Compliance January 22, 2019

Bill Provides Retirement Plan Withdrawal Relief for Employees Affected by Government Shutdown

Federal employees and contractors would be able to take retirement account distributions without penalty and be able to repay the distributions to their accounts.

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Members of the House of Representatives have introduced a bill to provide relief to federal employees affected by the partial government shutdown, H.R. 545, the Financial Relief for Feds Act.

The bill would allow furloughed federal employees, “essential” federal employees working without pay and contractors whose sole source of earned income is their federal contract to make a withdrawal from their retirement savings accounts without the 10% penalty that normally applies. That includes not only the federal Thrift Savings Plan (TSP) but also accounts such as IRAs.

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There would be no limit to the number of distributions made to an individual and each distribution would be $4,000, multiplied by the number of 14-day periods beginning during any Federal appropriations lapse with respect to such individual.

In addition, any individual who receives a Federal Government shutdown distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), of the Internal Revenue Code of 1986. These repayments of distributions would be treated as eligible rollovers.

The bill has been referred to the Committee on Ways and Means and the Committee on Oversight and Reform.
Investing January 22, 2019

Study Suggests ‘Optimal’ Range of 401(k) Investment Categories

Based on the ERISApedia.com Market-Based Portfolio Model, the optimal number of investment categories is between 12 and 20.

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Any 401(k) plan that has fewer than 12 and more than 20 investment categories is an outlier, according to the 401(k) Portfolio Study of Investment Categories by ERISApedia.com.

The study report says that offering fewer than 12 categories may mean that participants are not being given sufficient opportunity to diversify. Offering more than 20 investment categories could lead to lower average investment in each fund, which may cause higher fees. An overly large number of investment categories may also contribute to participant confusion.

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The ERISApedia.com Market-Based Portfolio Model (EMBP) provides a model to help establish investment lineups in 401(k) plans. It is not based on any formal academic principles but instead relies on market data at the investment category and the fund level to provide guidance to investment fiduciaries and financial advisers. EMBP involves a two-step process for establishing investment lineups in 401(k) plans. First is to determine the core investment categories to offer (including the number categories and the specific categories to include), and second is picking the individual fund or funds within each investment category. Based on the EMBP, the optimal number of investment categories is between 12 and 20.

The study finds the top five investment categories ranked by number of plans is Large Blend, Large Growth, Intermediate-Term Bond, Large Value and Target-Date. The top five ranked by average balance per plan are Target-Date, Stable Value, Large Blend, Large Growth and Intermediate-Term Bond.

However, there appears to be a fair amount of investment category variance among all plans. On average there are about 5.8 missing investment categories (the absence of categories in the top 20) and 4.0 extraneous categories (inclusion of categories not in the top 20) per plan for a total variance of 9.8. Much of the variance is concentrated in plans with less than $10 million in assets, which the study report says could be an indication that smaller plans do not have the resources to design a rational investment lineup.

Overall, the study finds that fund redundancy is relatively low, as only about 20% of all plans have fund redundancy in excess of six. However, the amount of fund redundancy increases as plan size increases. Fund redundancy most frequently is four for plans with more than $500 million in assets.

The report notes that there may be good reasons for relatively high fund redundancy. For example, an investment fiduciary may wish to provide an actively managed and passive fund for each of several of the major investment categories.

Interested parties may request a free copy of the report at https://www.erisapedia.com/signupv2?FreeSearch=1.

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