Benefits November 21, 2012

Roth 401(k) Usage on the Rise

November 21, 2012 (PLANSPONSOR.com) – Overall Roth 401(k) usage is up 14% year-over-year, a recent Wells Fargo study found.
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The study of 1.9 million participants in employer-sponsored 401(k) plans recordkept by the company revealed that the most frequent users of Roth contributions are Generation Y, whose year-over-year increase was slightly higher (16%) than the overall book-of-business. More than one-tenth (14.3%) of Generation Y now contribute Roth dollars when the feature is available, compared with 9.4% of Generation X and 5.8% of Baby Boomers.

When Wells Fargo first rolled out the Roth 401(k) option, plan sponsors were moving a lot of information about conversions, Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust, told PLANSPONSOR. That communication went to a smaller subset of employees, or participants already enrolled in a retirement plan rather than all employees.

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Once plan sponsors added the Roth 401(k) as an ongoing feature in employer-sponsored plans, Wells Fargo started to see a number of the new employees begin to look at it as an attractive option. “When you’re new and coming into a plan, you’re more opt to look at the options you’re given and make a more conscious decision around that,” Nordquist said. The adoption rate is also higher among Gen Y workers, in part because they are often new employees.

“Most of Gen Y is at a relatively low tax rate today,” Nordquist added. “They see that they’re doing okay with paying taxes on the contributions now, thinking that they’ll be in a higher tax bracket later, toward retirement.”

As far Roth 401(k) adoption by salary, there is some difference, but not as dramatic as it is by age, Nordquist said. “Clearly, with those that are making $100,000-plus we see the highest adoption; but even with those that are making $20,000 to $40,000, we see a 5% adoption.”

It is also common to see participants splitting their contributions between a Roth 401(k) and a traditional 401(k). “We hear from plan sponsors that they see participants who are unsure about what bracket they’ll be in and doing a little bit of both,” Nordquist noted.

Regarding the impending regulations coming from Washington regarding the tax treatment of retirement plans (see "The Fight for Retirement Plan Tax Advantages"), Nordquist said many are watching for tax-deferred status in general. “What we hope is that policymakers would clearly recognize that the tax incentive structures on these plans do drive good savings behavior,” Nordquist said. “We’d hate to go backward on the savings; we need to improve the savings rate.”

While still in a wait-and-see mode for future trends for Roth 401(k) adoption, Nordquist said she is “pleased to see that it’s being presented in a fashion that participants understand and can take action against.” It’s not a matter of better or worse—both Roth and a traditional 401(k) are equally great as long as participants are putting dollars away, she added. “It’s a positive, the way plan sponsors are explaining [Roth] so younger participants are signing up. We are staying encouraged by it.”

Compliance November 21, 2012

DOL Provides Post-Hurricane Compliance Relief

November 21, 2012 (PLANSPONSOR.com) – The Department of Labor (DOL) issued compliance information for employee benefit plans adversely affected by Hurricane Sandy.
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The agency understands as the implications of Hurricane Sandy unfolds, plan fiduciaries, employers, labor organizations, service providers, as well as participants and beneficiaries, may encounter compliance-related issues over the next few months in connection with employee benefit plans covered by the Employee Retirement Income Security Act (ERISA), Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi said. The guidance applies to employee benefit plans, plan sponsors and service providers to such employers, located in one of the counties or Tribal Nations, on October 26, 2012, that have been identified as covered disaster areas because of Hurricane Sandy. These areas are identified by the IRS at http://www.irs.gov/uac/Newsroom/Help-for-Victims-of-Hurricane-Sandy.

An IRS announcement provided relief from certain verification procedures that may be required under retirement plans with respect to plan loans to participants and beneficiaries, hardship distributions and other pension benefit distributions. The DOL will not treat any person as having violated the provisions of Title I of ERISA solely because they complied with the provisions of the IRS announcement.

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Amounts that a participant or beneficiary pays to an employer or amounts that a participant has withheld from his or her wages by an employer for contribution or repayment of a participant loan to an employee pension benefit plan constitute plan assets, and thereby are required to be forwarded to the plan, on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month in which the amounts were paid to or withheld by the employer.

The DOL recognizes that some employers and service providers acting on employers’ behalf, such as payroll processing services, located in designated affected areas will not be able to forward participant payments and withholdings to employee pension plans within the prescribed timeframe. In such instances, the agency will not, solely on the basis of a failure attributable to Hurricane Sandy, seek to enforce the provisions of Title I with respect to a temporary delay. In addition, the IRS said it will not seek to assess an excise tax with respect to a prohibited transaction under section 4975 of the Code resulting solely from such a temporary delay.

The regulations provide an exception to the 30-day advance notice requirement to participants and beneficiaries when the inability to provide the advance notice is due to events beyond the reasonable control of the plan administrator and a fiduciary so determines in writing.

With respect to blackout periods related to Hurricane Sandy, the DOL will not allege a violation of the blackout notice requirements solely on the basis that a fiduciary did not make the required written determination.

The agency said it recognizes that plan participants and beneficiaries may encounter difficulties such as meeting certain deadlines for filing benefit claims and COBRA elections. Plan fiduciaries should make reasonable accommodations to prevent the loss of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes.

Additionally, the DOL acknowledged there may be instances when full and timely compliance by group health plans and issuers may not be possible. As stated previously by the agency (see http://www.dol.gov/ebsa/faqs/faq-aca.html) its approach to enforcement continues to be marked by an emphasis on compliance assistance and includes grace periods and other relief, where appropriate, including when physical disruption to a plan or service provider’s principal place of business by the hurricane makes compliance with pre-established timeframes for certain claims decisions or disclosures impossible.

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