Compliance December 5, 2019

2019 Required Amendments List Published by IRS

Covered in this year’s required amendments list are new hardship withdrawal rules and a new regulation impacting certain cash balance pension plans.

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The IRS has published Notice 2019-64, which details the 2019 required amendments list for qualified retirement plans.

As the IRS notes, beginning with the 2019 required amendments list, all required amendments lists will apply to both individually designed plans qualified under Section 401(a) and individually designed plans that satisfy the requirements of Section 403(b).

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Part A of the Notice details “changes in requirements that generally would require an amendment to most plans or to most plans of the type affected by the change.”

First, the Notice states that final regulations relating to hardship distributions must be addressed.

“Plans (including § 403(b) individually designed plans) that (1) provide for a suspension of an employee’s elective deferrals or employee contributions as a condition for obtaining a hardship distribution of elective deferrals or (2) do not require a representation from an employee who requests a hardship distribution that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need, must be amended as necessary to eliminate the suspension and provide for the representation, for hardship distributions made on or after January 1, 2020,” the Notice states.

The IRS notes that the prohibition on a qualified plan’s or 403(b) plan’s suspension of elective deferrals and employee contributions as a condition for obtaining a hardship distribution of elective deferrals applies not only to the plan making the hardship distribution but also to all of the employer’s other qualified plans, Section 403(b) plans, and, if the employer is an eligible employer described in Section 457(e)(1)(A), eligible deferred compensation plans, as described in Section 457(b).

The second required change is detailed by the IRS as follows: “Collectively bargained cash balance/hybrid defined benefit plans maintained pursuant to one or more collective bargaining agreements ratified on or before November 13, 2015, and which constitute collectively bargained plans under Section 1.436-1(a)(5)(ii)(B), must be amended to the extent necessary to comply with those portions of the regulations regarding market rate of return and other requirements that first became applicable to the plan for the plan year beginning on or after the later of (1) January 1, 2017, and (2) the earlier of (a) January 1, 2019, and (b) the date on which the last of those collective bargaining agreements terminates.”

The IRS notes that the relief from the anti-cutback requirements of Section 411(d)(6) provided in Section 1.411(b)(5)-1(e)(3)(vi) applies only to plan amendments that are adopted before the effective date of those regulations.

Part B of the IRS Notice details “other changes in requirements that may require an amendment,” of which this year there are actually none.

Generally, December 31, 2021, is the last day of the remedial amendment period with respect to a disqualifying provision arising as a result of a change in qualification requirements that appears on the 2019 required amendment list and a form defect arising as a result of a change in Section 403(b) requirements that appears on the 2019 required amendment list. In addition, under section 8.01 of Revenue Procedure 2016-37 and section 6.01 of Revenue Procedure 2019-39, December 31, 2021, generally is also the plan amendment deadline for a disqualifying provision arising as a result of a change in qualification requirements that appears on the list and for a form defect arising as a result of a change in Section 403(b) requirements that appears on the 2019 list. Later dates may apply to a governmental plan.

Investing December 5, 2019

Keys to Future Investing Success for Institutional Investors

Sources share what to look for in asset managers and investment products to reap the best investment outcomes.

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There is no shortage of examples of how investment management and products have changed over the years to adjust to market factors and investor demographics.

Looking forward, NEPC, a research-driven independent investment consultant and private wealth adviser, has identified what it sees as the three new future fundamentals of investing and the largest drivers of investment success: sustainability, diversity & inclusion and innovation. Co-Head of NEPC’s Impact Investing Committee, Krissy Pelletier, based in Boston, says the fundamentals came to NEPC at it was looking at trends, with the goal of staying ahead of the curve, and determining what will help clients achieve the best results for portfolios and align with their goals.

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Sustainability

According to NEPC, once a niche strategy, impact investing is quickly becoming the norm. Plan sponsors and investment committees are held accountable for delivering both monetary and social returns. To meet this dual mandate, investors need a clearly defined roadmap.

According to Pelletier, impact investing has four key pillars: negative screening, environmental, social and governance (ESG) integration, thematic investing or proactive capital. “Investors should have clear ideas about what they want to do with their dollars. They may want to support renewable energy or health care innovation. Maybe they want to align their investment with their organization’s mission or they just view impact investing as a compelling investment opportunity,” she says.

Pelletier says NEPC’s view is that ESG integration factors are part of an investment process. “We do not believe ESG is a product or asset class. ESG information can be integrated into any investment process, and it is up to asset managers to include it in what they are creating,” she adds.

According to Pelletier, there are studies that show ESG integration will create better outcomes—better return and risk mitigation. “We’re seeing investors taking a state-of-the-state of existing portfolios, turning a critical eye to the levels of ESG integration used by asset managers. And, asset managers have been working on this. Many have products with strong ESG integration efforts,” she says.

Sheri Hawkins, head of strategic product development at Northern Trust Asset Management (NTAM) in Chicago, tells PLANSPONSOR she used to work with equity portfolios, so she is always thinking of investment philosophy. “Investors should be paid to take risk,” she says.

Hawkins says ESG factors are really business issues. If they are managed well, it can set a company up for success and the price of its securities reflects that success. “At NTAM, we evaluate investment strategies on qualitative, quantitative and index factors; we evaluate ESG across that spectrum,” she says.

Diversity & Inclusion

Hawkins says it is quite important to include diversity & inclusion (D&I) in asset managers. The whole ecosystem around investment management should pull from more diverse talent, as this more closely represents the investor base.

NEPC says investment programs benefit from the different perspectives and ideas that come from a diverse and inclusive workforce.

Sam Austin, partner and co-chair of NEPC’s Diverse Managers Committee, says, “Women- and minority-owned funds are still significantly underrepresented in the portfolios of institutional and high-net-worth investors, despite research that points to positive and, in many cases, superior investment performance of those funds.”

Hawkins says, “It’s important to realize that the most important financial goals of individuals inform or are directly tied to their life goals, including retirement funding. Looked at through this lens makes us better realize how important diversity within the industry is, as diversity brings a wider array of talent and therefore a higher likelihood for the best ideas to surface.”

As for investing in companies that have a strong D&I culture, Hawkins says, “Data shows a clear relationship between companies that excel on diversity and those that are among the top performers in their respective industries. This is logical, given that diversity strengthens culture, increases creativity, and builds greater trust/connectivity among employees.”

She cites a McKinsey & Co study which found firms in the top quartile of gender diversity are 21 percent more likely to produce above average profitability and firms in the top quartile for ethnic diversity are 33 percent more likely to experience above average profitability.

NTAM recently selected eleven minority-owned broker-dealers for its Minority Broker Program. Started in 2007, the program consists of firms owned by minorities, women, and disabled veterans. Each firm was selected for one or more asset classes, based on quantitative and qualitative selection criteria including execution capabilities, technology platforms and performance.

“We know that companies that excel on cultural, ethnic and gender diversity are among the top performers in their respective industries,” Northern Trust Asset Management President Shundrawn Thomas said in a company announcement. “This quality leads to higher levels of engagement, increased innovation and greater profitability. It further promotes better business outcomes for all stakeholders, including clients.”

But, NTAM goes even further. It uses third-party managers that run asset classes for which it doesn’t necessarily have expertise. A few years ago it decided it was important to understand and assess those managers and their own D&I practices. It even launched a fund around this concept—the Northern Engage360 Fund, a global equity fund that leverages broader swath of managers, a couple of minority-owned in addition to managers that have strong D&I practices in investment teams and management strategy.

Hawkins adds that public plan sponsors are very involved in in the Engage360 fund. “A feed investor was a university endowment committed to emerging managers for number of years. In a conversation with the client, we co-developed it.”

She says over time, NTAM has had a number of public and corporate plan sponsors come to it with a minority-owned target for their investments. “They come to us for separate accounts to direct commissions to minority brokers, and they are excited to see we were intentionally and thoughtfully directing investments through pooled funds, such as collective investment trusts [CITs].”

Innovation

NEPC says, “The quest for alpha drives innovation in the financial markets as investors deploy new technologies, data and investment models to access an ever-changing investment landscape. Forward-looking investors require new data analytics, investment structures and risk management models to provide access to new markets and asset classes with a proper balance between risk and long-term returns.”

According to Pelletier, institutional investors, including retirement plan sponsors, want to take in information about what is happening in the marketplace and in their portfolios more quickly. Innovation is about asset managers offering the tools and platforms to help asset owners have better understanding, and also about asset managers finding and uncovering trends in the marketplace and portfolios.

Hawkins contends that historically the asset management industry has been behind the curve when it comes to tech innovation. “The threat is coming fast and furiously. Asset managers who are oriented around innovation are likely to thrive. There are a number of studies that say those who invest in tech will thrive in the future not only from a client interest perspective but in margins,” she says.
“Part of idea about future fundamentals is what worked in the past may not work in the future. So, asset managers need to be flexible and open-minded and looking for the next best and brightest idea to bring better outcomes to investors, whether looking at their teams and firms or new products,” Pelletier concludes. “It’s about being good partners [with investors] and having conversations about what should be developed along the way.”

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