noted both among all workers and among private-sector workers, EBRI says. Specifically, the percentage of all workers participating in an employment-based retirement plan increased to 41% in 2013, up from 40% in 2010. The number of workers participating rose to 64.2 million in 2013, the highest number since 2007. In general, EBRI found, each category of workers was at its highest level of participation since the economic recession began in 2008.

The increases reflect the slowly improving national economy and employment rate in the aftermath of the recession, explains Craig Copeland, senior research associate at EBRI and author of the new report, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013.” The research is based on recently released 2014 data from the Census Bureau’s Current Population Survey, EBRI says.

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“Retirement plan participation by workers is tied to macroeconomic factors such as the labor market, in addition to various demographic factors,” Copeland says. “Other underlying factors also have an impact, but higher employment generally leads to higher levels of retirement plan participation.”

As the EBRI report notes, the percentage of workers participating in a plan varies significantly by the type of worker being considered. Trends in participation by demographic group include the following:

  • Among all American workers in 2013, 51% worked for an employer or union that sponsored a retirement plan (the sponsorship rate), while 41% participated in a plan;
  • Among wage and salary workers ages 21 to 64, the sponsorship rate increased to 56.0%, and the portion participating increased to 46%;
  • Among full-time, full-year wage and salary workers ages 21 to 64, the sponsorship rate was 62%, and 54.5% of the workers participated in a retirement plan; and
  • Almost 74% of wage and salary public-sector workers participated in an employment-based retirement plan.

In addition, demographic factors have a big impact on whether a worker has access to a retirement plan. For example, being white was associated with higher probabilities of participating in a retirement plan. Hispanic wage and salary workers were significantly less likely than both white and black workers to participate in a retirement plan, although native-born Hispanics were more likely to participate than non-native born Hispanics, EBRI says.

EBRI’s report also shows the overall gap between the percentages of black and white plan participants has narrowed when compared across earnings levels, with blacks surpassing whites at the income level of $75,000 or more.

In another important trend, workers with lower educational attainment had lower levels of retirement plan participation, EBRI says. While educational attainment has a strong correlation with earnings, when controlling for that factor, the higher educated still had the highest levels of participation. Those with the least education (no high school diploma) still had significantly lower levels of participation than those with at least a high school diploma, EBRI’s research shows.

While the overall percentage of females participating in a plan was lower than that of males, when controlling for work status or earnings, the female participation level actually surpassed that of males in 2013. EBRI says this gender gap significantly closed between 1987 and 2009 before widening again in 2010 to 2012. It has nearly closed again in 2013, according to the EBRI report.

EBRI notes that workers at large employers were far more likely to participate than those at smaller firms. Those in the manufacturing industry and the transportation, utilities, information, and financial industry had the highest probabilities of participating, while those in the “other-services industry” had the lowest probability.

Not only do the workers’ demographic characteristics affect the probability of their participation in an employment-based retirement plan, but their geographic location also has an impact. EBRI’s report shows wage and salary workers ages 21 to 64 living in Florida had the lowest probability (38.3%) of participating in a plan in 2013, while those living in Iowa had the highest probability (56.9%).

Those workers who do not participate in a plan tend to be young, part-time, low-income, or employed by small firms. For instance, of the 67.9 million wage and salary workers who worked for an employer who did not sponsor a plan, 17.9 million (26.4%) were ages 25 or younger or 65 or older, EBRI says. Almost 30 million (43.6%) were not full-time, full-year workers, and 29.2 million (43.0%) had annual earnings of less than $20,000. Furthermore, 39.3 million (57.8%) worked for employers with less than 100 employees, EBRI finds.

A full copy of EBRI’s report was published in the October EBRI Issue Brief, online at www.ebri.org.

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