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next issue no. 5: Fiduciary perspective
Staying on track: focus areas for plan sponsors
The fiduciary landscape has shifted over the past 12 months, creating new plan design and recordkeeping considerations for plan sponsors. Indeed, with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act at the end of 2019, the coronavirus pandemic and the subsequent passing of the Coronavirus Aid, Relief and Economic Security (CARES) Act, plan sponsors have faced many changes.
The CARES Act provided roughly $2 trillion in aid to help Americans manage the sudden economic fallout of the coronavirus outbreak and ensuing widespread unemployment. The Act allows qualified retirement plan participants who have been diagnosed with COVID-19 or have experienced adverse financial consequences caused by the virus, to turn to their DC plans to help fund a variety of short- and long-term financial needs.
CARES Act provisions
Coronavirus-related distributions (CRDs)
- 10% early withdrawal penalty and 20% mandatory tax withholding waived
- $100,000 limit across all plans and IRAs
- Option to have income taxed over three years with taxpayer ability to recontribute within three years, regardless of that year’s cap
- Increased loan limit of up to $100,000 or all of vested account balance, through September 22, 2020
- Repayments due for qualified individuals on or after March 27, 2020, and before January 1, 2021 may be delayed for up to one year
Suspension of Required Minimum Distributions (RMDs)
- To help provide relief for those required to take RMDs, the CARES Act suspends 2020 RMD payments (although a participant is not prohibited from receiving the amount that would have been paid as an RMD).
Plan sponsors had the option to choose whether to offer CRDs in their plans— balancing participant short-term financial needs with the longer-term impact that dipping into retirement plan funds has on retirement readiness. According to a recent survey conducted by the Secure Retirement Institute, nearly 4 in 10 (38%) did not implement the expanded withdrawal capability or the increased loan capability. However, plans that did allow them will need to amend their plan documents to reflect the changes by the end of the 2022 plan year.
Income is the outcome
The SECURE Act passed late last year comprised over 30 provisions, most of which became effective on January 1, 2020. Some of the most anticipated and widely publicized provisions were those around lifetime income. The SECURE Act encouraged inclusion of annuities in retirement plans by creating a new fiduciary safe harbor that helps 401(k) and 403(b) plans offer annuities by protecting plan sponsors from liability should the annuity provider become insolvent or otherwise unable to pay.
The safe harbor has opened the door for plans to adopt a lifetime income solution by limiting fiduciary liability, which has been a longstanding barrier. Under this provision, plan sponsors can rely on representations from the insurer issuing the annuity, regarding the strength of their financial position and other attributes. With the fiduciary onus being shifted to the issuing company, plan sponsors and consultants may more willingly consider using lifetime income-providing annuities in a plan’s lineup.
The SECURE Act also increased the portability of lifetime income balances. Previous legislation dictated that annuities must be liquidated when the sponsor no longer offers it. Now, participants can rollover a lifetime income investment to another employer-sponsored retirement plan or IRA without penalty or fees if the annuity is removed from the plan and certain conditions are met.
A third provision, one requiring lifetime income disclosures on benefit statements, will not be effective for at least another year. The DOL recently came out with an interim final rule, giving guidance on how these illustrations should give savers an idea of how much monthly retirement income they could expect to purchase with their account balance. Retirement plans will also need to provide explanations about what the lifetime income illustrations mean and the assumptions used to calculate the illustrations.
The interim final rule states:
- The statement must show the participant’s current account balance, both as a single life annuity and a qualified joint and survivor annuity income stream.
- The two illustrations must appear on the same statement, and they will show how the account balance might translate into lifetime income upon retirement.
- The illustration does not take into account future earnings or contributions, would not reflect actual or assumed market experience or inflation, and is not interactive in any way. It is also important to note that the ruling does not require DC plans to offer annuities; the goal is to help participants plan for both savings and spending.
The issue of participant data has been getting attention recently. Plan sponsors take every precaution to protect participant data from cyberattacks or other types of security breaches (as we discussed in Issue no. 4 of this publication), but how participant data is used is becoming a hot topic. The line of fiduciary responsibility is somewhat blurred around the use of participant data. There are no express provisions in ERISA that prohibit the use of plan participant data for any particular purpose. Also in question is whether participant data is considered a plan asset. ERISA does not specifically address whether participant data is a plan asset. To date, courts have held that plan data is not a plan asset. But with recent lawsuits regarding use of plan data, plan sponsors should understand and document how plan data is being used.
In the context of creating greater financial well-being, questions about the use of retirement plan participant data continue to bubble up. With access to such data, service providers and asset managers can help provide a more personalized experience through managed accounts and custom financial advice. Therefore, retirement plan committees and plan fiduciaries should begin discussing their responsibilities and their position on retirement plan participant data use, and may want to consider taking the following steps:
- Monitor any developing legal updates and ERISA guidance.
- Review existing service agreements with service providers.
- Determine what types of data are collected and how it is used.
- Prior to entering new service agreements, discuss and understand how service providers intend to use plan and participant data for non-plan purposes.
- Consider having legal counsel review any new service agreements prior to executing.
While the coronavirus pandemic has certainly slowed down activity in many areas of business, the pace of lawsuits targeting plan sponsors does not appear to be slowing. These lawsuits are both expensive to defend and to settle, and generally fall into one of three categories:
- Inappropriate investment choices: Early lawsuits dating back to 2008 primarily focused on investment choices.1 ERISA does not specifically indicate which investments are appropriate, rather it indicates that fiduciaries must exercise care and prudence to select and monitor investment options.
- Excessive fees: According to Bloomberg Law analysis, more than 60 cases involving plan fees were filed in the first eight months of 2020, compared to about 20 in all of 2019. Cases brought alleging excessive fees could be in relation to recordkeeping fees or investment management fees. ERISA guidance is similar to that of choosing investments, and while plans are not required to offer the lowest-cost investment choices, fees must be reasonable and reviewed periodically.
- Self-dealing: Self-dealing arises when fiduciaries act in their own best interest in a transaction, rather than in the best interest of their clients. An example might include an investment manager who offers their own proprietary funds rather than a mix that includes unaffiliated choices.
While lawsuits have not been limited to these three categories, they represent the most common areas of complaints to date. The good news is that plan sponsors can take steps to mitigate liability by following prudent processes and providing evidence that they are acting in the best interest of participants. In addition, plan sponsors should consider:
- Appointing qualified committee members with diverse opinions
- Holding regular retirement plan committee meetings
- Frequently reviewing the plan’s investments and their performance
- Documenting all decisions
- Periodically reviewing plan operations and providers, including recordkeepers
- Hire ERISA counsel to advise the plan fiduciaries on their carrying out their duties and responsibilities
Every year in the retirement business brings challenges and concerns for plan sponsors, some of which are to be expected and others that are simply beyond their control, such as the environment we’re experiencing this year. But, no matter what else has changed, plan sponsors’ duties to protect their plan and interests of their participants have not.
In this issue
1 Bloomberg Bureau of National Affairs, ERISA Litigation Tracker (2018).
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Please note that this information should not replace a client’s consultation with a tax professional regarding their tax situation. Nuveen is not a tax advisor. Clients should consult their professional advisors before making any tax or investment decisions.