Perspective: Staying on Top of 2008 Plan Changes

The new year ushered in some important provisions that directly affect qualified retirement plans.

Many plan sponsors, however, may not know, remember, or understand just what these changes entail. After all, it’s easy to overlook staggered implementation dates in laws that passed years earlier – in this case, the Pension Protection Act (PPA) of 2006. That’s why it’s important to educate your plan sponsors about new provisions and help them implement necessary plan changes that will ultimately be beneficial to their plans and to their employees.

The major changes for 2008:

  • Give permanence to a number of contribution and deduction rulings from 2001’s Economic Growth and Tax Relief Reconciliation Act (EGTRRA). These were originally set to expire in 2011.
  • Allow participants to rollover assets directly to a Roth individual retirement account (IRA), eliminating the interim step of first placing the money in a traditional IRA. This is simply a reduction in paperwork; applicable taxes will still be due.
  • Enable “catch-up contributions,’ which permit participants aged 50 and over to increase their savings as they near retirement. This plan enhancement is not mandatory, and sponsors that choose to offer it are not required to match the additional contributions.
  • Encourage plan sponsors to provide education and investment guidance to participants. This should be objective, professional, advice that has participants’ best interests at heart.
  • Allow adoption of auto enrollment provisions. Plan sponsors may be able to use this to avoid ADP, ACP, and top-heavy testing, if they meet requirements that relate to automatic deferrals, mandatory employer contributions (that become vested after two years), and participant notification.
  • Adopt an automatic rollover process. If your plan sponsors have already or plan to add auto enrollment, it’s also a good idea to help them develop an automatic rollover process. Increased plan participation, combined with our country’s high turnover rate, will almost certainly result in more terminated accounts remaining on the books of former employers.

In addition to the above, in the market there are now solutions available to help reduce your plan sponsors’ risk. One solution is to implement a voluntary rollover program to remove the terminated employees from the plan. These participants are the ones most likely to sue their former plan sponsor. Giving these former employees a choice to take control of their retirement, combined with expert help in understanding their options and implementing their choices, is the best way to manage that risk. This solution also reduces plan related expense – before the plan comes up for bid. No matter how the plan is charged for services or who pays for it, terminated employees in the plan increase plan-related expenses. Some studies indicate that terminated participants may be as high as 30% of the total participant base. Removing them in a retirement friendly way will reduce cost and secure loyalty from your plan sponsor.

For terminated participants, remaining in an ex-employer’s plan is also problematic because their retirement savings can languish from neglect. Helping your plan sponsors combine automatic plan enrollment and rollout features with access to a broad array of independent rollover vehicles and professional investment advice can be a winning combination for everyone involved:

  • Your plan sponsors stay on top of legislative changes while improving the efficiency of their plans.
  • Participants receive the necessary resources and support to stay invested in retirement.

And since we’re nearly halfway through the year, it’s also a perfect time to start giving your sponsors a heads-up for expected 2009 changes. Among them is the need for all plans to adopt undated plan documents during 2009 or 2010. This provides an excellent opportunity to get plan sponsors to consider a total plan review and potential overhaul. They will have to spend the time (and probably money) to go through this process. They can’t avoid it. So why not turn this into a more positive experience by helping them explore changes other than those that must be made. Major changes that will substantially improve a plan’s efficiency need to be considered during the next few months in order to be implemented by January 1, 2009.

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Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.

© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be considered investment advice.