Compliance December 5, 2019

IRS Publishes Required Amendments List for DC Plans

This year’s required amendments list touches on the new hardship withdrawal standards and a new regulation impacting certain hybrid defined benefit plans.

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The IRS has published Notice 2019-64, which details the 2019 required amendments list for qualified retirement plans.

As the IRS notes, beginning with the 2019 required amendments list, all required amendments lists will apply to both individually designed plans qualified under Section 401(a) and individually designed plans that satisfy the requirements of Section 403(b).

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Part A of the Notice details “changes in requirements that generally would require an amendment to most plans or to most plans of the type affected by the change.”

First, the Notice states that final regulations relating to hardship distributions must be addressed.

“Plans (including § 403(b) individually designed plans) that (1) provide for a suspension of an employee’s elective deferrals or employee contributions as a condition for obtaining a hardship distribution of elective deferrals or (2) do not require a representation from an employee who requests a hardship distribution that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need, must be amended as necessary to eliminate the suspension and provide for the representation, for hardship distributions made on or after January 1, 2020,” the Notice states.

The IRS notes that the prohibition on a qualified plan’s or 403(b) plan’s suspension of elective deferrals and employee contributions as a condition for obtaining a hardship distribution of elective deferrals applies not only to the plan making the hardship distribution but also to all of the employer’s other qualified plans, Section 403(b) plans, and, if the employer is an eligible employer described in Section 457(e)(1)(A), eligible deferred compensation plans, as described in Section 457(b).

The second required change is detailed by the IRS as follows: “Collectively bargained cash balance/hybrid defined benefit plans maintained pursuant to one or more collective bargaining agreements ratified on or before November 13, 2015, and which constitute collectively bargained plans under Section 1.436-1(a)(5)(ii)(B), must be amended to the extent necessary to comply with those portions of the regulations regarding market rate of return and other requirements that first became applicable to the plan for the plan year beginning on or after the later of (1) January 1, 2017, and (2) the earlier of (a) January 1, 2019, and (b) the date on which the last of those collective bargaining agreements terminates.”

The IRS notes that the relief from the anti-cutback requirements of Section 411(d)(6) provided in Section 1.411(b)(5)-1(e)(3)(vi) applies only to plan amendments that are adopted before the effective date of those regulations.

Part B of the IRS Notice details “other changes in requirements that may require an amendment,” of which this year there are actually none.

Generally, December 31, 2021, is the last day of the remedial amendment period with respect to a disqualifying provision arising as a result of a change in qualification requirements that appears on the 2019 required amendment list and a form defect arising as a result of a change in Section 403(b) requirements that appears on the 2019 required amendment list. In addition, under section 8.01 of Revenue Procedure 2016-37 and section 6.01 of Revenue Procedure 2019-39, December 31, 2021, generally is also the plan amendment deadline for a disqualifying provision arising as a result of a change in qualification requirements that appears on the list and for a form defect arising as a result of a change in Section 403(b) requirements that appears on the 2019 list. Later dates may apply to a governmental plan.

The Markets December 5, 2019

Don’t Overlook Stable Value’s Role as Bull Market Ages

If the Fed continues to cut interest rates, sources say, stable value funds will likely prove to be superior in comparison with money market funds.

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Earlier this week, John Hancock Retirement Plan Services revealed its newest stable value product, the Stable Value Guaranteed Income Fund.

While discussing the launch of the new fund, Patrick Murphy, CEO of John Hancock Retirement, also spoke generally about the importance of the stable value asset class—and not just for retirees and near-retirees.

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Stable value is a valuable option for the conservative portion of anyone’s portfolio, Murphy says. For retirees and near retirees, its guarantee of principal and interest provides principal preservation and a predictable income stream that they can rely on during their retirement years. For individuals who are uncomfortable with market volatility and those seeking to diversify their investments across a range of asset classes, stable value’s protection of principal and interest provides steady and stable returns, protecting these assets from loss in the event of a market downturn.

Murphy says it makes some sense why stable value investments are discussed less often by retirement plan fiduciaries than, say, target-date funds or managed accounts—despite the fact that stable value remains the largest conservative defined contribution (DC) plan asset class.

“Unlike TDFs, stable value funds generally do not qualify as a qualified default investment alternative [QDIA] as defined by the Employee Retirement Income Security Act [ERISA],” Murphy says, noting that there are limited exceptions for stable value assets that were invested prior to the Pension Protection Act. “Automatic investment into a plan’s QDIA selection is an important fiduciary decision and target-date funds, with age-based diversified portfolios designed to meet the retirement needs of participants who are at very different distances from retirement, are naturally the subject of much analysis.”

Still, as Murphy explains, stable value funds can and do play an important role as an asset class along with target-date funds, and they should also be the subject of sufficient deliberation. This is a sentiment echoed by Robert Lawton, president, Lawton Retirement Plan Consultants.

“Almost all 401(k) plans do a good job of covering the nine basic U.S. equity style boxes of value, blend and growth in the standard capitalization sizes of large, mid and small,” Lawton says. “However, does your plan offer an international bond fund? How about a real estate or commodities fund? In many plans, the real estate fund has been the best performing option recently and may be again this year. As the current economic cycle progresses, possibly into recession, and the bull market in U.S. equities comes to an end, do you have the right investment options available to allow your participants to continue to be successful investors?”

Lawton says a 401(k) investment fund lineup should offer “a high quality, extremely low risk option for those participants who are close to retirement, scared of volatile markets or conservative investors.” Stable value funds have been the highest yielding, lowest risk options available lately, he adds.

“If the Fed continues to cut interest rates, they will likely prove to be superior in comparison with money market funds,” Lawton says. “Be aware that employers have faced litigation for offering money market funds instead of stable value funds. Many advisers feel that the safe option is the most important investment option in 401(k) plans. Make sure your plan offers the best safe option possible.”

Murphy adds that stable value funds, with their guarantee of principal and guaranteed payment of predictable income, can be a valuable part of a plan’s “retirement tier” and a participant’s decumulation strategy. 

“As more plan sponsors focus on keeping terminated and retired participants in plan, offering investment options that meet retirees’ spending needs and principal preservation objectives has become increasingly important,” Murphy says.

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