GAO Calls for DOL-IRS Collaboration on Prohibited IRA Transaction Exemptions

GAO says the two agencies do not share enough information on these exemptions, and that sharing more information would lead to greater transparency and consistency.

The Department of Labor (DOL) grants exemptions to some prohibited transactions related to individual retirement accounts (IRAs), such as an IRA buying investment property from the IRA owner. As such, the Government Accountability Office (GAO) examined these exemptions and concluded that the Department of Labor (DOL) and the IRS should work closer together to establish a formal means to oversee these IRA prohibited transaction exemptions.

“With regard to DOL’s application review process, GAO found that DOL has not sufficiently documented internal policies and procedures to help ensure effective internal control of its process,” GAO says in a new report, “Individual Retirement Accounts: Formalizing Labor’s and IRS’ Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions.”

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GAO goes on to say: “Documenting procedures could increase transparency about how applications are handled, reduce the risk of DOL employees carrying out their duties inconsistently, and provide a means to retain organizational knowledge should key personnel leave unexpectedly.”

GAO notes that while DOL and IRS share some information on IRA prohibited transactions, it is not a formal process. Of the 124 IRA prohibited transaction exemption applications that GAO examined, in only eight cases did DOL contact the IRS. Further, DOL has information about why it denies some of these applications, which it fails to share with the IRS.

The report says that prohibited transactions tend to arise when IRA owners make unconventional investments outside of publicly traded stocks, bonds or mutual funds—and seek to invest in real estate, virtual currency or private equity. If the IRS finds that a person has engaged in a prohibited transaction, that person could face severe tax consequences. In some cases, the IRA could entirely lose its tax-favored status.

Typically, DOL only grants an exemption when it finds it is administratively feasible, in the interest of the IRA owner, and protective of the rights of the participant and beneficiaries. IRA owners and their fiduciaries can file applications for exemptions with DOL’s Office of Exemption Determinations, which is part of the Employee Benefit Security Administration (EBSA). They can research information about past exemptions on EBSA’s website. If an applicant finds that their application is similar to others that DOL has approved, they can expedite the process with an “EXPRO” application.

DOL typically takes between a few months to more than a year to review normal applications and as little as 78 days for an EXPRO application.

GAO found that most of the applications it reviewed, 88 of the 124, concerned the sale of IRA assets, followed by the purchase of assets (21 applications).

In conclusion, GAO says, documenting such procedures would provide greater transparency about how applications and handled, reducing the risk of employees carrying out their duties inconsistently.

As far as coordinating with the IRS, GAO says IRS officials say they would like more information from the DOL on requested exemptions. GAO also says that the two agencies do coordinate sufficiently on employer-sponsored retirement plans.

The DOL had put forth a significant expansion of the fiduciary rule to apply to all advisers and brokers, which the 5th Circuit vacated. Subsequently, the Securities and Exchange Commission passed Regulation Best Interest, which would require financial professionals to act in their clients’ best interest, but stops short of requiring all brokers to serve as fiduciaries.

Proactive Plan Sponsors Reap Benefits

Plan sponsors that fully automate their plans are more likely than others to believe their workers are on the path towards a financially secure retirement, J.P. Morgan found.

Proactive plan sponsors are much more likely (71% versus 47%) to believe that their workers are on a path towards a financially secure retirement, according to a report from J.P. Morgan Asset Managment, “The Power of Being Proactive.”

In the survey, proactive plan sponsors were actually those who indicated “that they place participants on a strong saving and investing path, through features such as automatic enrollment, automatic escalation, and streamlined investment decisions, like a target-date fund.”

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Additionally, 70% think their approach will help employees retire at their targeted retirement age, compared to only 43% of plan sponsors without this specific plan design.

J.P. Morgan found 41% of plan sponsors fully automate their plans in this way, while 59% allow their participants to make their own choices. Among those that the firm says are proactive, 87% believe that their approach is an appropriate benefit for their organization, compared to 74% of other plan sponsors. They also think their plan design demonstrates their level of care about employees (84% versus 64%), helps them in recruiting quality employees (74% versus 57%), helps their workers appreciate their compensation package (71% versus 60%), motivates employees (71% versus 50%) and helps them retain quality employees (69% versus 56%).

“We still see a sizeable gap between the importance plan sponsors place on their goals and how successful they believe their plans are in achieving them,” says Catherine Peterson, managing director, global head of insights programs at J.P. Morgan Asset Management. “The survey demonstrates the benefits of plan sponsors taking a proactive approach through measures such as automatic enrollment, automatic contribution escalation and streamlining investment decisions.”

The survey also found 55% of plan sponsors use automatic enrollment, up from 28% in J.P. Morgan Asset Management’s first survey in 2013. Thirty-eight percent use automatic escalation, up from 21% in 2013. While sponsors that do not use these tools said they thought employees would push back on them and/or should take financial responsibility themselves, J.P. Morgan’s 2018 DC Participant Survey found that most participants are in favor of automatic features, or are neutral about them.

Sixty-two percent of sponsors offer target-date funds (TDFs), up from 46% in 2013. Seventy-five percent of sponsors are highly confident in their selection and monitoring of TDFs. However, 30% said they do not have a solid understanding of how their TDFs work.

Seventy-one percent of sponsors work with an adviser or consultant, and among this group, 67% are satisfied with the service advisers are providing to them. However, only 24% are very satisfied. Forty-one percent of those sponsors working with advisers say their adviser comes to them with new ideas and best practices.

In sum, J.P. Morgan says that being proactive is a win-win for both plan sponsors and participants. Sponsors still need to learn more about how TDFs are constructed, and there is an opportunity for advisers and consultants to work with sponsors on these strategies.

“Significant progress has been made to strengthen DC [defined contribution] plans, with plan sponsors showing a strong and growing commitment to their employees’ fiscal health,” says Meghan Jacobson, executive director with J.P. Morgan Asset Management. “However, the fact that many plan sponsors are still falling short of achieving their goals suggests that more needs to be done to adopt a proactive approach.”

The firm’s findings are based on an online survey of 838 sponsors that Matthew Greenwald & Associates conducted between January and March of this year.

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