Deals and People July 1, 2019

Principal, Wells Fargo Combination to Provide Broader Range of Services

Principal’s acquisition of Wells Fargo’s Institutional Retirement & Trust business is complete, and Principal’s Renee Schaaf discussed what that means going forward for the businesses and their clients.

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In April, Principal Financial Group announced a definitive agreement with Wells Fargo & Company to acquire its Institutional Retirement & Trust business, with an expected closing in the third quarter. On the first day of the third quarter, Principal announced the deal is closed.

“We wasted no time. It went exactly as we had planned. We were able to get regulatory approval and complete all transition services agreements. It speaks well about the good collaboration between Principal and the Wells Fargo Institutional Retirement & Trust team,” Renee Schaaf, president – Retirement and Income Solutions at Principal Financial Group in Des Moines, Iowa, told PLANSPONSOR.

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Through this acquisition, Principal will double the size of its U.S. retirement business, while bringing on institutional trust and custody offerings for the non-retirement market and expanding its discretionary asset management footprint. Schaaf said Principal is excited about the trust and custody business. “It rounds out something on which we have not focused—serving non-retirement trust and custody assets,” she said.

According to Schaaf, one of the guiding principles in the integration of the two firms is being sure it brings forward best of both business models and service models. “It is very important to us to identify what features client most appreciate and bring value to marketplace,” she said. Schaff mentioned there is opportunity to add depth in what the two businesses have to offer together—both Wells and Principal have a total retirement outsourcing focus. Both organizations bring strength in the defined contribution (DC), defined benefit (DB), nonqualified plan, employees stock ownership plan (ESOP) and institutional asset advisory businesses.

As an example of adding depth, she said, Wells Fargo brings strength in area of DB plan fiduciary services. Principal has strength in this as well, but Wells Fargo has specific capabilities in the large plan market. Wells Fargo also has robust plan sponsor reporting capabilities. This will be combined with Principal’s recordkeeping and administration capabilities, in addition to its ability to offer bond designs to assist with asset-liability management. Principal also offers DB plan sponsors a guarantee that if they are interested in transferring risk in the future, it will quote and bid on that business.

Schaaf said Principal is not only acquiring additional capabilities and scale, but an experienced and highly professional team. “We are very keen on retaining talent,” she said.

Principal has already announced additions to leadership teams from Wells Fargo, with Joe Ready, current head of Wells Fargo Institutional Retirement & Trust, taking a new role as head of Trust and chief fiduciary officer for Wells Fargo Wealth & Investment Management.

According to Schaaf, plan sponsors clients have responded very positively to the acquisition, as Principal has ensured them that the integration will be seamless. Principal is making sure to minimize disruptions and on day one, there are no changes to what the client sees.

Wells Fargo has two different recordkeeping systems that are different from Principal’s, as well as a different system for trust and custody services. Schaff noted that both companies have proprietary systems. “As we think about the systems, it requires a very thoughtful approach for each line of business,” Shaaf said. “We are still doing a detailed analysis about whether to combine systems. We know we need to keep the strongest capabilities from each.”

As for the future, “We’ve been having early conversations with Wells Fargo Institutional Retirement & Trust business clients, and there is a real interest on their behalf to access and leverage the strong financial wellness capabilities we have as well as capabilities for the entire participant experience,” Schaaf said. Principal has broad electronic capabilities on the table to onboard participants in an intuitive, simple and fun experience. “When we’ve compared ours to other methods of enrollment, we see a 20% increase in the overall amount of deferrals.” In addition, Principal has developed a digital website for Hispanic employees that is not only translated but culturally transcribed to engage Spanish speakers in ways that are culturally relevant to them. “We are anxious to roll that out,” Schaaf said.

She added that Principal is well positioned to take advantage of and bring solutions into the marketplace as DC plan participants turn assets into an income stream for retirement.

Schaaf said there is a long integration period, 18 months, which allows Principal time to be very thoughtful about how to combine all the capabilities and offerings the two firms have, as well as to make sure client service teams and functionality are kept intact.

“The biggest challenge is getting our story out and working hand-in-hand with every consultant, adviser and plan sponsor to make sure we address everyone’s needs in the best possible way, but it is a challenge we are very prepared for and that we welcome,” Schaaf said. “We are so pleased with the cultural similarities between Principal and Wells Fargo and know there is so much we can do.”
Compliance July 1, 2019

The Shifting Mechanics of Hardship Withdrawals

In a new Snapshot publication, the IRS offers a detailed review of the shifting regulatory provisions applying to pre-retirement hardship distributions from DC plans, noting how these are changing as a result of the Bipartisan Budget Act of 2018.  

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As explained in a newly published “IRS Snapshot,” a 401(k) plan may permit pre-retirement distributions to be made on account of participants experiencing financial hardships. A hardship is defined as an “immediate and heavy financial need,” and the distribution must be declared by the participant to be necessary to satisfy an immediate financial need.

Generally speaking, employees’ contributions—rather than employer matching dollars—have been drawn upon to meet hardship withdrawal requests. But if the plan sponsor permits, IRS explains, certain employer matching contributions and employer discretionary contributions may also be distributed on account of a hardship, although the standards for distributions may be different.

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For plan years beginning prior to 2019, qualified matching contributions, qualified nonelective matching contributions, and income earned on elective deferrals could not be distributed on account of a hardship. These restrictions were lifted for plan years starting in 2019, however, and more changes are on the horizon due to the requirements of the Bipartisan Budget Act of 2018.

As the IRS explains, the Bipartisan Budget Act of 2018 made several important updates to the requirements for making and monitoring hardship distributions from tax-qualified retirement plans. In particular, the Act provided that a distribution from a 401(k) or similar qualified plan will not fail to be treated as made on account of hardship merely because the employee did not first exhaust any available loan from the plan.

In addition to expanding the types of contributions and earnings a plan may make available for hardship distributions, the law directed the IRS and Treasury Department to eliminate the safe harbor requirement to suspend participant contributions for six months in order for the distribution to be deemed necessary to satisfy an immediate and heavy financial need. Among still other changes, the Act ordered employers and the IRS to allow participants to more easily certify that they are experiencing a financial hardship.

As reviewed in the Snapshot, responding to the Bipartisan Budget Act, the IRS has put forward a proposed regulation to replace the previous requirement for a detailed and document-supported representation of hardship with “a general written statement that the employee has insufficient cash or other liquid assets to satisfy the need,” effective for distributions made on or after January 1, 2020. The IRS Snapshot points out that “whether an employee has an immediate and heavy financial need depends on all relevant facts and circumstances,” and that, broadly speaking, when the proposed rule becomes final, an employer may confidently rely on the employee’s representations unless the employer has actual knowledge that the representations are false.

While the hardship withdrawal rules are, in a sense, becoming more lenient, there are still restrictions. Pursuant to the “safe harbor” provisions most plan sponsors seek to comply with, a distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for:

  • Generally, expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care.
  • Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments).
  • Payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of postsecondary education for the employee, or the employee’s spouse, children, or dependents.
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
  • Burial or funeral expenses for the employee’s deceased parent, spouse, children, or dependents.
  • Certain expenses relating to the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC § 165.
  • The plan may also permit distributions for medical care, tuition, and funeral expenses for certain beneficiaries of the participant, per IRS Notices 2007-7 and 2007-1.

The IRS Snapshot notes that many plans may continue to use more detailed policies and procedures already in place for documenting participants’ requests and receipts of hardships distributions. The recent changes, in other words, allow but do not require plans to be more lenient about the certification and monitoring of declared hardships. And, however a plan sponsor chooses to proceed, it will also be important to ensure the plan remains compliant when it comes to the treatment of records and documents tied to pre-2019 hardships distributions. 

With all this in mind, the IRS Snapshot includes the following audit tips:

  • Review the plan document and stated hardship policies.
  • Examine the hardship distribution form(s) and any written statements provided by the employee for proper signatures, especially spousal consent (if applicable).
  • Make sure that the distribution is limited to the maximum distributable amount related to the source of the funds.
  • Examine the records the employer used to establish whether a hardship exists and the amount of the hardship. Records containing the necessary information may include, but aren’t limited to, medical bills, tuition bills, eviction notices, or closing sheets for the purchase of a principal residence.
  • For elective deferrals, examine the documentation provided by the employee to determine that the employee has no other reasonably available resource to relieve the hardship. This can be limited to an employee representation.
  • For elective deferrals, for plan years beginning prior to January 1, 2019, verify that the employee obtained available distributions and loans and was prohibited from making contributions for six months after the hardship distribution.
  • Examine the returned check(s).  
  • Examine the trust fund statement.
  • Make sure the distribution is properly reported on Form 1099-R.
  • Look for indicators of fraud.

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