The Markets February 25, 2014

Sponsors See Value in Managed Accounts

A greater focus on participant outcomes and their own fiduciary responsibilities may be leading more plan sponsors to adopt managed accounts for their retirement plans.
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Fidelity Investments reported 784 new plan sponsors joined the Fidelity Portfolio Advisory Service at Work (PAS-W) program—the company’s proprietary managed account offering for workplace retirement accounts—during 2013. Sangeeta Moorjani, senior vice president of investment services at Fidelity in Boston, tells PLANADVISER a couple of factors contributed to this rise in demand. Not only are plan sponsors much more focused on making sure participants are retirement ready, they’re also seeking help managing their fiduciary risk, and from the plan participant perspective, employees seem to need more and more assistance.

Recent Fidelity research found 77% of respondents admitted they did not have the skill, will or time to manage their own investments. And among Fidelity participants who did take an active role in managing their savings, another study showed more than half (53%) did not have the appropriate asset allocation for their age group.

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Moorjani explains that managed accounts within retirement plans consider employees’ overall financial situations—including risk tolerance and assets/savings outside the plan—and construct a portfolio personalized to the individual using funds within the plan’s investment lineup. Fidelity offers a multi-channel model, with which participants can either speak one-on-one with an adviser or interact with the account manager online, and receive print summaries to help them as well.

Plan sponsors who choose to offer a managed account in their fund lineup are providing participants with professional help with retirement savings, Moorjani says. They are also offering participants a more personalized and appropriate asset allocation.

However, offering a managed account requires education so employees take into account whether they need such personalization. According to Moorjani, participants who need more personalization include those with more complex financial situations—multiple retirement accounts, spousal income and a low risk tolerance. Participants should also be informed of additional fees for managed accounts; plan sponsors should make sure they understand the fee they are paying and the value they are receiving for that fee.

When considering a managed account option, plan sponsors should make sure the provider is experienced with managed accounts, Moorjani suggests. Plan sponsors should also consider the need for a multi-channel model to address participants’ different preferences for access to information—face-to-face, online or on paper, she says. It is important to look at the level of personalization the solution is able to offer participants, and it is critical for plan sponsors to understand whether the provider will offer fiduciary oversight of the account, she adds.

While there are many different managed account providers, Moorjani believes what differentiates Fidelity is its experience—more than 20 years offering both institutional and retail managed accounts—its mutli-channel model, and the fact its managed account is completely integrated into the overall plan experience.

Compliance February 25, 2014

Failed to Provide Safe Harbor Notice?

Failed to provide the safe harbor 401(k) plan notice to employees eligible to participate in the plan? There’s a fix for that.
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In a recently updated page on the Internal Revenue Service (IRS) website, the agency notes that a safe harbor 401(k) plan requires the employer to provide timely notice to eligible employees informing them of their rights and obligations under the plan, and certain minimum benefits to eligible employees either in the form of matching or nonelective contributions.

Safe harbor notices should be sent within a reasonable period before the beginning of each plan year. In general, the law considers notices timely if the employer gives them to employees at least 30 days (and no more than 90 days) before the beginning of each plan year; and in the year an employee becomes eligible, generally no earlier than 90 days before the employee becomes eligible and no later than the eligibility date.

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The failure to provide a safe harbor notice is a failure to operate the plan in accordance with its safe harbor provisions. The plan has an operational failure because it failed to operate in accordance with the terms of the plan document. The plan sponsor cannot “opt out” of safe harbor plan status for the year simply by performing the ADP/ACP tests for the year of the failure, the IRS says.

The appropriate correction for a late safe harbor 401(k) notice depends on the impact on individual participants. For example, if the missing notice results in an employee not being able to make elective deferrals to the plan (either because he was not informed about the plan, or informed about how to make deferrals to the plan), then the employer may need to make a corrective contribution that is similar to what might be required to correct an erroneous exclusion of an eligible employee.

On the other hand, if an employee was otherwise informed of the plan’s features and the method for making elective deferrals, the failure to provide notice may be treated as an administrative error that would be corrected by revising procedures to ensure that future notices are provided to employees in a timely manner.

If an employee is not given the opportunity to elect and make elective deferrals to a safe harbor 401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of Internal Revenue Code Section 401(k)(12), then the employer must contribute 50% of the excluded employee’s missed deferral, adjusted for earnings. An employee’s missed deferral is the greater of 3% of compensation, or the maximum deferral percentage for which the employer matches at a rate at least as favorable as 100% of the elective deferral made by the employee.

The plan sponsor must also contribute the amount of matching contribution (adjusted for earnings) the employee would have received.

Examples, as well as tips for finding and avoiding this mistake, are included in the IRS’s web page here.

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