Tuesday, June 28, 2016

Watching for unintended consequences









John Schadl, Principal and Head of Vanguard ERISA and Fiduciary Services


I admit it—I am an ERISA nerd. As head of the ERISA & Fiduciary Services group in the Vanguard Legal Department, I truly get excited when big ERISA events occur: the occasional legislation with retirement plan provisions, benefits decisions from the Supreme Court, and big retirement plan regulatory packages.

The Department of Labor’s (DOL) April 6 release of its final rule updating the definition of fiduciary advice was one of those seminal events for ERISA lawyers—the biggest retirement plan development in ten years. The ERISA nerd in me sat down with a shot of caffeine, a fresh legal pad, a pencil, and a highlighter to dig into the 1,000-plus-page release.

One main theme coming out of earlier versions of this set of rules was the potential for unintended consequences. This was a big package that fundamentally changed the parameters of what constituted fiduciary conduct.

The vast majority of the provisions directly address the actions and behaviors of service providers—for example, responding to requests for proposal (RFPs), providing investment lineup monitoring support, or providing investment education to participants. But following the DOL’s 2015 proposal, the sheer breadth and reach of the rules caused some to question whether employees in a plan sponsor’s payroll, accounting, human resources, and financial departments would become plan fiduciaries when talking to participants and beneficiaries about plan investments or distribution options.

On this front, the final rule contains good news. The DOL explicitly concluded that it generally doesn’t consider such communications to be fiduciary advice unless the employee is paid specifically to provide such advice (reaching the sensible conclusion that the plan sponsor and its payroll, accounting, HR, and/or financial department employees typically don’t stand to benefit from such communications).

As such, this provision in the final rule represents a big win for plan sponsors and cause for celebration by ERISA nerds and non-ERISA nerds alike. Vanguard was proud to stand with plan sponsors in pointing out the proposal’s potential overreach and encouraging a more workable alternative.

Because of the scope of the fiduciary rule, Vanguard is spending considerable time wading through the DOL’s regulatory package and analyzing its wide-ranging impacts to make sure we identify all of its consequences (both intended and potentially unintended) for our clients. To achieve this objective, we’re preparing a more detailed analysis and will provide additional information about potential effects on different types of institutions. But in this particular instance, we’re pleased to report a good news story for plan sponsors.

About John Schadl
John Schadl is a principal and head of Vanguard ERISA and Fiduciary Services, which provides legal counsel on retirement and fiduciary topics for the company's institutional and retail businesses. Previously, Mr. Schadl led Vanguard Strategic Retirement Consulting, which works with plan sponsors on fiduciary and regulatory issues. Earlier in his career, Mr. Schadl handled retirement savings tax and fiduciary issues as an associate at the law firm of Susanin, Widman & Brennan, P.C. He earned a B.A. at the University of Notre Dame and a J.D. at Villanova University School of Law.

President Obama’s 2017 budget proposal has several potential effects on retirement

President Obama’s final fiscal year 2017 budget proposal is a record $4.1 trillion package that includes provisions to increase access to retirement plans and portability of retirement benefits. The Obama administration released details of the provisions in the Fiscal Year 2017 Revenue Proposals. Many of the President’s retirement plan provisions were included in previous budget proposals, although the administration included two new provisions in its final budget proposal that are both aimed at increasing access to retirement plans.

One proposal would allow for the creation of open multiple employer plans (MEPs) that would permit unaffiliated employers to offer benefits through a single plan. Under current law, employers that participate in MEPs are often employers that have some type of affiliation, such as belonging to the same trade or business association. The administration’s proposal would eliminate this “common bond” requirement.

Allowing unaffiliated employers to participate in a single MEP, which would be treated as a single plan under the Employee Retirement Income Security Act of 1974 (ERISA), would make it easier and less costly for small employers to offer tax-qualified retirement benefits to their employees. The administration believes that if it can reduce the complexities and costs associated with maintaining a retirement plan, small businesses will be more willing to offer retirement plans to their employees.

The administration’s other new proposal is intended to encourage state retirement savings initiatives, such as the Illinois Secure Choice Savings Program. The Department of Labor (DOL) has recently proposed regulations and guidance to move forward with state-based retirement savings initiatives. To further encourage these initiatives, the administration proposes to set aside $6.5 million to allow a handful of states to pilot and evaluate state-based 401(k)-type programs.

All of the other retirement plan provisions in the President’s final budget proposal were included in previous budget proposals. Following are the more significant proposed provisions that would impact retirement plans.

Nonrefundable Start-Up Costs Tax Credit
Small employers with 100 or fewer employees that adopt new qualified retirement plans, SEPs, or SIMPLEs would be eligible for an annual tax credit of up to $1,500 per year for three years. This tax credit for start-up costs would not be applicable to employers that offer an automatic IRA arrangement.

Also proposed is that this credit be extended to four years for any employer that adopts a new qualified retirement plan, SEP, or SIMPLE during the first three years of offering (or being required to offer) an automatic IRA arrangement.

Auto Enrollment Tax Credit
Small employers that adopt new qualified retirement plans that include an auto enrollment feature or add an automatic enrollment feature to an existing plan would be allowed a tax credit of $500 per year for three years. The auto enrollment tax credit would be in addition to the start-up costs credit.

Penalty-Free Withdrawals for Long-Term Unemployed Individuals
Long-term unemployed individuals would be permitted to take distributions of up to $50,000 per year for two years from IRAs, 401(k) plans, and other tax-qualified defined contribution plans, with certain amounts to be excluded from the 10 percent early distribution penalty tax. The penalty-free distributions could not exceed 50 percent of the aggregate IRA, 401(k), and other taxqualified defined contribution plan balances, subject to an exception for the first $10,000 of otherwise eligible distributions.

Certain Part-Time Workers to Participate
Employers would be required to expand 401(k) plan participation eligibility rules, by permitting part-time employees to participate in the plan if the employee has worked at least 500 hours per year with the employer for at least three consecutive years. The provision would not require the employer to make matching contributions.

Annuity Portability
Plans would be permitted to allow participants to take a distribution of a lifetime income investment through a direct rollover to an IRA or other qualified retirement plan if the annuity investment is no longer authorized to be held under the plan. The distribution would be allowed without regard to another triggering event that would permit a distribution.

Nonspouse Beneficiary Rollovers to Inherited IRAs
The options available to a nonspouse beneficiary under an employer-sponsored retirement plan or IRA for moving inherited plan or IRA assets to an inherited IRA would be expanded to allow 60-day rollovers (i.e., indirect rollovers) of such assets.

Deductibility of Retirement Savings Plan Contributions
The tax value of specified deductions or exclusions from taxable income, including those for IRAs and retirement plan contributions, would be reduced to a maximum of 28 percent instead of allowing taxpayers to exclude the contributions from the full 33 percent, 35 percent, or 39.6 percent that they would otherwise owe. Taxpayers in the 28 percent and lower brackets would be unaffected. This same provision also would limit the tax value of contributions made by these upper income taxpayers to health savings accounts and Archer medical savings accounts.

Cap on Tax-Advantaged Retirement Savings Plan Accumulations
Contributions to tax-advantaged retirement savings plans (such as IRAs, 401(a) plans, 403(b) plans, and funded 457(b) governmental plans) would be prohibited for individuals who have accumulated assets past a certain threshold. That threshold is the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan (for 2016, an annual benefit of $210,000). Currently, the maximum permitted accumulations for an individual age 62 is approximately $3.4 million.

Limit Payout Options for Nonspouse Beneficiaries
Nonspouse beneficiaries of retirement plans and IRAs would be required to take distributions over a period of no more than five years. Under current law, depending on the original IRA owner’s date of death and whether there is a designated beneficiary under the plan, a nonspouse beneficiary generally may be able to take payments over her own life expectancy. Certain exceptions would be made for nonspouse beneficiaries who are disabled, chronically ill, minors, and are not more than 10 years younger than the account owner.

Roth Conversions
Roth conversions would be limited in that only taxable assets in IRAs and qualified retirement plans would be eligible for rollover or conversion to Roth IRAs. This provision is designed to limit individuals who do not qualify for a Roth IRA from making nondeductible contributions to Traditional IRAs and then converting the assets to a Roth IRA.

No RMDs for Some Taxpayers
RMDs would be eliminated if the aggregate value of an individual’s IRA and other tax-favored retirement plan accumulations does not exceed $100,000 on a measurement date. The RMD requirements would phase in ratably for individuals with aggregate retirement benefits between $100,000 and $110,000.

Employer Reporting of Defined Contribution Plan Contributions
Employer contributions to defined contribution plans would be required to be reported on Form W-2, Wage and Tax Statement.

Cost-of-Living Adjustments
To avoid declines in the cost-of-living adjustments, the adjustments would be modified to prevent deflationary adjustments.

NUA Tax Treatment
The special net unrealized appreciation (NUA) tax treatment applicable to employer securities would be eliminated. This special tax treatment currently allows employer securities to be distributed and retained by the participant, with the participant paying current tax on the cost basis and later paying tax on the gain of the security at the capital gains rate.

Chance of Becoming Law
In the final year of a two-term lame-duck presidency, chances that the President’s budget will be adopted as proposed are slim to none, although the White House has expressed hope that they can obtain bipartisan support for a number of the President’s initiatives.

Keep your plan on track year round

Plans with a calendar year-end recently completed required annual compliance testing, while other plans will be completed throughout the year.

Regardless of your timing, it’s neither too late nor too early to take steps to position your plan for success in 2016. By monitoring your plan’s status throughout the year, you can prevent compliance testing surprises. In addition, you’ll enjoy the peace of mind that comes from knowing your plan is on the right track.

To better serve you, Vanguard provides the following resources:

  • Online Resource for Upcoming Annual Events: Available in the News and Communications section of the employer website, this guide provides key deadlines throughout the plan year that affect year-end processing.
  • Guide to Online Compliance Testing:1 Available in the News and Communications section of the employer website, this guide assists you with the compliance testing process. It offers step-by-step instructions on how to review and approve your plan’s testing.
  • Online access to year-end testing results:2 Shortly following the plan year-end, you’ll receive an email from Vanguard notifying you that your plan’s compliance testing results are available on the employer website.3 You can then submit census corrections and approve testing directly online.
  • Reminder notices: Vanguard emails important reminder notices for key plan deadlines. To make sure we have your current email address, see “Ensure your contact info is current.”
  • Online updates: Regular plan and industry updates are posted to the employer website. Stay on top of the latest news by making a habit of checking the home page and visiting the News and Communications section.
  • Monthly plan confirmation (MPC) report: To ensure your plan is on track to meet compliance requirements, Ascensus runs quarterly ADP/ACP tests.2 Test results are included in your plan’s MPC report, which is available on the employer website.
  • Planillustrator report: This report consolidates data and uses color-coded graphs to make plan information easier to access and understand. You can track key plan metrics, including demographics, participant usage, and investment-related activities—all in a single location.
  • Interim plan testing: Validate your plan’s status by running an interim test at any time using the employer website. The test can be accessed by going to the Processing tab and clicking Plan Level Processing, followed by Compliance Testing, Interim.


Helpful tip! To ensure your testing results are accurate, your plan’s data must be correct and current. Use the Census Integrity Scan to identify any inconsistencies and gaps in data. To run the report on the employer website, go to Processing, Plan Level Processing, Census Integrity, choose the current plan year under the Results box, and click Submit.


Regularly reviewing your plan’s data can help you identify issues that may cause your plan to reflect a failing status so you can take prompt corrective action.

For additional information on compliance testing, please contact your Vanguard Retirement Plan Access Client Service Team.

1This communication is provided only to plans that require ADP/ACP testing.
2Plans such as safe harbor, money purchase pension, and profit sharing only plans generally do not require ADP/ACP testing.
3Plan sponsors without a valid email address on file with Vanguard will receive paper delivery of their compliance testing.

Support for large plans requiring an audit

Are you aware that Vanguard provides comprehensive audit support for large plans that require an annual audit of their financial statements?

Typically, plans with 100 or more participants require an audit. We’ll prepare and deliver a complete audit package—also known as the Plan Year-End Summary—containing information your auditor can use to successfully execute a plan audit, including the following:

  • Basic plan- and participant-level activity reporting
  • A copy of the annual SSAE16 report from Ascensus’ auditors
  • Asset categorization guidance for Topic 820 (formerly FAS-157) purposes
  • Trust reporting and the annual SSAE16 audit report for Ascensus Trust (if employers contract with Ascensus/Frontier Trust for trust services)
  • Plan-level notes to ensure auditors have an explanation for any unusual activity in the plan
  • FAQs that explain our reporting methodology in detail
  • Distribution and loan reports

Ascensus will automatically prepare the audit package for plans required to use the Form 5500 Large. The audit package may also be created upon request for other plans. It’s delivered via a secure website in order to ensure that auditors can get a “clean copy” whenever they need one.

To ensure that this package contains all of the information that your auditor needs, Ascensus regularly solicits feedback on what should be included from auditing firms, clients, and institutional partners. This helps to facilitate a smooth audit process and minimizes the need for additional back and forth.

Should any questions arise, your Vanguard Retirement Plan Access Client Service
Team is available to provide further assistance at any point.