Ask the Experts October 23, 2012

(b)lines Ask the Experts – Who Gets a Summary Annual Report?

October 23, 2012 (PLANSPONSOR (b)lines) – “We have several employees here who do not elect to participate in our retirement plan even though they are eligible. Since our employer contribution is a match, they do not have an account balance.
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“Must the Summary Annual Report (SAR) be distributed to all plan participants, or only those with account balances? If we were to distribute to all participants in our plan (all employees, since we allow all employees to make elective deferrals), this would be a significant administrative burden, since we are an organization that employs many individuals who may work only a few days/weeks out of the year.”  

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

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The SAR, which must be delivered within two months of the deadline for filing of your 5500 (by 12/15 for calendar year plans who filed on 10/15), must be delivered to ALL 403(b) plan participants and beneficiaries receiving benefits. This would include anyone who is eligible to contribute to the plan, but fails to do so, regardless of whether or not they have an account balance. Former employees with account balances must receive the SAR as well.  

In your case, if a substantial portion of your workforce consists of employees who may only work a limited period each year, you may wish to take advantage of the exclusion provided in the final 403(b) regulations from the right to make elective deferrals for those who normally work fewer than 20 hours per week. Although the exclusion is generally cumbersome to administer, it may be worth the burden in your case if it results in not having to send SARs (and other documentation that must be provided to plan participants) to a significant portion of your workforce. You can take advantage of this exclusion by amending your 403(b) plan accordingly.  

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

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Administration October 22, 2012

NYC Responds to Accusation of Risky Plan Investments

October 22, 2012 (PLANSPONSOR.com) – An official with the New York City Deferred Compensation Plan says a report about its target-date funds fails to take into consideration the plan’s unique population and the city’s defined benefit programs utilized by almost all plan participants.
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A report by Peter Thomann, owner of Thomann Tax & Asset Management Inc., claimed target-date funds used by the plan have too much exposure to equity after the target date has been reached. In a letter to PLANSPONSOR, Georgette Gestely, director, Tax Favored & Citywide Program, said the plan’s Pre-Arranged Portfolios’ glidepaths have been customized to take the characteristics of the plan’s average participant into consideration.    

Plan participants are free to create their own asset mix if their circumstances differ from the general population, or for any other reason, including the advice of their financial planner. The funds are intended for use only by those participants who do not wish to customize their own asset allocation.   

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“On average, the plan’s participants differ from many other employee populations that invest in target-date funds in two important ways,” Gestely explained. First, nearly all participants have a combination of a defined benefit plan and a deferred compensation plan. The defined benefit plan typically provides between 50% and 70% of final earnings for a retiree’s lifetime, thus providing a fixed benefit for life. Effectively the defined benefit, as well as the lifetime annuity participants receive under Social Security, are insulated from the risk of the equity market. The availability of defined benefit payments, coupled with the earlier retirement age of many participants, supports the slightly higher equity allocation of the Pre-Arranged Portfolios, compared to some ‘off-the-shelf’ target year fund families.”  

Gestely added that it is common in the industry for the glidepath to continue, after the target date, for periods ranging from five to 30 years, and fund officials believe this is appropriate given the relatively longer post-retirement investment time horizon of many participants.   

“Both [the] plan and the board's consultant, Mercer Investment Consulting, continue to believe that the Pre-Arranged Portfolios are designed and structured appropriately for the demographics of the NYCDCP participants,” the letter concluded.  

Included with the letter was a memo from Mercer IC, which noted that the standard allocations for nearly all institutionally sold off-the-shelf target-date funds assume a retirement age of 65 and do not take into account DB plan benefits. When the glide paths were designed for the NYC plan, DB benefits and retirement age were incorporated into the customization of the funds.  

Mercer added that the City of New York’s Pre-Arranged Portfolios utilize the “through” glide path methodology, with the rationale being plan participants rely on these funds for income throughout retirement, which may last 30 years or more.  

A chart in the Mercer memo shows the Pre-Arranged Portfolios have a higher equity allocation, except for the Static Allocation Fund, into which each fund merges 15 years after the target date. The Static Allocation Fund has an equity allocation lower than the median.

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