Compliance May 3, 2013

Budget Proposal Could Create Administrative Headache

May 3, 2013 (PLANSPONSOR.com) - President Obama’s proposal to cap individuals' retirement savings not only has the potential to affect participants — it could also add administrative work for sponsors and advisers. 
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The proposed fiscal year 2014 budget would place a cap on retirement savings, prohibiting employees from saving more than $3 million in individual retirement accounts (IRAs) and other tax-deferred retirement accounts. Analyses from the Employee Benefit Research Institute suggest that up to 5% of retirement plan participants could be affected by this cap (see “SavingsCaps Could Affect 5% of Participants”).

“I don’t think it would have any impact on the bigger companies,” Richard Del Monte, president of Del Monte Group LLC, told PLANSPONSOR. “They just adjust and move forward.”

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He said, however, the impact on small businesses could be significant. Dentists and doctors with a staff of five people or fewer, for example, may stop offering a retirement plan altogether if the proposal passes, because their personal deductibility—which Del Monte said is huge for them—would be affected.

The proposed budget could mean that small-business employees will lose out on the opportunity to save at work, as well as contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules, said Brian H. Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries (ASPPA) (see “Budget Proposals for RetirementSavings—A Deterrent or Not?”). 

As a result in a loss of benefits, employers could lose highly skilled workers to other companies with a more competitive offering, Del Monte added.

But some sources like Lee Topley, managing director of Unified Trust, do not think the budget provisions would encourage job switching because these restrictions would be everywhere. He thinks the $3 million cap will only affect a small percentage of participants, but it is too early in the proposal to make definitive conclusions. 

Administrative Burden on Sponsors, Advisers  

The bigger potential problem with the $3 million cap, Topley said, is that it could burden advisers and sponsors alike with administrative hassles related to monitoring IRAs outside of a participant’s current plan.

If this burden falls on the plan sponsor, it could ultimately increase the cost of offering a defined contribution plan because of the added administrative expense, he said. “So I think there could be a negative impact [on sponsors],” Topley said. “It is going to add another level of complexity to what the adviser is doing, as well.”

Rather than placing a $3 million cap on IRAs and other tax-deferred retirement savings, Del Monte suggests eliminating the stretch provision in pensions for non-spouse beneficiaries. Instead of allowing these beneficiaries to take distributions from the inherited IRAs over their lifetime, the government could require them to take out the money within five years.

The $3 million cap proposal is flawed, Del Monte contends, because tracking down every IRA and the amount in it is difficult. “People have balances all over the place,” he said. “I really can’t imagine it would ever get enacted.” 

Benefits May 3, 2013

Benchmarking Fees for Optimizing Plan Value

May 3, 2013 (PLANSPONSOR.com) – Benchmarking plan fees can ultimately optimize the value of an employer’s retirement plan.
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In its preamble of the ERISA Section 408(b)(2) service provider disclosure rules, the Department of Labor (DOL) said: “Now, more than ever, it is critical for plan sponsors to understand plan fees.” But, just because information is disclosed does not mean it is understood, noted David de Tagyos, regional consultant with Goldman Sachs Asset Management’s Retirement Services Group, speaking to attendees of the 42nd Annual Retirement & Benefits Management Seminar, sponsored by the Darla Moore School of Management of the University of South Carolina, and co-sponsored by PLANSPONSOR.  

To really understand plan fees, plan sponsors must understand how fees are derived, determine whether fees are reasonable in light of services provided, and demonstrate that a prudent process was followed for service provider and fee decisions, de Tagyos contended. He said it is not enough to look at total plan costs, because many fees make up that number, and while total costs may be in line with the industry normal, the fees for one particular service or provider may be out of whack. In addition, there should be a balance between what the plan pays and what it receives. “408(b)(2) provides the data, and benchmarking provides the scale,” de Tagyos said.  

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He added that reasonable value is what the DOL is looking for, not the lowest cost. “If a provider is above average for fees, it should be because it is above average with service,” he stated.

Plan sponsors and advisers should explore new ways to benchmark plan fees, de Tagyos said, noting that traditionally they have requested periodic proposals from different vendors, used databases of Form 5500 filings and used benchmarking produced by the plan provider. He suggested the use of independent, third-party data. In addition, benchmarking should be an “apples-to-apples” comparison of plans similar to the plan sponsor’s with respect to plan size, number of participants, employer industry, employer match and allocation to index funds. “Using two or more sources is an even better measure and documentation of fee reasonableness,” de Tagyos added.  

Benchmarking leads to optimal plan value by helping plan sponsors: 

  • Renegotiate with providers for lower fees; 
  • Identify services that may be unnecessary; 
  • Enhancing the investment lineup; 
  • Improving plan design; and  
  • Providing documentation for a fiduciary audit file. 
“Plan sponsors should work with advisers to utilize the benchmarking capabilities of an independent, third-party specializing in retirement plan fee benchmarking,” de Tagyos concluded.

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