Compliance September 11, 2017

IRS Reminds 403(b) Plan Sponsors of Common Plan Errors

In a new publication, the IRS lists rules for 403(b) compliance and resources from the agency to help plan sponsors.

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In an updated page on its website, the Internal Revenue Service (IRS) has listed common 403(b) plan mistakes, IRS services, products and assistance to help 403(b) plan sponsors stay in compliance.

“It’s important to know the tax rules that apply to your 403(b) plan and to pay attention to the operation of your plan,” the IRS says.

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One area in which the IRS says it commonly finds mistakes is with the written plan document requirements. The IRS reminds plan sponsors that a 403(b) plan doesn’t need to be a single plan document; sponsors can compile the salary reduction agreements, the contracts that fund the plan, and written procedures for eligibility, benefits, dollar limitations, nondiscrimination and universal availability. However, the IRS notes a single plan document makes administration easier, especially if the plan has multiple vendors.

There is now a pre-approved plan program from the IRS, and Section 21 of Revenue Procedure 2013-22 establishes a remedial amendment period under which an eligible employer can retroactively correct form defects in its written 403(b) plan in order to satisfy the written plan document requirement of the 2007 final regulations. Revenue Procedure 2017-18 provides that the last day of the remedial amendment period for 403(b) plans is March 31, 2020.

The IRS also notes it commonly finds mistakes regarding:

  • Ineligible employers;
  • Universal availability rules;
  • Depositing elective deferrals;
  • Excess elective deferrals;
  • Contribution limits;
  • Loans;
  • Hardship distributions;
  • Post-severance contributions; and
  • In-service exchanges and transfers.

The new page includes links to resources from the IRS to aid in 403(b) plan compliance, including its 403(b) Plan Fix-It Guide.

Participants September 11, 2017

Most Participants Not Receiving Retirement Savings Advice

Of those who do seek retirement investments advice, financial advisers are the most utilized source, according to a survey by Betterment. 

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Most 401(k) participants prefer to receive advice on their retirement investments through email and one-on-one counselling sessions, according to a survey by Betterment for Business, the technology-focused 401(k) provider. 

The “most preferred cadence” for advice was “as often as a question arises” (28%), suggesting a need for personalized, on-demand advice. The study also identifies room for improvement in terms of how advisers are interacting with current and potential clients. 

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In fact, most participants surveyed (53%) say they receive no advice on their retirement investments at all. This statistic is of particular concern considering separate studies projecting low returns for the long-term and participants’ common misconceptions about retirement savings.  

Nonetheless, the Betterment study finds that financial advisers remain the most utilized source for retirement advice among those who seek it. Of these, 65% work with a financial adviser, as opposed to other potential sources of guidance, such as a bank or an insurance agent. Most say they either fully trust or place a lot of trust in their financial advisers.  

Betterment notes that this data arises as news around the Department of Labor (DOL) fiduciary rule reveals to many consumers that the financial advice they received on retirement investments could be subject to conflicts of interest. However, the firm’s survey found that fiduciary awareness is still just taking hold. Only 42% of respondents correctly identified what a fiduciary is in the retirement planning context. Moreover, 27% did not know what a fiduciary was at all, and 20% believed financial adviser and fiduciary were synonymous.  

Of those aware of the details of the changing fiduciary duty, 84% still have taken no action, such as asking whether their personal advisers are fiduciaries. But of those that did take action, 48% decided to find a new adviser.  

“The recent fiduciary ruling developments have spurred conversation around what credible advice should look like, and many advocates of the rule have hoped that investors would demand accountability from their financial professionals,” observes Jon Stein, CEO, Betterment. “All savers have the right to sound, reliable and personalized advice on their retirement investments, and as people demand and exercise that right, retirement outcomes can improve.”  

In addition, the Betterment survey shed light on how participants are saving. Consistent with previous reports, it noted that automatic features seem to be boosting participation. The survey found that 94% of participants with auto-enrollment continue contributing to their plans. Half even increased their contributions. Most (78%) also didn’t opt out of auto-escalation. Betterment notes, “Millennials seem to like auto-escalation—but in practice, might not be using it most effectively, further underscoring the need for relevant, timely advice and education.” 

Betterment for Business’s Consumer Retirement Advice Report was produced with data from 1,051 consumers who work at small and medium-sized businesses and currently contribute to their employer-sponsored 401(k) plans. 

For more information, visit BettermentforBusiness.com. 

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