PSCA Calls for Clearer Guidance from IRS and DOL on Missing Participants

The plan sponsor advocacy organization says there have been “numerous reports of aggressive DOL enforcement activity, and sometimes inconsistent positions taken by DOL auditors, regarding how plan sponsors are handling missing participants.”

The Plan Sponsor Council of America (PSCA), a part of the American Retirement Association (ARA), has submitted written guidance on missing participants to several agencies including the Department of Labor (DOL), the U.S. Department of the Treasury, and Internal Revenue Service (IRS).

PSCA explains that it provided this guidance in response to recent Department of Labor enforcement activity as well as a Government Accountability Office (GAO) request. Additionally, PSCA has signed on to a letter to the DOL regarding this issue sent by a group of concerned trade organizations.

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In a public statement published alongside the comment letter, PSCA explains that it first requested back in April 2017 additional guidance from the IRS and DOL regarding various Internal Revenue Code and Employee Retirement Income Security Act (ERISA) compliance issues that arise when there is a missing or nonresponsive participant and proposed a sample safe harbor plan.

“Since this request, there have been numerous reports of aggressive DOL enforcement activity, and sometimes inconsistent positions taken by DOL auditors, regarding how plan sponsors are handling missing participants,” PSCA writes. “We have heard concerns from our plan sponsor members that they have been or may be subjected to enforcement actions even though the DOL and IRS have not issued comprehensive guidance on missing participants that provide a clear roadmap for compliance.”

The PSCA comment letter emphasizes the benefits of the sample safe harbor plan originally proposed in the April 2017 correspondence.

“The sample plan provides plan sponsors with ten clear steps to locate missing participants for certain plans while continuing to meet their fiduciary obligations and preserve their plan qualification,” PSCA explains. “In encouraging the IRS and DOL to jointly issue guidance and adopt such a plan, plan sponsors, particularly small plan sponsors, would no longer have the necessity to attempt to harmonize inconsistent guidance issued by separate agencies.”

Additionally, although PSCA says it recognizes that the IRS’ lack of sufficient staffing and resources impacts the feasibility of elements key to the success of the proposed safe harbor plan, such as the letter forwarding service, the advocacy group argues that the program can be reinstated “in a manner that meets the needs of both the IRS and plan sponsors.”

“As the agencies work to develop guidance, PSCA remains committed to assisting the responsible agencies and the plan sponsor community in navigating these complex and highly important issues,” the group confirms.

Read the full comment letter here.

PGIM Advocates for Institutional Approach to DC Investing

PGIM suggests DC plan sponsors look to the investing approach of defined benefit (DB) plans, endowments, sovereign wealth funds, insurance company general accounts, sophisticated wealth management platforms and family offices. These institutional investors focus on solutions that are believed to offer a higher probability of meeting a desired outcome.

A report, “Defined Contribution Investments on Trial,” from the Institutional Relationship Group at PGIM, the asset management arm of Prudential Financial, notes that recent lawsuits have challenged the investment menu selection approach of many defined contribution (DC) retirement plans.

Some plans use what PGIM calls the Retail Approach with a primary focus on appealing to what is believed to be what participants want, using a wide array of choice and an emphasis on name recognition. Others use what PGIM calls the Simple Approach, focusing on minimizing fees and maximizing simplicity, using heavy or exclusive use of passively managed funds and basic asset classes.

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Josh Cohen, PGIM’s head of Institutional Defined Contribution, based in Chicago, tells PLANSPONSOR that maximizing simplicity and cheapness can benefit plan sponsors, calling into question whether fiduciaries are acting in the best interest of participants, unless these plan sponsors truly believe active management doesn’t work. However, he notes institutional peers haven’t come to that conclusion.

PGIM advocates for what it calls the Institutional Approach to DC plan investments, and suggests DC plan sponsors look to the approach of defined benefit (DB) plans, endowments, sovereign wealth funds, insurance company general accounts, sophisticated wealth management platforms and family offices. These institutional investors focus on solutions that are believed to offer a higher probability of meeting a desired outcome.

An Institutional Investment Approach uses outcome-oriented investments, broad asset class diversification, best-of-breed investment management, a thoughtful mix of active and passive strategies and are vehicle agnostic, meaning they consider institutional mutual funds, collective investment trusts (CITs) and separate accounts. According to Cohen, this mindset can be used in the DC plan framework as well.

According to Cohen, institutional investors look at what investments will provide better outcomes. “For example, a DB plan may use liability-driven investing, or LDI. A similar option in DC plans is TDFs, or target-date funds,” he says. Cohen adds that institutional investors have seen advantages from using a broad asset class. There has been a move from just stocks and bonds to credit, private equity and private real estate. He says the types of asset classes may differ based on the institution’s asset size or liquidity needs. He also suggests DC plan sponsors look at emerging markets, emerging market debt and illiquid asset classes, such as real estate.

“Another thing I like is [institutional] investors are thinking about active versus passive. They are all using a combination of active and passive investment, although there may be differences in how they allocate them. But, very few are all in one or the other,” Cohen says. “For example, we asked DB plan chief investment officers how many used passive bonds, and no hands were raised. But many DC plans only focus on simplicity and fees, and their TDFs will have half or more of assets in fixed income funds.”

Cohen says that having an institutional mindset for TDFs means they will have a mix of active and passive underlying investments and diverse asset classes. “There are some off-the-shelf TDFs that fit that bill, but larger plans and a few down market can create customized TDFs taking into account demographic differences of participants,” he says.

According to Cohen, 26% of DC plan sponsors say active funds would be harder to monitor, but he points out that just because plan sponsors go passive, it does not reduce monitoring responsibilities. Plan sponsors must think about to what indexes they will benchmark and the lowest possible share class. He adds that there is no such thing as a passive TDF—underlying investments need to be monitored. “There are plenty of OCIOs and other experts that will share investment monitoring responsibilities with plan sponsors,” Cohen says.

DC plan sponsors should also follow institutional investors’ approach to using multi-manager funds (white-labeled investments can fit this bill), institutional mutual funds, CITs and separate accounts, he adds, pointing out that experts want to work with plan sponsors to determine the best investment vehicles for their plans.

“It’s all about the best interest of participants. To protect plan liabilities and reduce risk, diversifying asset classes really makes a lot of sense,” Cohen says.

He concludes: “The average investor couldn’t get access to these asset classes on their own, and even if they could, they would be paying much higher than institutional prices, so why are we denying individual workers these asset classes?”

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