Benefits May 2, 2014

Small Businesses Increasing Retirement Savings Efforts

May 2, 2014 (PLANSPONSOR.com) – The smallest of employers are gaining enough confidence in the economic growth of their businesses to increase efforts to help employees save for retirement.
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Fidelity Investments latest Small Business Retirement Savings Analysis reveals increases in average balances and contributions in small businesses’ retirement benefits plans for the third consecutive year. According to the analysis, average balances in Simplified Employee Pension Plans (SEP-IRAs) increased by 92% to $84,410 from 2008 to 2013. Average balances in Savings Incentive Match Plans for Employees (SIMPLE-IRAs) increased 100.8% to $36,235. 

In addition to contributing to their own retirement, small business owners are contributing more to employees’ accounts, Brian Hogan, director of small business retirement products at Fidelity in Smithfield, Rhode Island, tells PLANSPONSOR. From 2008 to 2013, the employer contributions for employees to SEP-IRAs increased 17%, and SIMPLE-IRAs saw an increase of 13.3% in employer contributions to employees’ accounts, he says. 

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Hogan explains that SEP-IRAs are funded only by employer contributions, they do not allow for employee deferrals, and they have higher statutory contribution limits than other defined contribution plans. These tend to be offered by very small, mostly family-owned companies. SIMPLE-IRAs, however, are structured more like 401(k)s, where employees are allowed to contribute to their own accounts. 

Offering these plans provides tax benefits for small businesses, Hogan notes. Mainly, they get to deduct any contribution made on behalf of employees from taxable income. In addition, if a small business starts a new plan, it can get a tax credit for start-up costs up to $500. SIMPLE-IRAs also allow employees to save income pre-tax, reducing their current taxable income.

For small businesses deciding to offer a retirement plan to employees, which type of plan to offer depends on the number of employees, how much administrative responsibility employers want, and what contribution limits they would like for themselves and employees, according to Hogan. Also, small business owners should determine whether employees want to make their own contributions to their accounts.

He notes that if a small business owner offers a SEP-IRA, the contribution made to employees’ accounts must be the same, in percentage or formula, as what the owner contributes to his or her own account. “If they don’t want to do that, or if they have a higher number of employees or employees want to contribute to the plan themselves, a SIMPLE-IRA is the best choice,” Hogan says.

He adds that with a SIMPLE-IRA, plan sponsors do not have the same fiduciary responsibility as they would with a 401(k) plan. They do not have to select an investment lineup for the plan; they choose a provider, and participants set up their own accounts and decide on investments. Hogan notes that if a business has more than 100 employees, it may not offer a SIMPLE-IRA, and will have to choose another plan type.

“It was encouraging to see the results [of our analysis],” says Hogan. “We’ve seen, as the economy turns around, small business owners are becoming more confident in their businesses and in making contributions to [their own and employees’] retirement.”

Compliance May 1, 2014

Meeting Expectations of the DOL

May 1, 2014 (PLANSPONSOR.com) – There are four main fiduciary duties the Department of Labor (DOL) expects from plan sponsors.
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According to Jennifer Del Nero, assistant regional director for the DOL’s Employee Benefits Security Administration (EBSA) in Atlanta, they are:

  • Act solely in the interests of the participants and their beneficiaries;
  • Be prudent;
  • Pay only reasonable and necessary expenses for the plan; and
  • Follow the terms of the plan.

Del Nero explained to attendees of the Retirement & Benefits Management Seminar, hosted by the University of South Carolina Darla Moore School of Business, and co-sponsored by PLANSPONSOR, that expenses are reasonable only if they are necessary for the operation of the plan, and are not excessive for the service received. “The main thing to remember about ensuring reasonable expenses is document, document, document,” she said. Plan sponsors should keep records about decisions to select products and providers and decisions to keep products and providers.

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When it comes to following the terms of the plan, there are three areas of concern for the DOL, Del Nero said:

  • Loans – the plan document may specify reasons for which participants may take a loan, but some plan sponsors do not follow this, she said;
  • Forfeitures – the plan should state whether they are allocated—and how—or used for expenses (see “Administering Retirement Plan Account Forfeitures”); and
  • Mandatory cash outs – the plan may call for terminated participant balances of less than $1,000 to be cashed out or balances less than $5,000 to be rolled into a safe harbor IRA, but some plan sponsors are not doing so, she said.

“Do not exercise personal discretion when the terms of the plan are clear,” Del Nero told seminar attendees.

Del Nero shared tips to help plan sponsors avoid common problems:

  • Understand your plan and your responsibilities;
  • Carefully select service providers;
  • Make timely contributions;
  • Avoid prohibited transactions; and
  • Make timely reports to government and disclosures to participants.

One note about disclosures to participants Del Nero offered: The 404(a)(5) participant disclosure rules do not meet Employee Retirement Income Security Act (ERISA) Section 404(c) requirements (see “404(c) in the Modern World”). “They line up pretty well, but plan sponsors still need to make sure they are complying with all of 404(c),” she said.

When selecting service providers, Del Nero recommended plan sponsors should do the following: 

  • Obtain information from more than one service provider;
  • For valid comparison, make sure to collect the same information from each provider;
  • Consider “bundled” and “unbundled” services;
  • Check a service providers license, if required (attorney, accountant, etc);
  • Understand terms of contracts;
  • Document processes used in reviewing and selecting service providers; and
  • When renewing contracts, repeat the selection process and confirm that facts on which initial selection was made have not changed.

Plan sponsors must also monitor their service providers to make sure the services are being delivered as agreed. Del Nero reminded attendees that the plan fiduciary may be liable if the service provider fails to carry out its responsibilities.

If mistakes are made, the DOL offers a voluntary fiduciary correction program. Del Nero said there are 19 transactions that can be corrected using this program.

Del Nero warned that if a plan sponsor receives a letter from the DOL with an offer to voluntarily correct a mistake, it should never use the word “settle” in its response. “If you ‘settle,’ you pay a penalty, which goes to the IRS,” she said.

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