Employee Retirement Plan Compliance Changes for 2012

icon Blog on Benefits Costs  •  posted 02/18/12

Deadline Extended for 401k Plan Fee Disclosures to Employees

As reported in the March issue of CR (“Deadline Nearly Here for New 401k Plan Disclosure Rules” [ http://www.iofm.com/article/view/deadline-nearly-here-for-new-401k-plan-disclosure-rules], the Department of Labor’s new rule requiring plan sponsors to disclose information on 401k plan fees and expenses is designed to help employees comparison shop among plan investment options. Controllers with fiduciary responsibilities for compliance with the rule got welcome news regarding the deadline for compliance—it has been pushed back to August 30 from April 1.

Companies seeking to better understand and identify the fee structures of plans they offer employees should note that a move to passive funds from active funds in their plans is one way to lower fees—keeping employees happier.   According to a Callan survey, plan sponors who changed their mix increased the use of passive funds by 44.8 percent—compared with 6.9 percent who increased use of active funds. Fees for passive funds are rarely higher than 0.2 percent, versus a typical high of 1.3 percent for actively managed funds. Increased offering of index funds can have a similar result.

Nondiscrimination Rule Compliance for Defined Benefit Plans

Of the shrinking number of companies that offer defined benefit plans, more are closing the plan to new participants to hold down costs. Other companies have “hard frozen” their plans, meaning that no participants accrue new benefits. Controllers and other finance executives with fiduciary responsibilities for plans, at companies fit this description, need to be aware that to ensure their plans remain tax-qualified, they must comply with IRS nondiscrimination rules. Nondiscrimination requirements are designed to ensure that plan benefits don’t discriminate in favor of officers, shareholders, or highly compensated employees in comparison with rank-and-file employees.

The rule of thumb to achieve compliance is that the plan must cover non-highly compensated employees according to the same ratio as highly compensated employees. In addition, the average benefit level, as a percentage of pay, must not discriminate between the two classes of employees.

Controllers in this position should ensure that the defined benefit plan and its participants is monitored and passes nondiscrimination test methodologies (the IRS allows several different tests). A plan that doesn’t pass the nondiscrimination tests may need to be redesigned, whether by adjusting benefits, adding new participants—for example, from another business unit—or by basing benefits on career-average pay instead of final-average pay. For more information on IRS nondiscrinination requirements: http://www.irs.gov/retirement/article/0,,id=112858,00.html#16.