Benefits August 11, 2020

Small Business Employers are Freezing Cash Balance Plans

Amid the pandemic, many are pausing their cash balance plans out of concern that there could be insufficient cash on hand to make required contributions.

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Before the outbreak of the coronavirus pandemic, small business were increasingly adopting cash balance plans.

Now, many are frozen or paused, say industry experts. At Kravitz Financial, about a quarter of the company’s small business clients froze their cash balance plans, and of that number, 10% had started terminating them.

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“During this climate, most will freeze the plan which reduces the funding requirements,” says Daniel Kravitz, president. “When the economy picks up, oftentimes they’ll unfreeze.”

Cash balance plans are celebrated by many across the industry as highly effective retirement plans for both employer and employee. Aside from its high contribution limits and tax-deferment potential, when employees receive their monthly reports, benefits are explained in the form of a lump sum account balance, making it easier for the participants to understand.

“More employers are finding transparency important,” says Alex Kuhel, a Chicago-based partner at October Three.

Adam Bergman, founder of IRA Financial, explains how many of his clients paused their cash balance plans out of concern that there would be insufficient cash to make required contributions. Bergman notes that because most employees hadn’t yet worked 1,000 hours during 2020 when their plans were frozen—as most froze in March or shortly after—employers had greater flexibility to enact a freeze. In many cases with defined benefit (DB) plans, participants won’t accrue their benefit until they work 1,000 hours. Because of this, employers may freeze their plans, if needed, before the benefit is ensured. 

Bergman says it is important to point out that the window for freezing cash balance plans has pretty much closed, because by this point in the year employees have likely exceeded 1,000 working hours.

“Since its August now, the 1,000 hours requirement has probably been surpassed by a lot of business owners, so that may not be an option,” he says. “Hopefully, their business is rebounding, and they’ll have the cash they need to make contributions.”

Funding requirements during the current economic environment have been altered slightly thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, says Kuhel. Normally, if an employer is following a calendar tax year, they can adopt and fund a DB or cash balance plan by September 15, 2021, in order to receive a 2020 deduction. Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the 2020 deadlines have been extended to January 1, 2021. Additionally, employers will have until January 1, 2021, to complete any minimum required contributions originally due in 2020.  

Small business employers who received a Paycheck Protection Program (PPP) loan may have been able to use these funds for their cash balance plan. The Department of Treasury issued guidance listing the repayment of retirement benefits as an area to allocate loan funds to. However, Kuhel recommends checking in with a benefits attorney prior to doing so.

“It is listed under payroll in the treasury guidance, but we would always encourage an employer to seek counsel to just be safer,” he adds.

Kravitz adds that employers can use the loan to fund required contributions for employees, but not larger contributions that fund the business owner’s benefit. Yet, both he and Bergman reference little utilization of PPP funds due to restricted time periods and little guidance on PPP usage specifically for cash balance plans.

Compliance August 11, 2020

Mercy Health Corp. Faces 403(b) Plan Excessive Fee Lawsuit

Among other things, the lawsuit alleges the health care system unreasonably maintained investment advisers and consultants despite the known availability of others with lower costs and/or better performance histories.

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An Employee Retirement Income Security Act (ERISA) lawsuit has been filed against fiduciaries of Mercy Health Corp.’s 403(b) plan.

The complaint alleges that the fiduciaries breached the duties they owed to the plan and its participants by authorizing the plan to pay unreasonably high fees for recordkeeping and administration (RK&A); failing to objectively, reasonably and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and unreasonably maintaining investment advisers and consultants for the plan despite the known availability of similar service providers with lower costs and/or better performance histories.

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The plaintiff contends that the defendants “did not engage in a prudent decision-making process and/or engaged in self-dealing, as there is no other explanation for why the plan paid these unreasonable fees for RK&A, investment management, and investment advisory and consultant services.” The plaintiff also brings prohibited transaction claims based on dealings between the defendants and the recordkeeper, investment manager, investment advisers and consultants to the plan.

The proposed class action lawsuit alleges that during the class period, the defendants failed to regularly monitor the plan’s RK&A fees paid to covered service providers, including but not limited to Voya, and failed to regularly solicit quotes and/or competitive bids from covered service providers in order to avoid paying unreasonable fees for RK&A services. According to the plaintiff, the defendants did not have a plan or process in place to ensure that the plan paid no more than a competitive reasonable fee for RK&A services.

Because the defendants failed to regularly monitor the plan’s RK&A fees paid to covered service providers, the fees were significantly higher than they would have been had the defendants engaged in this process, the complaint states. Using a graph and table, the lawsuit contends that during the year 2018, other plans of similar sizes with similar amounts of money under management as compared to the Mercy Health plan paid recordkeepers an average of approximately $536,914, or approximately $48.83 per participant. Mercy Health’s plan paid RK&A fees to Voya totaling approximately $1,294,361, or approximately $118.00 per participants.

The lawsuit also alleges that the defendants failed to ensure that the plan paid no more than a reasonable fee for expenses related to its target-date funds (TDFs) and that they did not have a plan or process in place to ensure that the plan paid no more than a reasonable fee for expenses related to its TDFs.

As with many other excessive fee lawsuits, the plaintiff in this case says the plan paid unreasonably high fees based on the share classes selected for funds in the plan. “Defendants: did not conduct an impartial and objectively reasonable review of the plan’s investments on at least a quarterly basis; did not identify cheaper, lower-cost, more prudent share classes available to the plan; and did not transfer the plan’s investments into these cheaper, lower-cost, and/or institutional shares, all to the substantial detriment of plaintiff and the plan’s participants,” the complaint states. It contends that because the defendants failed to act in the best interests of participants by engaging in an objectively reasonable investigation process when selecting its investments, the defendants caused unreasonable and unnecessary losses to participants in the amount of approximately $19,460,841.

The lawsuit also specifically calls out what it says are excessive fees associated with the plan’s stable value funds.

According to the complaint, during the class period, the defendants paid service providers in excess of $4,500,000 for fees and commissions. It says the services “provided by Regulus Advisors do not warrant the fees charged because there are other equally or superior services available to plan participants, including plaintiff, for free or at significantly lower rates than those charged by Regulus Advisors.”

Noting that Voya and Regent are parties in interest as they provide services to the plan, the complaint states that the defendants “knew or should have known that Regal and Voya, as dual-registered RIAs, had an inherent conflict of interest and/or interests materially adverse to the best interests of plan participants.” It says the defendants caused the plan to engage in transactions in which goods and/or services were furnished, either directly or indirectly, between the plan and parties in interest, including, but not limited to Regal and Voya. According to the complaint, the defendants engaged in prohibited transactions that do not qualify for a statutory exemption as reasonable compensation for plan service providers.

Mercy Health has not yet responded to a request for comment.

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