Compliance April 1, 2024

Stakeholders Ask for Fewer Regulatory Mandates for Automatic Portability

U.S. Chamber of Commerce and ERIC ask for a longer compliance date and a removal of required non-English disclosures.

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Two key industry groups asked the Department of Labor to reduce disclosure and other regulatory requirements in its retirement plan automatic portability proposal. The proposal was issued in January, and the comment period expired on Friday, with the lobby groups U.S. Chamber of Commerce and ERISA Industry Committee among those weighing in with request for changes.

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The proposal would codify the SECURE 2.0 Act of 2022’s Section 120, which seeks to reduce leakage in the retirement system by allowing auto-portability service providers to charge a reasonable fee for transferring retirement assets from a safe harbor individual retirement account to a participant’s new defined contribution plan.

Providers could do this without the participant’s affirmative consent, provided the provider sends notice to the participant informing them of their ability to opt out. The proposal states that automatic portability transactions are intended to “benefit participants and IRA owners that are unresponsive or considered missing.”

As the proposal is written, in order for a provider to charge the participant, as opposed to charging one of the participating plans, the provider must provide notice to the participant, disclose its fees to the participant and maintain the same investment selection when possible, among other requirements.

Appointed Plan Official

The ERISA Industry Committee on Friday asked the DOL to remove certain requirements in the proposal, starting with the mandate that participating plans appoint a plan official “responsible for monitoring transfers into the plan and ensuring that the rolled-over funds are invested properly.” ERIC’s comment called this provision “unduly burdensome” and stated it would discourage sponsors from participating. If the DOL decides to keep this provision, according to the ERIC comment, the plan’s recordkeeper should be able to fulfill this requirement.

The Business organization U.S. Chamber of Commerce, which also submitted comments on Friday, concurred that this provision should be removed because many plan sponsors lack access to retirement accounts to confirm the transfer. Instead, the Chamber of Commerce’s comment stated, the DOL should require the portability provider to maintain policies and procedures that ensure the “automatic portability transaction will be invested in accordance with a participant’s election or the default election if there is no current election.”

Other Provisions

Both ERIC and the Chamber of Commerce also asked the DOL to remove the requirement that portability providers make non-English disclosures and call centers available if they notify a participant who lives in a county in which at least 10% of the residents are literate only in a particular non-English language.

ERIC wrote that this provision “will simply serve to increase the administrative costs of sponsoring a retirement benefit, which will ultimately be borne by participants.”

In its call for comment, the DOL had asked for opinion on whether it should require portability providers to keep insurance for digital data breaches in a final rule. The Chamber of Commerce answered that plan sponsors should not be required to keep insurance and this decision should be left to the provider.

The proposal also requires portability providers to acknowledge that they are a fiduciary when effecting portability transactions. The Chamber of Commerce requested that the DOL clarify that the fiduciary relationship extends only to the IRA owner in the portability transaction, not to the IRA itself or to the participant in an ongoing relationship that extends past the portability transaction.

Compliance Period

The proposal has an effective date of 60 days after its finalization. ERIC recommends that this be extended to at least 180 days, and the Chamber of Commerce recommended 12 months. The Chamber of Commerce noted that many provisions will require the negotiation of new contracts, which it argued cannot be done in 60 days.

The DOL has not announced a date for a final auto-portability rule.

Benefits April 1, 2024

Know Your DC Plans

Tax-exempt, church and governmental employers have a wide range of considerations when picking what retirement plan, or plans, to offer.

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Art by Alex Eben Meyer

For sponsors in the for-profit world, there is not much choice for defined contribution plans: 401(k) plans are available, but 403(b) and 457(b) plans are not.

For sponsors in the tax-exempt, church and governmental fields, however, all three are available, and there are many trade-offs and nuances to consider in choosing between them.

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457(b)s for Tax-Exempt Organizations: A ‘Top Hat’

457(b) plans are used very differently by the two types of employers that use them: governmental sponsors and tax-exempt, or nonprofit, sponsors.

A 457(b) used by a tax-exempt employer is “a top-hat plan,” says David Ashner, an attorney with Groom Law Group. The plan will be used for a select group of employees on top of another DC plan, usually a 403(b).

Robert Abramowitz, a partner in Morgan, Lewis & Bockius LLP, explains that having a top hat 457 allows select employees, usually executives and other highly paid employees, to contribute more to their retirement. The contribution limits for 2024 for both a 403(b) and a 457(b) are $23,000, and employees with access to both can max out each for a total of $46,000.

There are not any clear regulations for which employees would qualify for a top hat plan, Abramowitz says, and “there has been a lot of litigation in that space.” Some sponsors limit it to a few executives or to “the top couple of percent” of employees. It is not subject to the highly-compensated-employee threshold, set at $155,000 for 2024. Tax-exempt 457(b) plan sponsors do not have the option to offer a Roth account, though government 457(b) sponsors can.

Abramowitz says that 457(b) top hat plans are more vulnerable to disqualification than other plans. He says he tells his clients to “be very careful in its administration, because technically the IRS could come and disqualify the entire plan for operational errors.” This is because top hat plans are often seen as a form of executive compensation, rather than being used for retirement security.

457(b)s for Government Sponsors

For governmental plans and plans sponsored by a qualified church-controlled organization, such as a hospital, 457(b) plans are used as the primary DC plan option, rather than as an add-on to a 403(b), which is different than the broader tax-exempt sector, says Abramowitz. “cannot sponsor a 457(b) and must use a 403(b).

Governmental 457(b)s are not subject to ERISA, Abramowitz says, and can be used by the general employee base of the sponsor. They also lack an early withdrawal penalty, and

Church organizations can use 457(b)s, but it “may not be a good idea, because in all likelihood, a 403(b) plan would be more attractive for more employees,” Abramowitz says. This is because 457(b)s sponsored by state or local governments during bankruptcy, whereas those sponsored by a tax-exempt organization are not.

According to the IRS, “plan assets are not held in trust for employees but remain the property of the employer (available to its general creditors in the event of litigation or bankruptcy).”

A 403(b) “is just safer for rank-and-file employees,” Abramowitz says, since in a 457(b) plan, they are not protected from their employer’s creditors if the sponsor is not a governmental organization.

403(b) Plans

Ashner explains that 403(b) plans, another DC plan type available to nonprofits and governmental institutions, are similar to 401(k)s. The primary trade-off is that 403(b)s have fewer testing and compliance requirements, while 401(k)s “typically have a wider range of investment options.”

For example, 403(b)s do not need to have nondiscrimination testing for employee contributions and instead are subject to a universal eligibility requirement. However, they are limited to annuities and mutual funds and cannot offer collective investment trusts as investments.

Abramowitz says 403(b)s are very common in higher education, and so many sponsors in that field sponsor one, because “that’s what other colleges or universities around the country are doing.”

401(k) plans

Both Ashner and Abramowitz agree that the main reason for a nonprofit or government employer to offer a 401(k) is the “wider array of investment options,” such as CITs and the option of self-directed accounts.

Abramowitz adds that some states, such as New Jersey, tax deferrals to 403(b)s and not to 401(k)s, meaning 401(k)s have a significant advantage for the purposes of state income taxes. But counting against those considerations, there are “more burdensome testing rules” to factor in, because 401(k)s have more nondiscrimination testing.

Abramowitz says there are many factors to consider, and “it’s not one-size-fits-all. You have to analyze employer objectives and the employees covered.”

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