Compliance January 19, 2023

How SECURE 2.0 Can Help Small Businesses

SECURE 2.0 has several provisions designed to increase retirement plan creation and participation by small businesses, in particular by offering them larger tax credits and by exempting them from certain provisions.

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The SECURE 2.0 Act of 2022, among many other things, offers increased tax credits to small businesses to encourage plan creation. These tax credits were expanded to such an extent that Joe DeBello, vice president of OneDigital Retirement and Wealth, remarked at a OneDigital webinar on Tuesday that it will be “next to impossible for small businesses to not be able to offer a retirement plan.”

The recently passed retirement reform law will increase the three-year startup tax credit to 100% of administrative costs, up from its current 50%, with an annual maximum of $5,000, for employers with up to 50 employees. This provision came into effect on January 1 of this year.

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Chad Parks, founder and CEO of Ubiquity Retirement and Savings, a 401(k) provider specializing in small businesses, says that this should be a big deal for small business. He remarks that this provision “basically says to the small business owner that the federal government is so serious about getting you into the retirement system, that they are willing to pay the startup costs for the first three years.”

Parks explains that since small business plans rarely cost in excess of $5,000 a year to administer, this effectively makes the plan set up free for the first three years.

For small businesses sponsoring a new defined contribution plan, SECURE 2.0 also credits employer contributions. “The amount of the additional credit generally will be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. This full additional credit is limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees. The applicable percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year and no credit for tax years thereafter,” according to the Senate Committee on Finance. This provision also took effect on January 1.

Section 111 of SECURE 2.0 also states that joining a pooled or multiple employer plan counts as creating a plan for purposes of applying the three-year administrative cost tax credit. This provision is retroactive for plans created after December 31, 2019.

SECURE 2.0 also exempts small businesses from certain mandates. Most notably, employers with 10 or fewer employees do not have to have the automatic enrollment and escalation features required for all new plans created in 2025 or later.

Parks notes, however, that the SECURE Act of 2019 provides a tax credit of $500 for the first three years after an automatic enrollment plan is adopted. This tax credit did not have an expiration clause and was not repealed by SECURE 2.0, which means that when automatic features become mandatory for all new plans, the $500 credit will still apply for the first three years for new plans using automatic features.

Small businesses did not, however, receive an exemption from what might be the most infamously complicated provision in SECURE 2.0: a mandatory Roth source for all catch-up contributions made by highly compensated employees. David Stinnett, head of strategic retirement consulting at Vanguard, warns sponsors to not “underestimate the complexity of this provision.”

Plans that do not offer a Roth source may even have to suspend catch-up provisions for their HCEs entirely if they are not prepared to comply with this requirement in 2025, when it is set to start, Stinnett says. This could be a particularly burdensome feature for small businesses, one to be prioritized in planning.

Section 310 changes the rules for top-heavy testing in 401(k) plans. 401(k) plans are regularly required to pass the top-heavy test, which assesses the contribution proportions that HCEs and non-HCEs can make to a plan. If they do not pass, the sponsor can make a 3% non-elective contribution instead. This can be particularly burdensome for small businesses, because they are more likely to fail the test, according to Parks, and the 3% contribution, in effect a penalty, would affect their budget more than a larger business.

As a consequence, small businesses have an incentive to remove excludable employees (i.e. lower paid and part-time employees) from the plan so the businesses can pass the test without paying the 3% contribution.

Section 310 allows sponsors to perform a top-heavy test on excludable and non-excludable employees separately, thereby making it easier to pass and reducing the incentive to remove excludable employees from the plan.

Though Section 310 does not apply only to small businesses, it does potentially impact them more. The phrase “small business” or “small businesses” was used three times in Section 310 in a summary of SECURE 2.0 provided by the Senate Committee on Finance.

Compliance January 19, 2023

Allianz Asset Management of America Dealt Lawsuit Over 401(k) Plan

Workers contributing to the Allianz Savings and Retirement Plan have brought allegations of self-dealing against plan fiduciaries.

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A pair of Allianz Asset Management of America 401(k) Savings and Retirement Plan participants have claimed in federal court that plan fiduciaries engaged in self-dealing, according to the complaint, Chad Rocke and Christopher Collins v. Allianz Asset Management of America et al.

The plaintiffs’ attorneys allege two counts of fiduciary breach—of loyalty and prudence—against the company, the plan committees and numerous individuals, and—failure to monitor fiduciaries.

“Although using proprietary options is not a per se breach of the duty of prudence or loyalty, a fiduciary’s process for selecting and monitoring proprietary investments is subject to the same duties of loyalty and prudence that apply to the selection and monitoring of other investments,” the complaint states. “Based on the defendants’ decision to maintain an all-proprietary lineup in lieu of any less expensive and otherwise superior nonproprietary alternatives, it is reasonable to infer that the defendants’ process for selecting and monitoring the Allianz Funds was imprudent and disloyal.”

Workers contributing to the savings and retirement plan during this time were only offered investments managed by either Allianz Global Investors or Pacific Investment Management Company LLC—except the self-directed brokerage account—both of which are subsidiaries of Allianz, according to the complaint. For example, at year-end 2021, the plan’s menu consisted of three proprietary collective investment trusts and 36 proprietary mutual fund investments, the plaintiffs allege.

The retirement plan fiduciaries are alleged to have maintained an all-proprietary fund lineup that included expensive, underperforming investments, for the benefit of the defendants and at the expense of plan participants from 2018 to the present, the complaint states.

The plaintiffs’ attorneys allege the defendants’ use of proprietary funds also caused participants to incur excessive fees, because the AllianzGI and PIMCO proprietary mutual funds are actively managed funds. As such, the active funds charged an annual operating expense, paid to AllianzGI or PIMCO and deducted from the rate of return of the fund, according to the complaint.

“In part because of the high fees associated with the AllianzGI and PIMCO proprietary investment products, these investments tended to underperform, costing the plan tens of millions of dollars in lost benefits that participants would have had in their accounts had the plan’s investments been managed in a prudent and impartial manner,” the complaint states. “A prudent fiduciary offering proprietary high-fee options like the AllianzGI and PIMCO Funds would continuously monitor whether the higher total plan cost as a result of using an exclusively all-proprietary lineup was justified by a reasonable expectation of increased returns.”

From 2018 through the end of 3021, the last year for which data is publicly available, the Allianz 401(k) plan had between 4,156 and 4,710 participants and comprised approximately $1.1 billion to $1.9 in total retirement assets, according to the complaint. The plaintiffs’ attorneys requested that a class action be certified by the U.S. District Court for the Central District of California and be applied to all participants of the Allianz Asset Management of America 401(k) Savings and Retirement Plan, who were invested in the AllianzGI or PIMCO Funds at any time on or after December 27, 2017, excluding individuals with any responsibility for the plan’s administrative functions or investments.

The named defendants in the lawsuit include Allianz Asset Management of America, the administrative plan committee of the 401(k) Savings and Retirement Plan, the retirement plan committee of the Allianz Asset Management of America 401(k) Savings and Retirement Plan and 30 unnamed individuals.

The plaintiffs are represented by the Keller Law Group, based in Los Angeles and Nichols Kaster, based in Minneapolis.

Allianz Asset Management of America is based in Newport Beach, California, and a division of global financial services company Allianz SE, headquartered in Munich.

A spokesperson for Allianz in Munich declined comment on the litigation. 

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