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1977 - 2017

40th

Anniversary

LOS ANGELES • NEW YORK • CHICAGO • ATLANTALas Vegas • Denver • Portland • Phoenix • Salt Lake City • San Diego • Ann Arbor • Charleston • Naples • Honolulu

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Better Together The truth about Health Savings Accounts, 401(k)s and retirement.

BY BRAD WEXLER AND JOSEPH LUSCAVAGE

COVER STORY

40

FALL 2017Contents

30 The History and Future of MEPs and PEPs

Are we headed for a second ‘gold rush’ for multiple employer plans and pooled employer plans?

BY PETE SWISHER

FEATURE STORIES

6 From the President

Memories, plans and gratitude abound as 2017 approaches its end.

RICHARD HOCHMAN

39 New and Recently Credentialed Members

63 ASPPA/ARA GAC Submits Two Comment Letters to the DOL

Recent comment letters addressed the BICE and ERISA §408(b)(2) issues.

CRAIG P. HOFFMAN

ASPPA IN ACTION

46 The First 100 Days

Creating a remarkable client experience early in the relationship can guarantee a client for life. Here’s how.

BY JOEY COLEMAN

2 PLAN CONSULTANT | FALL 2017

25 Pension Plans in Mergers and Acquisitions ACTUARIAL

JOHN R. MARKLEY

27 Supreme Court Broadly Interprets ERISA’s Church Plan Exemption MARKETINGSTEPHEN ROSENBERG AND CAROLINE FIORE

51 Compassionate Compliance MARKETINGLAURIE SKATTUM

54 Tips on Starting a Retirement Plan Business BUSINESS PRACTICES

MIKE EDWARDS

57 Precept 10, Part 3: Understanding Care ETHICS

LAUREN BLOOM

59 Getting Professional Help in an Advisor Search SUCCESS STORIES

JOHN IEKEL

61 Work Smarter by Leveraging Cheap Tech TECHNOLOGY

YANNIS P. KOUMANTAROS AND JJ MCKINNEY

04 Letter from the Editor

08 50 Shades of Gray REGULATORY/LEGISLATIVE UPDATE

BRIAN H. GRAFF

10 Status of the Form 5500 Modernization Proposal REPORTING

KIZZY M. GAUL

12 ARA Argues for Tax Incentives for Retirement Savings LEGISLATIVE

JOHN IEKEL

14 How to Prepare a Plan Sponsor for the IRS Correction Program COMPLIANCE/ADMINISTRATION

GARY D. BLACHMAN

18 IRS Announces Last Day for Amending 403(b) Plans: Are You Ready? REGULATORY

GARY D. BLACHMAN AND AMY G. DAVIES

22 Recordkeepers Beware: Excessive-Fee Litigation Can Be Aimed at You RECORDKEEPING

NICHOLAS J. WHITE AND ROBERT R. GOWER

571814COLUMNS

TECHNICAL ARTICLES

PRACTICE MANAGEMENT ARTICLES

Published by

Editor in ChiefBrian H. Graff, Esq., APM

Plan Consultant CommitteeMary L. Patch, QKA, CPFA, Co-chair

David J. Witz, Co-chairGary D. Blachman

Jason D. BrownThomas Clark, Jr., JD, LLM

Kelton Collopy, QKAKimberly A. Corona, MSPA

Shawna Della, QKAJohn A. Feldt, CPC, QPA

Catherine J. Gianotto, QPA, QKABrian J. Kallback, QPA, QKA

Phillip J. Long, APMKelsey H. Mayo

Michelle C. Miller, QKAEric W. Smith

EditorJohn Ortman

Associate EditorTroy L. Cornett

Senior WriterJohn Iekel

Graphic Designer/ProductionLisa M. Marfori

Technical Review BoardMichael Cohen-Greenberg

Sheri Fitts Drew Forgrave, MSPA

Grant Halvorsen, CPC, QPA, QKA Jennifer Lancello, CPC, QPA, QKA

Robert Richter, APM

Advertising SalesGwenn Paness

[email protected]

ASPPA Officers

PresidentRichard A. Hochman, APM

President-ElectAdam C. Pozek, QPA, QKA, CPFA

Vice PresidentJames R. Nolan, QPA

Immediate Past PresidentJoseph A. Nichols, MSPA

Plan Consultant is published quarterly by the American Society of Pension Professionals & Actuaries, 4245 North

Fairfax Drive, Suite 750, Arlington, VA 22203. For subscription information, advertising, and customer service contact ASPPA

at the address above or 800.308.6714, [email protected]. Copyright 2017. All rights reserved.

This magazine may not be reproduced in whole or in part without written permission of the publisher. Opinions

expressed in signed articles are those of the authors and do not necessarily reflect the official policy of ASPPA.

Postmaster: Please send change-of-address notices for Plan Consultant to ASPPA, 4245 North Fairfax Drive, Suite 750,

Arlington, VA 22203.

Cover: Tyler Charlton Illustration

Celebrating excellence in 401(k) plan administration

John Hancock has declared October 17th National TPA Day®

We understand the value and expertise that you bring to the retirement industry by:

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• staying on top of legislative and regulatory changes;

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• delivering best-in-class service for a plan and boosting retention;

• providing local market insights and referral opportunities to financial representatives.

John Hancock Life Insurance Company (U.S.A.), John Hancock Life Insurance Company of New York and John Hancock Retirement Plan Services, LLC are collectively referred to as “John Hancock”. John Hancock Retirement Plan Services, LLC, Boston, MA 02210. NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED © 2017 All rights reserved. MG-I30926-GE 08/17-34239 MG080317388283

Thank you to all the dedicated plan

consultant professionals for all you do to make

401(k) plans work the way they should.

10.17.17


L E T T E R F R O M T H E E D I T O RPC

f you’re not in the habit of either regularly perusing the sports section of your favorite newspaper or binge-watching ESPN, you may have missed this one. So let me explain. No, there is too much. Let me

sum up. On Sept. 5, the Boston Red Sox admitted to a complicated scheme to steal signs from opposing teams — using an Apple Watch. The scheme worked like this: When a Sox baserunner was on second base, an employee in the team’s video room at Fenway Park would use a center field camera to pick up the hand signals the catcher used to communicate with the pitcher about which pitch to throw next (e.g., one finger for a fastball, two for a curve, etc.), and transmit the information to a Red Sox trainer in the dugout wearing an Apple Watch. The trainer would relay the information to a player in the dugout, who in turn would relay it to the runner on second — who would signal the batter at the plate, giving him the advantage of knowing what pitch was coming before it was thrown.

Apparently it was the general manager of the Red Sox archrival New York Yankees who tipped off Major League Baseball officials, complete with video evidence of the scheme in action. Following a brief investigation, Sox officials ’fessed up — and in true baseball tradition, accused the Yankees of using a video camera to steal signs at Yankee Stadium. You gotta love baseball.

As of this writing, investigations

JOHN ORTMANEDITOR-IN-CHIEF

Red Sox Called Out by YankeesLast month’s rule-bending brouhaha was all about honesty and integrity, two principles that should ring a bell with ASPPA members.

into both alleged schemes are ongoing; if you just have to know how it all ended, Google “Red Sox Apple Watch.”

For the record, sign stealing is not against Major League Baseball’s rules, nor is it uncommon. Actually, it’s something of a time-honored tradition; baserunners have been sneaking peaks at the catcher, trying to tip a teammate at bat off to the next pitch, since the earliest days of the sport. But using electronic devices to communicate in the dugout is prohibited, and that’s the violation at issue in this case.

Okay, so I shared this story for two reasons. The first is that, like all baseball rule-bending tales, it’s a fun one to tell.

The second has a bit more relevance to you and your practice. Because the Red Sox’ “Watch-gate” pickle is all about honesty and integrity.

As ASPPA members know, the ASPPA Code of Professional Conduct (now reformulated as the American Retirement Association Code of Professional Conduct) has long been a great source of advice and guidance on many aspects of professional ethics. Arguably, no section of the Code is more fundamental than Section 10, “Professional Integrity,” which requires members to perform professional services “with honesty, integrity, skill and care.”

Honesty, integrity, skill and care. Conceptually the meaning of these four fundamental principles may seem obvious. But in practice,

understanding what they require in the context of a professional practice can be tricky.

This brings me to another time-honored tradition, one not found in baseball but in journalism: The Shameless Plug. If you missed it for some reason, the estimable Lauren Bloom, ethics guru and author of PC’s ethics column, is currently in the middle of sharing a four-part series devoted to Section 10 and its principles. So far, she has discussed honesty (in the spring issue) and skill (summer). In this issue, Lauren focuses on care. The series wraps up in the winter 2018 issue with a focus on integrity. She does a terrific job fleshing out the sparse 94 words of Section 10 in a practical, real-world context. You should read the whole series, in my humble opinion.

And that’s my Shameless Plug.Comments, questions, bright

ideas? Email me at [email protected].

I

Build Up Your CE Credits via Plan Consultant QuizzesDid you know that each issue of Plan Consultant magazine has a

corresponding continuing education quiz?

Each quiz includes 10 true/false questions based on articles in that issue. If

you answer seven or more quiz questions correctly, ASPPA will award you

three CE credits. And you may take a quiz up to two years after the issue of

PC is published. This makes Plan Consultant quizzes a convenient and

cost-efficient way to earn valuable CE credits anywhere, anytime.

Visit: www.asppa-net.org/Resources/Publications/CE-Quizzes

to get started!


F R O M T H E P R E S I D E N TPC

ANNUAL CONFERENCEIn addition to GAC, much of

my volunteer time with ASPPA has been with Conferences. To say that conferences have evolved over the years is an understatement. I first got involved with the Conferences Committee back in the days when Annual was held in the dark basement of the Washington Hilton, with attendees overfilling break-out session spaces. Annual had already outgrown both the Hyatt on Capitol Hill and the Grand Hyatt. I was Annual Conference Co-Chair when the decision was made to move to the brand new Gaylord Hotel at National Harbor. For many, it has become our home away from home once a year.

I understand that conferences that require participants to be away for days at a time and potentially incur significant travel and entertainment expenses have fallen out of favor and have been somewhat replaced by web-based education. On a personal note, whether as an attendee or an instructor, I still prefer the hands-on, face-to-face networking experience that you can only get at a conference.

Realizing that we have to deliver more value than just continuing education credits, the Conferences staff, working with Brian Graff and ASPPA President-Elect Adam Pozek, is hard at work trying to redefine the Annual experience. This year we tried to entice newly credentialed QKAs to attend their first-ever ASPPA Annual, to participate not only in the technical sessions, but also the “March on the Hill.” For many it will be their first time on Capitol Hill. We hope they will begin to

marketplace, but it was such a positive experience as we all worked together for the advancement of the private retirement system as a whole.

As acknowledged by numerous government speakers over the years, ASPPA Government Affairs has demonstrated unparalled influence in driving national policy affecting retirement security for the nation’s workforce in the right direction.

GAC is a reflection of the tireless efforts put forth by both the ASPPA member volunteers and the professional staff of ASPPA (now American Retirement Association). It has been both a thrill and an absolute honor to be an active participant in the process. While GAC has evolved over the years, I can’t say enough positive things about its leadership, including ARA General Counsel Craig Hoffman and former Committee Co-Chair Robert Kaplan.

Since Bob spent many formative years in the office next to mine at McKay Hochman, I like to think he is the amazing talent he is recognized as being because I taught him everything I know. That is before he went out and learned everything all over again, but correctly.

Bob has accepted a new, key positon at ARA — Director of Technical Education — helping to better deliver vital education to ASPPA members, thus providing additional value to their employers. While we are losing his services as a volunteer, ASPPA and its members are much better off having Bob in such a key role.

ith publishing deadlines dictating timing, I find myself authoring my final article just as I am receiving the summer edition of Plan

Consultant. So I am going to try to summarize what has happened in 2017 just slightly into the second half of the year.

After a decade in ASPPA leadership, it is strange to come to the realization that I am just months from my inevitable “has been” status. So I need to start by saying what a great and fulfilling journey my ASPPA ride has been.

GACI joined ASPPA in the late 1980s,

just about the same time that McKay Hochman was established. For most of the time it was a very symbiotic relationship. Joining ASPPA and getting involved in the Government Affairs Committee gave me the opportunity to learn about ways to influence policy and help my client base as they strove to provide a secure retirement for the employers and plan participants they represented.

McKay Hochman was one of a group of companies providing plan documents that worked together to provide the legal framework that has formed the foundation of the employer-sponsored retirement plan system that we all work to support and maintain. Representatives of most of the document vendors served together on the Plan Document Subcommittee of ASPPA GAC. We might have been competitors in the

W

BY RICHARD HOCHMAN

A Beneficial YearMemories, plans and gratitude abound as 2017 approaches its end.

7WWW.ASPPA-NET.ORG

American Retirement Association and the sister organizations to bring it about. Efforts are underway to do just that, although there is nothing that I am able to report at this time. Hopefully, that will change soon.

FINAL COMMENTSBeing a part of volunteer

leadership is a challenging role to fulfill. And honestly, it can only be successful if the professional staff delivers. I have already mentioned some of the staff I have had the pleasure of working with. There are others that also deserve a mention. Though I do not share the close personal relationship that many of my predecessors have with him, ASPPA would not be the organization it is without the leadership of Brian Graff, our Executive Director. He is an industry icon, and his accomplishments are far too numerous to list here. I have enjoyed working with him as we have tried to guide ASPPA in the last year. Nevin Adams is also an amazing talent, and we are lucky to have his services. I have been fortunate to both have known and have the opportunity to work with Nevin over the years, and I appreciate all the assistance he has given me and everything he has done for the industry.

I want to thank the third member of the current Management Council and our next President, Adam Pozek. With everything going on in Washington, he will have a lot on his plate in 2018. I wish him well.

Finally, I sincerely want to thank my fellow ASPPA members for giving me the honor of representing them this past year. I hope you believe it has been a beneficial year for ASPPA and its members.

Richard Hochman is Director, Retirement Plan Consulting Services, at Actuarial Systems Inc. He serves as ASPPA’s 2017 President.

as documents reflect more design flexibility.

During my speech at Annual last year, I talked about the new strategic plan that the Leadership Council had just approved. Unfortunately, much of the plan will not be implemented by year’s end as I had hoped. That said, we have made strides in the right direction. Leadership understood that we had to reach out to new, younger members to get their input. As I mentioned in my previous column, we put together a task force under the watchful eye of Jennifer Gibbs Swets to listen to what our Millennial members have to say. The progress of that task force will be discussed at our Leadership Council meeting just before this year’s Annual. I would hope to be able to provide a preliminary report at Sunday’s Business Meeting.

The strategic plan also addressed the issue of diversity in ASPPA leadership. I will be among the first to admit that the new leadership represented at last year’s Annual Conference lacked that desired diversity. We are in the process of completing the nomination process for 2017 and I can assure you that the nominees will be far more diverse than was reflected in 2016. One of the items that we will address in October is the changing nature of ASPPA membership and how that is reflected in future leadership.

Also outlined in our strategic goals was the need/desire to expand our advocacy and make it more effective by representing a broader cross-section of retirement industry constituents. Unfortunately, many of the plan sponsors and participants our members work with every day don’t understand the significance of the contribution we make to their retirement security. They don’t understand the value of what our members do on their behalf. That can only change if we are more inclusive in our representation. ASPPA cannot bring about this recognition on its own; we must work with the

understand how important it is to discuss retirement issues with their elected representatives in Congress and their key staffers.

Also, as I noted in my previous column, we have added a new recodkeeping track to this year's conference.

The goal for 2018 is to provide attendees at all levels — be they newly credentialed, more experienced staff or key managers or owners — with a memorable experience that will excite them and make them want to attend in 2019 and beyond.

I want to take a moment to thank all the volunteer members who worked hard to make this year’s Annual a success.

Even with all the work of the committee volunteers, Annual would not be possible without the skills, efforts and plain old hard work of the ARA’s talented Conferences staff headed by Erin Stewart. I have worked with Erin so long I think of her almost like a member of the family. Melissa Trout is the other key member of the Conferences staff that I have had the pleasure to work with for the last year plus.

ASPPA IN 2017After all the changes to the

individually designed plan program, where the industry was basically left out in the cold, ASPPA worked with other industry representatives to make sure it did not happen with the pre-approved program which constitutes over 85% of all qualified retirement plans. The fruition of our efforts was the release by IRS of Revenue Procedure 2017-41, which dramatically changes the landscape of the pre-approved program. The program for the next round is streamlined, combining the best parts of the old M&P and Volume Submitter programs. Much of what is in the new program mirrors comment letters that ASPPA sent to IRS and Treasury over the last few years. The hope is that the new program rules will make your job easier,


retirement plans and their participants and beneficiaries would not only be preempted by ERISA, but that even if the “savings clause” in ERISA’s preemption provision were somehow interpreted to cover the Nevada regulation of these activities, it would still require the matter to be referred to federal court.

In sum, we believe — and have explained to the Nevada regulators — that by regulating fiduciary advisory services to employer-sponsored retirement plans and their participants and beneficiaries, at best the state is providing them with a federal cause of action they are already entitled to while exposing the state to unnecessary and unproductive litigation risk.

As we go to press, it is our hope that those regulators will heed our comments, and, as our comment letter requested, “expressly exempt services provided to an ERISA-governed employee benefit plan, the fiduciaries of the plan and/or to the plan’s participants and beneficiaries from the reach of Nevada law as amended, in recognition of the preemption of that law in this regard by ERISA.”

ERISA’s preemption in such matters is well established and acknowledged by the courts. However, it is important that we continue to remind and reinforce that standard before contrary edicts take root.

Because, however complex ERISA might seem — it’s far better than the 50 shades of gray that might be the alternative.

Brian H. Graff is the Executive Director of ASPPA.

with a separate, and potentially duplicative set of rules, as well as covering the additional litigation risks — additional costs that may well be borne by the retirement plans those advisors support, and that might well affect and influence existing service partnerships.

In fact, the greater potential cost of this undertaking is not what it means in Nevada, but where it might go from here. It was, after all, the lack of federal action on the coverage front that has inspired more than half the states to consider — and a handful to act on — adopting a state-run option for private sector workers. Could Nevada’s example lead other states concerned about leaving their citizens vulnerable to unscrupulous advisors to adopt similar legislation? Senator Ford says legislators from other states have already contacted him.

The Nevada legislation does give the relevant state administrator broad interpretive authority, but requires that, before the Securities Administrator issues regulations clarifying what is and is not a breach of the new fiduciary duty, she must be sure her rules do not impose “a direct and significant economic burden upon small business or directly restrict the formation, operation or expansion of a small business.” A “small business” is defined as a for-profit enterprise with fewer than 150 full- or part-time workers.

The American Retirement Association (parent organization of ASPPA) has already met with Nevada regulators, and on August 23 filed with those regulators an opinion letter from the law firm of Trucker Huss that presents our strong argument that any Nevada regulation of fiduciary advisory services to employer-sponsored

he Silver State — with little fanfare and precious little notice — on July 1 enacted legislation that subjects broker-dealers and advisors doing business in Nevada to a new fiduciary standard, and

one that explicitly allows the client to sue under state law — and yes, at present there is no distinction made for those who work with ERISA plans.

The legislation — Nevada Senate Bill 383 — was introduced by Nevada state senator Aaron Ford shortly after the Labor Department first announced that it was delaying the original applicability date. In fact, Ford has said that his concerns about the fate of the federal fiduciary regulation inspired him to sponsor the legislation. It was signed into law by Gov. Brian Sandoval (R) on June 2, and revises the Nevada Securities Act to mandate that any “broker-dealer, sales representative, investment adviser or representative of an investment adviser shall not violate the fiduciary duty toward a client” imposed by another statute, NRS 628A.010, which imposes the “duty of a fiduciary” on all financial planners. However, Senate Bill 383 also modifies the definition of “financial planner” to remove what had been an exclusion from that category for broker-dealers and their representatives and investment advisers and their representatives.

But, you say, “I’m not an advisor or broker-dealer working with retirement plans in the state of Nevada. Why should I care?”

First, there are the practical implications for those doing business with plans that work with advisors impacted by the new state regulation; the increased costs of complying

Will states move to fill a fiduciary ‘gap’?

T

50 Shades of Gray?REGULATORY/LEGISLATIVEUPDATE

BY BRIAN H. GRAFF

ASSESSMENTS PERFORMED BY CEFEX, CENTRE FOR FIDUCIARY EXCELLENCE, LLC.

For more information on the certification program, please call 416.693.9733.

ASPPA Retirement Plan Service Provider

The following firms are certified* within the prestigious ASPPA Service Provider Certification program. They have been independently assessed to the ASPPA Standard of Practice. These firms demonstrate adherence to the industry’s best practices, are committed to continuous improvement and are well-prepared to serve the needs of investment fiduciaries.

*as of June 19, 2017

Alliance Benefit Group of Illinois Peoria, IL | abgill.com

Alliant Employee Benefits New York, NY | alliant.com

Altigro Pension Sevices, Inc. Fairfield, NJ | altigro.com

American Pensions Charleston, SC | american-pensions.com

Aspire Financial Services, LLC Tampa, FL | aspireonline.com

Associated Benefit Planners, Ltd. King of Prussia, PA | abp-ltd.com

Atessa Benefits, Inc. San Diego, CA | atessabenefits.com

Atlantic Pension Services, Inc. Kennett Square, PA | atlanticpensionservices.com

Beacon Benefits, Inc. South Hamilton, MA | beacon-benefits.com

Benefit Management Inc. Providence, RI | unitedretirement.com

Benefit Planning Consultants, Inc. Champaign, IL | bpcinc.com

Benefit Plans Plus, LLC St. Louis, MO | bpp401k.com

Benefit Plans, Inc. Omaha, NE | bpiomaha.com

Benefits Administrators, LLC Lexington, KY | benadms.com

Blue Ridge ESOP Associates Charlottesville, VA | blueridgeesop.com

BlueStar Retirement Services, Inc. Ponte Vedra Beach, FL | bluestarretirement.com

Cetera Retirement Plan Specialists Walnut Creek, CA | firstallied.com

Creative Plan Designs Ltd. East Meadow, NY | cpdltd.com

Creative Retirement Systems, Inc. Cincinnati, OH | crs401k.com

Delaware Valley Retirement, Inc. Ridley Park, PA | dvretirement.com

DWC ERISA Consultants, LLC St. Paul, MN | dwcconsultants.com

Fiduciary Consulting Group, Inc.Murfreesboro, TN | ifiduciary.com

Great Lakes Pension Associates, Inc.Farmington Hills, MI | greatlakespension.com

Ingham Retirement Group Miami, FL | ingham.com

Intac Actuarial Services, Inc. Ridgewood, NJ | intacinc.com

July Business Services, Inc. Waco, TX | julyservices.com

Kidder Benefits Consultants, Inc. West Des Moines, IA | askkidder.com

Moran Knobel Bellevue, WA | moranknobel.com

National Benefit Services, LLCWest Jordan, UT | nbsbenefits.com

Niles Lankford Group Inc.Plymouth, IN | nlgpension.com

North American KTRADE Alliance, LLC.Plymouth, IN | ktradeonline.com

Pension Associates InternationalBarreal de Heredia, Costa Rica

Pension Financial Services, Inc.Duluth, GA | pfs401k.com

Pension Planning Consultants, Inc. Albuquerque, NM | pensionplanningusa.com

Pension Solutions, Inc. Oklahoma City, OK | pension-solutions.net

Pentegra Retirement ServicesColumbus, OH | pentegra.com

Pinnacle Financial Services Inc.Lantana, FL | pfslink-e.com

Preferred Pension Planning CorpBridgewater, NJ | preferredpension.com

Professional Capital Services, LLCPhiladelphia, PA | pcscapital.com

QRPS, Inc.Raleigh, NC | qrps.com

Qualified Plan Solutions, LC Colwich, KS | qpslc.com

Retirement Planning Services, Inc. Greenwood Village, CO | rpsplanadm.com

Retirement Strategies, Inc.Augusta, GA | rsi401k.com

Rogers Wealth Group, Inc.Fort Worth, TX | rogersco.com

RPG Consultants Valley Stream, NY | rpgny.com

Savant Capital ManagementRockford, IL | savantcapital.com

Securian RetirementSt. Paul, MN | securian.com

Sentinel Benefits & Financial GroupWakefield, MA | sentinelgroup.com

SI Group Certified Pension ConsultantsHonolulu, HI | sigrouphawaii.com

SLAVIC401K.COMBoca Raton, FL | slavic.net

Summit Benefit & Actuarial Services, Inc.Eugene, OR | summitbenefit.com

TPS GroupNorth Haven, CT | tpsgroup.com

Trinity Pension Group, LLCHigh Point, NC | trinity401k.com

2017_CEFEX_Ad.indd 1 6/19/17 2:07 PM


In July 2016, the DOL, IRS and PBGC issued a proposal for a major overhaul of the regulations and forms associated with the Form 5500 annual reporting process. Under the modernization proposal, changes would have been effective beginning with the 2019 Form 5500 filings. The proposed form revisions and

implementation of regulations had intended to achieve five primary goals in improving reporting for employee benefit plans:

1. To modernize financial reporting by improving the reliability and transparency of information reported regarding plan investments and other transactions.

2. To provide greater information regarding group health plans by requiring group health plans covered by Title I of ERISA to file the Form 5500. It was anticipated that there would be approximately 2 million additional Form 5500 filings because of this requirement.

3. Enhance data mineability, accessibility and usability of data reported on the forms.

4. Improve service provider fee information and harmonize reporting on Form 5500 Schedule C with the disclosure regulation at 29 CFR 2550.408b-2.

5. Enhance compliance with ERISA and the Code through new questions regarding plan operations, service provider relationships and financial management of the plan.

Comments on the proposal were due by Dec. 5, 2016, and 200 comment letters were filed. Many of the comments focused on the cost and burden to comply

I

Status of the Form 5500 Modernization ProposalBY KIZZY M. GAUL

REPORTING

with the reporting requirements. It was anticipated that the modernization proposal would require large-scale changes to investment platforms, trust account systems, recordkeeping systems, reporting systems and the software that supports preparation of the form. Many commenters also suggested that more time would be needed to implement these types of changes ahead of the proposed effective date.

As part of the transition under the Trump administration, a freeze on new or pending regulations was implemented until the administration has had an opportunity to review them. While there has not been formal guidance on the status of the modernization proposal, with the new administration’s position on reducing regulatory burdens, it is anticipated that there will be revisions to the proposal and the effective date. Any updates to the proposal would likely warrant a new public comment period.

ADVANCE COPIES OF 2017 FORM 5500 AND 5500-SF

In April 2017, the DOL filed advance copies of the 2017 Form 5500, including the related schedules and instructions, with the Office of Management and Budget (OMB). The advance copies also provide the following “Changes to Note” as outlined in the instructions:

“The IRS-only compliance questions are removed from the Form 5500 and Schedules, this includes:• Preparer information• Schedules H and I, lines 4o and 6a through 6d, regarding

distribution during working retirement and trust information.• Schedule R, Part VII, regarding the IRS Compliance questions

The new administration may revise or delay the effort.

11WWW.ASPPA-NET.ORG

objectives of the audit proposal, the exposure draft provides:

“The objectives of the proposed procedures are to improve the execution and consistency in audit procedures related to limited scope audits as current practice varies resulting in inconsistent audit quality. The proposed SAS also provides examples of ways the auditor can evaluate the financial statement presentation and disclosures relating to the certified information, such as obtaining an understanding of management’s selection and application of accounting principles which would include concluding on the appropriateness of selected investment valuation methodologies, and determining whether relevant fair value disclosures are in accordance with the financial reporting framework.”

One of the items in the proposal to be aware of is that auditors would be required to test and potentially publicly report on a plan’s compliance with ERISA plan provisions. These include items such as eligibility and vesting provisions, the calculation of employer and employee contributions, treatment of forfeitures and nondiscrimination testing. Unless the findings are “clearly inconsequential,” the instance of noncompliance would need to be publicly reported on the Report on Specific Plan Provisions Relating to the Financial Statements. This appears to be true even if the plan has corrected the findings under the IRS Employee Plans Compliance Resolution System (EPCRS).

Kizzy M. Gaul, JD, CPC, QPA, QKA, TGPC, has 10 years of plan design and compliance consulting experience. She is currently

the chair of the ASPPA Government Affairs Subcommittee for Reporting and Disclosure, and can be reached at [email protected].

in the Federal Register after the instructions have been posted.

• Line 4 of the Form 5500 has been changed to provide a field for filers to indicate that the name of the plan has changed. The instructions for line 4 have been updated to reflect the change. The instructions for line 1a have also been updated to advise filers that if the plan changed its name from the prior year filing(s), complete line 4 to indicate that the plan was previously identified by a different name.

• For Schedule MB, the instructions for line 6c have been updated to add mortality codes for several variants of the RP-2014 mortality table and to add a description of the mortality projection technique and scale to line 6, Statement of Actuarial Assumptions/Methods.

• For Form 5500-SF, line 6c is modified to add a new question to the existing question which asks, if the plan is a defined benefit plan, is it covered under the PBGC insurance program? Filers who answer “Yes” must enter the My PAA-generated confirmation number for the PBGC premium filing for the plan year.

AICPA PROPOSED CHANGES TO AUDIT STANDARDS

In response to the DOL’s 2015 review and assessment of the quality of plan audits, the American Institute of CPAs (AICPA) has proposed changes to audit standards that may have a significant impact on reporting obligations for employee benefit plans. The AICPA accepted comments through Aug. 21, 2017, and the proposed standards would apply to audits of single employer, multiple employer and multiemployer plans subject to ERISA. The effective date outlined by the exposure draft is for audits of financial statements for periods ending on or after Dec. 15, 2018, subject to consideration of comments received. Regarding the overarching

• Form 5500-SF, Part VIII regarding trust information and Part IX regarding IRS Compliance questions”

The compliance questions were added to the 2015 Form 5500 and plan sponsors were later instructed not to complete the questions. Revised versions of the questions also appeared on the 2016 Form and OMB approved the IRS request to collect the information on Form 5500-SUP in March 2016. In November 2016, the IRS again confirmed that the questions should not be completed for the 2016 plan year.

It is likely that the removal of the compliance questions is not permanent and that they will reappear on a future version of the Form 5500. While that timing is unclear, it is an indication that these questions may be implemented in conjunction with a future iteration of the modernization proposal.

Additional “Changes to Note” include:• The instructions for Authorized

Service Provider Signatures have been updated to reflect the ability for service providers to sign electronic filings on the plan sponsor and DFE lines, where applicable, in addition to signing on behalf of plan administrators on the plan administrator line.

• The instructions have been updated to reflect that the new maximum penalty for a plan administrator who fails or refuses to file a complete or accurate Form 5500 report has increased to up to $2,097 a day for penalties assessed after Jan. 13, 2017, whose associated violation(s) occurred after Nov. 2, 2015. Since the Federal Civil Penalties Inflation Adjustment Improvements Act of 2015 requires the penalty amount to be adjusted annually after the Form 5500 and its schedules, attachments, and instructions are published for filing, be sure to check for any possible required inflation adjustments of the maximum penalty amount that may have been published


In preparation for the coming tax reform debate, the ARA encourages lawmakers to support small plan formation, access for contract workers, tackling student loan debt, keeping the current pass-through income tax rate, and a new “HSA sidecar.”

The American Retirement Association expressed its strong support for new and existing tax incentives to encourage retirement savings in a July 17 letter to Senate Finance Committee

Chairman Orrin Hatch (R-UT). “The goals of achieving a tax code

that is efficient, fair, and increases the financial and retirement security of American families, are goals that the American Retirement Association shares with the Committee,” the letter states. The primary message the ARA wants to convey to the committee, the letter says, “is that the current tax incentives work well to promote good savings behavior for tens of millions of working Americans.”

But the ARA goes farther than supporting current provisions, arguing that tax incentives targeted at employers and employees should be enhanced, and that “at a minimum, any modifications to the current incentives should be

evaluated based on whether or not the changes will encourage more businesses to sponsor retirement plans for their employees,” it says.

EXPANDING WORKPLACE SAVINGS

The most important factor affecting whether workers save for retirement — and a critical factor in increasing the financial and retirement security of American families — is the presence of workplace retirement plans, the ARA notes. The letter argues that making it easier and more meaningful for a small business to adopt a workplace retirement savings plan would increase access to saving through payroll deduction and greatly enhance the likelihood that rank-and-file workers will save for their retirement.

Not only that, increasing the availability of workplace retirement plans will heighten the effectiveness of other actions to better assist lower-

paid workers to save, the ARA argues. Among those is improving the Saver’s Credit. “We urge the Committee to modify the 1040 EZ individual income tax form to allow the moderate income individuals who predominantly use that form to claim the Saver’s Credit. Additionally, if the credit is directly deposited to retirement savings accounts instead of refunded to the saver, it should also help supplement savings,” the ARA suggests.

The ARA “also supports proposals that would expand retirement plan access to temporary or self-employed contract workers that make up an ever greater share of the workforce in the so-called modern ‘gig economy,’” the letter says. “The tax code should be changed to encourage retirement plan sponsors to open their plans to these workers who would otherwise not be eligible to participate in the retirement plan without jeopardizing the tax qualified status of their plan. It should

BY JOHN IEKEL

LEGISLATIVE

ARA Argues for Tax Incentives for Retirement Savings

13WWW.ASPPA-NET.ORG

Committee to solve this problem and continue promoting retirement plan sponsorship by small businesses.”

INTEGRATING HEALTH AND RETIREMENT SAVINGS

In the letter, the ARA notes that health savings accounts (HSAs) largely are treated separately from retirement savings accounts; “hence employees do not receive holistic financial advice and access to lower cost retirement plan investments.”

To ameliorate that situation, the ARA proposes modifying the HSA rules to give plan sponsors the option of offering an HSA in their 401(k) plan. “We call it the ‘HSA side car’ proposal,” says the letter, noting that in 2001, Congress passed a similar provision allowing plan sponsors to add an IRA to their 401(k) plan.

Integrating HSAs into the 401(k) would help employees in three major ways, says the letter:

1. Participants will get access to lower cost investment options offered in their 401(k) plan.

2. The proposal will give employees access to holistic financial education and planning tools so they can allocate their savings across their health and retirement accounts to best meet their family needs.

3. The HSA side car proposal will create more HSA accounts because opening an HSA will now be linked to retirement plan enrollment.

In addition, the letter says, the HSA side car proposal “preserves all the unique characteristics of HSAs under current law to keep things simple.”

“The American Retirement Association looks forward to working with the Committee to simplify the rules and regulations surrounding the tax incentives to save for retirement through workplace based retirement plans,” the letter concludes.

and local governments and nonprofit organizations to terminate their existing retirement savings plans and procedures and adopt a new program that would be foreign to millions of workers.”

It further argues that “The distinctions in defined contribution plans for public and non-profit workplace workers were designed to protect traditionally lower paid workers who feel called to serve society. Improved retirement security, and meaningful simplification, will be accomplished through thoughtful modifications to the existing structure” and that tax simplification should not result in “wasting resources on cosmetic overhauls that produce pain rather than savings gain.”

PASS-THROUGH INCOME TAX RATES COULD ELIMINATE INCENTIVES FOR SMALL BUSINESS PLANS

The letter applauds the committee’s work on tax reform, which it calls “long overdue.” It also cites a House Republican Blueprint proposal capping the maximum tax rate on active business income at 25% and wage income at 33%. “We expect small business owners to characterize most of their income as active business income to take advantage of the 25% tax rate and forgo contributions to a retirement plan which will be eventually taxed at 33% as deferred wages,” the letter says, noting that the ARA estimates that more than 300,000 retirement plans sponsored by small business pass-through entities affecting 24 million non-owner employees will terminate their retirement plans to take advantage of the 25% tax rate on active business income. Not only that, the letter says, deferring wages in contributions to a retirement plan which will be taxed eventually at 33% under the blueprint “results in a 10% penalty on the small business owners for saving in a retirement plan rather than paying out profits currently.” The ARA “looks forward to working with the

also be made clear that voluntary participation in the retirement plan by contract workers should not, by itself, change the employment classification of the contract worker.”

Another factor affecting retirement savings, says the letter, is student loan debt. Calling it “one of the most challenging issues for millennial workers and their families,” the letter notes that it impedes “their ability to achieve a basic level of financial wellness” and “often precludes their participation in their workplace retirement plan, and the matching employer contributions that they would otherwise receive.” As a result, the letter says, “Those employees miss out on essentially “free money” by not taking advantage of those matching employer contributions.”

The letter says that the ARA “strongly supports” a provision in Ranking Member Ron Wyden’s (D-OR) Retirement Improvements and Savings Enhancements (RISE) Act discussion draft that would allow employers to make matching contributions to their 401(k) plans on behalf of their employees who made student loan payments, but as a result were unable to afford to also contribute to their 401(k) plan. “This provision would encourage everyone to participate in the 401(k) plan and receive meaningful employer contributions to help build up a secure retirement nest egg,” the letter says.

SIMPLIFICATION NOT CONSOLIDATION

The letter notes that some consider consolidation of provisions of the federal tax code that address retirement plans to be a goal of tax simplification. “The American Retirement Association would caution against tax reform proposals that would consolidate all the different types of defined contribution plans into a single type of plan,” the letter says. “That would not be a simplification in our view,” it continues, saying that “it would cause serious disruption since it would force state


COMPLIANCE/ADMINISTRATION

n an ideal world, retirement plans would be administered according to the terms of their governing plan documents and updated on a timely basis for all required legal changes. However, despite their

best efforts, 401(k) plan sponsors and administrators are likely to experience one or more errors at some point during the life of their retirement plan, such as

the exclusion of employees, improper administration of loans or other distributions, a failure to obtain spousal consent or follow other described procedures, or plan documents that are not timely amended.

The IRS recognizes that retirement plans are extremely complicated and contain many moving parts that often lead to plan errors. For this reason, the

An attorney or employee benefits consultant who is well-versed in EPCRS can often save the plan sponsor significant time and money.

I

How to Prepare a Plan Sponsor for the IRS Correction Program

BY GARY D. BLACHMAN

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occurred, it should then determine the best options for correcting those errors within the guidelines established by the IRS under EPCRS.

WHAT WENT WRONG? AND HOW DO WE FIX IT?

The EPCRS provides specific correction methods for the most common types of plan failures. The IRS’ 401(k) Plan Fix-It Guide also provides instructions for correcting the most common failures in 401(k) plans. Additionally, when the IRS has not specified a correction for a particular type of failure, the EPCRS provides guidelines for plan sponsors to determine the appropriate correction method. [Rev. Proc. 2016-51, Section 6] The IRS has identified four categories of qualification failures in EPCRS:

1. Operational failures occur when the plan is not operated according to the terms of the plan document or the requirements of the Internal Revenue Code.

2. Plan document failures occur when the plan document does not comply with the Code’s requirements, e.g., if a plan sponsor does not timely amend the plan document for required legislative developments.

3. Demographic failures occur when the plan fails annual minimum nondiscrimination or coverage requirements.

4. Employer eligibility failures occur when the employer is not eligible to sponsor a type of retirement plan (e.g., a for-profit corporation attempts to sponsor a 403(b) plan). [Rev. Proc. 2016-51, Section 5.01(2)]

WHAT ARE MY OPTIONS FOR MAKING CORRECTIONS?

Self-Correction Program (SCP)A plan sponsor may correct

insignif icant qualif ication failures

THE PLAN ADMINISTRATOR FOUND AN OPERATIONAL DEFECT! NOW WHAT?

What should a plan sponsor do after discovering an administrative or operational failure? After discovering a plan failure, the plan sponsor should consider the following questions:

1. Have we identified all possible operational or administrative failures?

2. What are the available options under EPCRS for fixing all the identified failures?

3. Which service providers should assist with the correction process?

4. How much time is involved and what is the cost to fix these failures?

CONDUCT AN ASSESSMENT TO DETERMINE THE SCOPE OF THE FAILURES

As a first step, the sponsor should consult with the recordkeeper and any other service providers to confirm each of the operational errors along with how and when these errors occurred. The full extent of the errors should be identified as soon as possible to minimize the time and money necessary to conduct fact finding and correction planning. After a sponsor identifies what errors have

IRS maintains the Employee Plans Compliance Resolution System (EPCRS) [Rev. Proc. 2016-51] to encourage and provide plan sponsors with the opportunity to voluntarily correct the most common plan failures with the added benefit of reduced sanctions.

This article provides an overview of EPCRS and how you can prepare a plan sponsor with the necessary tools to determine whether the IRS correction program is appropriate for them to prevent a retirement plan from disqualification and the loss of certain tax benefits.

CAN THE IRS REALLY DISQUALIFY A RETIREMENT PLAN?

Yes! Most plan sponsors are already familiar with the tax advantages of qualified retirement plans and the corresponding requirements to comply with the qualified plan rules in both form and operation. However, what may be a surprise to some plan sponsors is that if the IRS discovers certain failures to comply with the myriad rules and regulations during an audit of the retirement plan, it could result in plan disqualification and include income tax penalties on the: • Employer for the loss of its tax

deductions for any historical plan contributions;

• Plan participants for the vested portion of any employer contributions made into their accounts; and

• Plan trust for the investment income in the trust for all open tax years.

Fortunately, the IRS created the EPCRS to avoid these drastic sanctions for qualification failures and to encourage voluntary correction through a system of reduced correction fees. The EPCRS provides guidance on how certain errors should be corrected, but it is complicated and not comprehensive in describing approved methods for all possible errors.

Corrections should be reasonable and appropriate for the type of failure that occurred.”


at any time and without IRS involvement. The sponsor must determine whether a failure is insignif icant based on the following factors: what other failures occurred at the same time, the percentage of plan assets involved, the number of years involved, the number of participants affected, whether the failure was corrected within a reasonable time after discovery, and the reason for the failure. SCP is generally preferable if it’s available because a formal application to the IRS isn’t required, saving the sponsor the VCP fee and, possibly, additional legal and recordkeeping fees. [Rev. Proc. 2016-51, Part IV].

Voluntary Correction Program (VCP) With IRS approval

If SCP isn’t available, the failure must be corrected under VCP. Under VCP, a plan sponsor must submit an application to the IRS that describes the plan failures and the proposed corrections of those failures. The IRS will then review and hopefully approve all proposed corrections and provide the plan sponsor with a favorable compliance statement.

Audit Closing Agreement Program (Audit CAP)

If the IRS discovers failures during an audit, VCP and SCP aren’t available (except that SCP does remain available for insignificant failures). If significant failures are discovered during an audit, the IRS will require correction and impose penalties significantly higher than the VCP fee that would have applied. This creates a significant economic incentive to correct under SCP or VCP. [Rev. Proc. 2016-51, Section 10]

The SCP is the least expensive option and the Audit CAP program is the most expensive and time consuming of the available correction programs.

Regardless of whether a

sponsor corrects a failure under SCP or VCP, the sponsor should carefully document each step in the correction process to an internal file. The sponsor should record an explanation of why specific corrective actions were taken and any administrative changes to prevent reoccurrence of the failure (if applicable), and maintain a copy of the VCP application and compliance statement and any correspondence with the IRS.

CORRECTION PRINCIPLESUnder EPCRS, the IRS

specifies some general correction principles applicable to all of the available correction methods listed above:

1. Participants must be made whole. The IRS will typically determine that a correction approach is appropriate if the correction method restores the plan and the participants to the same position in which they would have been if the failure had not occurred. [Rev. Proc. 2016-51, Section 6.02(1)]

2. Reasonable and appropriate correction. Corrections should be

reasonable and appropriate for the type of failure that occurred. Depending on the nature of the failure, more than one reasonable and appropriate correction method may be available to the plan sponsor. [Rev. Proc. 2016-51, Section 6.02(2)]

3. Consistency requirement. Generally, where more than one method of correction is available to the plan sponsor to correct a failure, the selected correction method (and earnings determination), should be applied consistently for all failures across all plan years. [Rev. Proc. 2016-51, Section 6.02(3)]

SHOULD I HIRE AN ATTORNEY OR CONSULTANT TO ASSIST WITH THESE CORRECTIONS?

While a plan sponsor is not legally required to engage an attorney or consultant to assist with EPCRS, those plan sponsors that are unfamiliar with the correction process are encouraged to consult with appropriate experts in the EPCRS correction process. An attorney and/or employee benefits consultant who is well-versed in EPCRS can often save the plan sponsor significant time and money.

For example, the VCP application requires that multiple tax forms are submitted to the IRS so the IRS reviewing agent can fully review the identified errors and proposed corrections. An experienced attorney or consultant will coordinate information gathering with the plan recordkeeper, accountant, financial advisor and any other service providers to the plan. Furthermore, an attorney will know what information supports the specific proposed correction and how to draft the required IRS forms and present the errors clearly to the IRS and in the light most favorable to the plan sponsor.

And lastly, if the IRS has any additional questions or concerns, an experienced attorney can also negotiate an appropriate correction

The SCP is the least expensive option and the Audit CAP program is the most expensive and time consuming of the available correction programs. ”

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correct plan errors quickly and voluntarily. Plan sponsors should remain diligent and periodically review their plan documents and operations for compliance problems. For instance, plan sponsors should coordinate with their plan advisors to regularly review annual testing and reporting along with ongoing plan administration.

The SCP and VCP allow plan sponsors to correct nearly all plan errors at a significantly reduced fee when compared to the cost of correction when plan errors are discovered upon an IRS audit. Without the correction options available under EPCRS, there is an increased risk to plan sponsors that plan errors will become more expensive to fix over time. For these reasons, plan sponsors are encouraged to evaluate all available options whenever plan errors are identified and to make IRS approved corrections as soon as possible.

Gary D. Blachman, Esq., is a partner with Thompson Hine, LLP where he is a member of the firm’s national employee

benefits and executive compensation group. He counsels large public and private companies in the design and administration of tax-qualified retirement plans, non-qualified plans and health and welfare plans. Gary is a past president of the Cincinnati ASPPA Benefits Council, past Chair of ASPPA General Conferences, and past Chair of the Employee Benefits Committee of the Cincinnati Bar Association. He is also a member of the Great Lakes Area IRS Tax Exempt and Government Entities Council.

1138358.1

statement, it generally has 150 days to fully complete the correction that is agreed upon and described in the compliance statement. If needed, the sponsor can usually obtain an extension if requested before the expiration of the 150-day period. [Rev. Proc. 2016-51, Section 10.07]

In my experience, a VCP application is typically reviewed by the IRS and a favorable compliance statement is provided to the plan sponsor within two to nine months from the date of the original submission. Depending on the number of plan errors, it is possible for the IRS review to take longer before the plan sponsor obtains final approval.

NOW THAT I KNOW I HAVE A PLAN ERROR, WHAT SHOULD I DO NEXT?

The IRS created the EPCRS to encourage plan sponsors to

with the IRS agent to minimize the plan sponsor’s tax liability.

HOW MUCH TIME AND MONEY IS INVOLVED IN THE SCP AND VCP CORRECTION PROCESS?

The time needed to gather the necessary plan documentation, supporting data, and employer and employee communications can vary depending on whether the errors are insignificant or significant. For instance, a failure to properly administer the terms of a hardship withdrawal for one or two participants will not consume as much time as a failure to administer the terms of plan loans for several hundred participants over a four-year period following the acquisition of another company.

Under SCP, the sponsor doesn’t qualify for corrective relieve for a signif icant failure unless the correction is either completed or substantially completed before the end of the second plan year following the plan year of the correction or, if earlier, the date the sponsor receives notice of an IRS audit (the “SCP deadline”). Generally, a failure is treated as substantially completed if the failure has been corrected for at least 65% of the participants involved and within 120 days of the SCP deadline. [Rev. Proc. 2016-51, Section 9]

If SCP isn’t available, a failure may need to be corrected under VCP. The VCP requires a plan sponsor to submit an application to the IRS along with a filing fee based on the number of participants in the plan. IRS filing fees are published annually and can range from $500 for a plan with 20 or fewer participants to $15,000 for a plan with more than 10,000 participants. [Rev. Proc. 2016-51, Section 12] The IRS fees will vary depending on the type of plan failures.

Under VCP, once a plan sponsor receives a compliance

Plan sponsors are encouraged to evaluate all available options whenever plan errors are identified and to make IRS approved corrections as soon as possible. ”


he IRS recently announced the end of the “remedial amendment period” during which employers maintaining a 403(b) plan may retroactively comply their plan

documentation with Code Section 403(b) requirements, including final 403(b) regulations. The end of the remedial amendment period is March 31, 2020. Eligible employers may comply their 403(b) plans either by adopting a pre-approved 403(b) plan or

making required amendments to their own documentation. To be eligible for the remedial amendment period, an employer must have timely adopted a written plan intended to satisfy the final 403(b) regulations.

WHAT IS A ‘PRE-APPROVED’ PLAN DOCUMENT?

A pre-approved 403(b) plan document is one that was submitted to the IRS by a document provider and received an approval letter from the IRS.

Questions and answers as the end of the remedial amendment period approaches.

T

IRS Announces Last Day for Amending 403(b) Plans: Are You Ready?

BY GARY D. BLACHMAN AND AMY G. DAVIES

REGULATORY

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If an employer’s plan is treated as individually designed, the employer may not rely on the pre-approved plan’s approval letter to show that the plan complies with the 403(b) plan document requirements.

WHY DO I NEED TO AMEND OR RESTATE A 403(b) PLAN?

Prior to 2009, IRS guidance concerning Section 403(b) was contained in diverse separate rulings and employers were not required to have a written 403(b) plan document. Final 403(b) regulations published July 26, 2007 and effective Jan. 1, 2009, consolidated and expanded IRS guidance concerning 403(b) plans and included the requirement that a written plan document be maintained for all 403(b) plans. For 2009, an employer was deemed to satisfy the final 403(b) regulations if the employer adopted a “good faith” written plan by Dec. 31, 2009, administered its plan in accordance with a reasonable interpretation of the regulations, and made efforts to correct any operational failures before the end of 2009.

Revenue Procedure 2013-22 established a remedial amendment period, beginning Jan. 1, 2010 (or the 403(b) plan’s effective date, if later), for employers to correct plan defects once the deemed compliance rule for 2009 expired. That Revenue Procedure simultaneously established the pre-approved plan program to facilitate adoption of compliant plans by employers.

An employer with a plan defect must amend its 403(b) plan during the remedial amendment period to correct the defect. The amendment must be effective retroactively to the first day of the remedial amendment period. A plan defect is a provision or the absence of a required provision that causes the plan not to satisfy the 403(b) requirements.

If the employer elects to restate its plan, the new document must incorporate all amendments and reflect the plan’s operation from the first day of the remedial amendment period through the current date of adoption.

WHAT IF THE EMPLOYER DID NOT TIMELY ADOPT A WRITTEN 403(b) PLAN?

The remedial amendment period is only available to employers that adopted a good faith written plan document by the deadline (Dec. 31, 2009, for plans in effect during 2009, or the effective date of the plan, for plans first effective after 2009). The IRS recognizes that some employers may not have timely adopted a written plan document. To address these situations, the IRS recently updated the Employee Plans Compliance Resolution System (EPCRS) to provide a method for correcting this error. The employer must submit an application to the IRS under the Voluntary Correction Program (VCP) and pay a filing fee that is based on the number of participants in the 403(b) plan. The objective of the program is for the IRS to review and approve the new 403(b) plan document and provide the employer with a favorable compliance statement.

Restating on a pre-approved plan gives the employer reliance that the provisions in its plan document comply with section 403(b), including the final regulations, and that plan assets are protected from taxation. There is no IRS approval process in place for individually designed 403(b) plans, so employers are encouraged to adopt pre-approved plans when possible.

There are two types of pre-approved plans. A “prototype plan” consists of an adoption agreement, in which an employer selects its plan features from among those available under the prototype, and a base plan document, which describes in detail the plan provisions, including applicable legal limitations and requirements.

Prototype plans can be either non-standardized or standardized. Standardized prototype plans give employers more reliance that their plans satisfy IRS requirements, but additional limitations and requirements are built into the plan to support that reliance. For example, a standardized plan that provides for nonelective employer contributions must cover all employees of the adopting employer and members of its controlled group (except certain employees who are disregarded under the Internal Revenue Code, e.g., nonresident aliens).

The other type of pre-approved plan is a “volume submitter plan.” A volume submitter plan may consist of an adoption agreement and base plan document, like the prototype, or it may consist of a single specimen plan that includes flexible provisions elected by the employer. The major difference between a prototype plan and a volume submitter plan is that an employer may modify the provisions of a volume submitter plan (so long as the modified plan is still substantially similar to the pre-approved plan) without having the plan treated as an individually designed plan.

With a prototype plan, any modification of the plan’s provisions will cause the plan to be treated as individually designed.

An employer with a plan defect must amend its 403(b) plan during the remedial amendment period to correct the defect.”


design changes to enhance employee participation and retirement savings.

Plan sponsors should consider involving legal counsel in the preparation and/or review of the plan restatement before executing the document to help ensure the document has been prepared accurately, consistent with current plan terms, and consistent with intended design changes. Mistakes made during the restatement process can create compliance issues that may only be correctable using the IRS’s VCP program.

The March 31, 2020 restatement deadline is more than two years away, which gives employers ample time to review and amend their 403(b) plans. However, employers should consider that any retroactive changes to correct their plan documents and/or operational errors may require additional time to obtain IRS approval under the VCP program. To minimize compliance risk, employers should start the amendment process early and engage with service providers who can assist in preparing necessary plan documentation and will keep the employer informed of restatement deadlines.

Gary D. Blachman is a partner in the employee benefits and executive compensation group at Thompson Hine LLP. His

practice focuses on legal compliance requirements applicable to ERISA-governed retirement plans. Gary is a member of the Plan Consultant Committee and is a past president of the Cincinnati ABC chapter.

Amy G. Davies is senior counsel in the employee benefits and executive compensation group at Thompson Hine LLP. She

has more than 30 years of experience drafting pre-approved and individually designed retirement plan documents. 1142925.1

WHAT HAPPENS IF AN EMPLOYER DOES NOT CORRECT PLAN DEFECTS BY THE 2020 DEADLINE?

If an employer does not correct plan defects by the March 31, 2020 deadline, any defect discovered after the deadline, e.g., during a government audit, will need to be corrected, but the cost and manner of correction is likely to be less favorable to the employer. It is anticipated that government audits will increase after 2020. The remedial amendment period provides employers with an opportunity to review and correct any plan defects before they are discovered by the IRS or the Department of Labor.

If an employer adopts a pre-approved plan during the remedial amendment period, it can rely on the IRS approval letter for interim compliance, even if the IRS or the Department of Labor later identifies a defect in the pre-approved plan language. This reliance component is not available to employers maintaining individually designed plans.

IS A COMPLIANCE REVIEW RECOMMENDED?

Yes, the plan remedial amendment period provides an opportunity for employers to review how they are administering their 403(b) plans and to ensure that plan operations are consistent with the terms of the plan document and applicable legal requirements. A compliance review can identify any current errors in the plan’s operations and ensure that they are not carried forward into the restated plan document.

WHAT ARE COMMON COMPLIANCE ISSUES IN A 403(b) PLAN?

The following are areas in which 403(b) plan operations are often inconsistent with the plan terms or not compliant with current requirements under ERISA and/or the tax code: • Eligibility provisions and

compliance with the universal availability requirement

• Definition of compensation when determining employee benefits

• IRS contribution limits (e.g., compliance with maximum compensation limit to determine plan benefits or overall limitations on maximum contributions to the plan)

• Application of the 15-year catch-up rule

• Compliance with annual non-discrimination rules for 403(b) plans

• Reporting and disclosure requirements

• Administration of plan loans and hardship withdrawals

• Timely remittance of elective deferrals

• Coordination of plan document terms with annuity contracts

• Quarterly review of performance of selected investment options

• Annual review of plan fees and expenses

WHAT SHOULD SPONSORS DO NOW?

Sponsors of 403(b) plans should prepare for the restatement deadline by doing the following:

1. Review and compare the plan document to actual plan administration and confirm the plan is operated according to the terms of the plan document.

2. Determine whether to modify the plan’s current administration to conform to the plan document or vice versa.

3. Review the plan’s annual compliance testing to confirm all required testing is passed.

4. Consider engaging an independent investment advisor or consultant to review the plan’s investment options and all plan-paid fees and expenses.

5. Use the plan document review as an opportunity to make

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RECORDKEEPING

A recent lawsuit raises concerns about asset-based recordkeeping fees.

Recordkeepers Beware: Excessive-Fee Litigation Can Be Aimed at You

BY NICHOLAS J. WHITE AND ROBERT R. GOWER

he issue of recordkeeping fees has largely remained below the radar. However, an increasing number of ERISA plan excessive fee lawsuits are starting to focus not only on the amount of

investment fees, but also the amount of recordkeeping and administrative fees paid from plan assets. If these fees are not reasonable under all of the relevant facts and circumstances of the plan, the recordkeeping arrangement constitutes a prohibited transaction under ERISA and the Internal Revenue Code, for which not only the plan fiduciaries but also the recordkeeper can be held liable.

Increasingly, the analysis of recordkeeping fees is calling into question asset-based fee agreements, under which fees increase as plan assets grow. Are such agreements appropriate for ERISA plans? This issue is addressed in a recent class-action lawsuit filed in an Ohio federal district court against Nationwide Life Insurance Company in its capacity as recordkeeper for an ERISA-covered defined contribution plan.

Before discussing the legal theories set forth in the complaint, we provide some context below by setting forth the relevant prohibited transaction rules and the exemption permitting

plan services providers to receive compensation from ERISA plan assets.

LEGAL BACKGROUNDBoth ERISA and the Code

prohibit a “party-in-interest,” a term that includes a plan recordkeeper, from entering into an arrangement for services, unless the services are: • necessary for the establishment or

operation of the plan; • the arrangement is reasonable

under all the relevant facts and circumstances of the plan; and

• no more than reasonable compensation is paid for the services.1

T

1 ERISA §408(b)(2) and Code §4975(d)(2).

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reasonable amount of compensation that should have been charged to the AW Plan.”

To demonstrate the downstream impact, Schmitt cites a DOL publication noting that even a 1% increase in fees stretched over a 35-year period makes a 28% difference in retirement assets at the end of a participant’s career.4 To further her argument that an asset based fee structure is unreasonable, Schmidt asserts that the greatest costs are incurred onboarding the plan on the recordkeeper’s platform, and thereafter the services are relatively simple and routine; therefore, the costs of those services should remain the same regardless of the size of the account.

Schmitt concludes that “these excessive fees violate a fundamental principle of ERISA: that no contract for services can charge any more than reasonable compensation in relation to the services being provided. And, the fact that Nationwide discloses “that a [p]lan is paying an unreasonable fee [in accordance with the requirements of ERISA section 408(b)(2)] does not make the fee reasonable.”

Interestingly, the suit does not allege a breach of fiduciary duty on the part of the AW Plan fiduciaries for entering into the Nationwide contract; however, it is not silent on the issue. The complaint states that “although the AW Plan fiduciaries may have breached their fiduciary duties to the AW Plan by entering into the Nationwide contract, the U.S. Supreme Court made it clear in Harris Trust and Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 245 (2000), that 29 U.S.C. § 1132(a)(3) authorizes a civil action against a non-fiduciary who participates in a transaction prohibited by 29 U.S.C. § 1106(a).” The decision to forgo a breach of fiduciary duty claim against

AW Plan had 27 participants and $1.1 million in plan assets. The AW Plan contracted with Nationwide under its Retirement Flexible Advantage Retirement Plans Program (the “Program”) to provide recordkeeping and other services for a fee of 1% per year of the AW Plan assets.

To support her claim, Schmitt cites a survey by NEPC, an independent investment consulting firm, in which it found that the median recordkeeping cost of 113 plans was $64 per plan participant in 2015. Schmitt asserts that “as a result of Nationwide’s asset-based fees, in 2014 the AW Plan paid approximately $9,400 for recordkeeping services for a plan that had only 15 participants at the end of the year, amounting to $625 per participant.” She alleges further that in 2015, due to plan asset growth, the AW Plan recordkeeping fees “increased to $11,000 for 22 participants amounting to $500 per participant” and, thus, “Nationwide’s fees are almost 10 times more than the

Thus, it is a prohibited transaction for the plan fiduciaries to permit a plan to pay more than reasonable compensation for recordkeeping services, and it is a separate prohibited transaction for a party-in-interest to receive more than reasonable compensation.2

There exists substantial ERISA authority and Department of Labor (DOL) guidance regarding the prudent processes plan fiduciaries should undertake to ensure that plan service contracts are reasonable under ERISA standards. However, there is no formal guidance on how recordkeeping and administrative fees should be charged to plan participants. Historically, these fees have been charged mostly on a pro rata or per capita basis, but alternative fee structures — including asset-based fee structures — are becoming increasingly popular and warrant careful attention for the reasons highlighted in the recent complaint filed against Nationwide.

CLASS-ACTION LAWSUIT AIMED AT ASSET-BASED RECORDKEEPING FEES

Alana Schmitt, a participant in the Andrus Wagstaff, PC 401(k) Plan (the “AW Plan”), filed a class-action lawsuit3 representing as many as 37,000 retirement plans and 2.4 million individual investors, alleging that Nationwide Life Insurance Company, Nationwide Bank and Nationwide Trust Company (collectively, “Nationwide”) have systematically overcharged 401(k) plan participants for recordkeeping and administration services in violation of the prohibited transaction rules of ERISA §406(a). The complaint states that the plaintiffs seek to recover “excessive and unreasonable asset-based fees and prevent Nationwide from charging those excessive fees in the future.” According to the complaint, at the end of 2015 the

If recordkeeping fees increase without an increase in the quantity or quantity of services, it is difficult to argue that the fees remain reasonable.”

2 ERISA §406(a)(1)(b) and Code §4975(c)(1)(C). 3 Schmitt v. Nationwide Life Ins. Co., S.D. Ohio, No. 2:17-cv-00558, complaint filed on June 27, 2017 and amended on July 8, 2017.4 U.S. Department of Labor, “A Look at 401(k) Plan Fees (August 2013).


would allow a plan sponsor and recordkeeper to negotiate reasonable compensation based on plan assets, but would simultaneously protect plan participants from significant fee increases without service increases.

CONCLUSIONThe recent complaint against

Nationwide should not be understood to mean that asset-based recordkeeping fees amount to prohibited transactions. Rather, the complaint serves as a reminder that plan service providers are permitted to receive fees from plan assets only to the extent they comply with the terms of an exemption. This means recordkeepers and other service providers (not just plan fiduciaries) must be able demonstrate at all times that both the contract under which they operate and the fees they charge are reasonable to the particular plan and its participants.

Nicholas J. White is a Director with Trucker Huss, APC in San Francisco. He is a Fellow of the American College of Employee

Benefits Counsel, Vice Chair of the DOL Subcommittee of ASPPA’s Government Affairs Committee, and a past member of both the Executive Committee and the Board of Directors of ASPPA. Nick is a frequent speaker and writer on a wide range of employee benefits topics.

Robert Gower is a Director with Trucker Huss, APC, where he focuses on qualified plan design and compliance and ERISA fiduciary issues.

He is a member of ASPPA, and speaks frequently on fiduciary responsibility and plan design and governance matters.

an increase in the number of participants or whether there has been a meaningful change in plan services. If recordkeeping fees increase without an increase in the quantity or quantity of services, it is difficult to argue that the fees remain reasonable.

Are per capita fees the answer? Some would argue that they are, as fees charged on this basis spread recordkeeping costs equally, as a dollar amount, across the participant population. Furthermore, such fees are highly transparent, easily understood and unaffected by market conditions. But there is a significant downside to this approach in that it requires participants with lower account balances to pay a greater share of the recordkeeping costs, as a percentage of their plan account. On this basis, it could be reasonably argued that the per capita approach is fundamentally unfair.

Most likely, the answer as to how best to structure recordkeeping fees lies somewhere in between the asset-based and per capita approaches, such that fees remain both fair and level. An asset based approach with a cap might be appropriate for a younger plan with fewer assets, which could eventually evolve into a modified per capita approach. For example, an agreement could establish an approach under which the recordkeeper charges an asset-based amount to cover its costs (which includes a profit), with a cap on the total amount of the fees. If amounts in excess of the agreed-upon fee are received (for example, through an increase in plan assets), such excess is used to pay reasonable plan expenses, or credited directly to participant accounts pursuant to a methodology pre-approved by the plan fiduciaries that ensures all participants pay the same percentage of fees (while benefiting from any revenue sharing applicable to their plan account). Such an approach

the AW Plan fiduciaries is likely based on a desire to not clutter the case by claims that could result in a relatively small recovery. The potential for a large-dollar recovery lies in the prohibited transaction claim against Nationwide, as the recordkeeper for thousands of DC plans.

ALTERNATIVE FEE STRUCTURES THAT MAY BE ACCEPTABLE

While the law does not require that recordkeeping fees be paid based on any particular methodology, the law does require that recordkeeping services be performed pursuant to a reasonable contract or arrangement, and that no more than reasonable fees be paid from plan assets for the services, judged based on the particular facts and circumstances of the plan and its participants.

Having said there is no legally mandated formula or set of formulas for determining recordkeeping fees, there is no getting around the fact that asset-based fees present a unique risk for the service provider. Yes, asset-based fees allocate recordkeeping costs equally across participant accounts, as a percentage of total plan assets; therefore, the costs affect participants in proportion to changes in their accounts that occur with contributions, distributions and market fluctuations. This seems fundamentally fair. Also, under an asset-based structure participants with higher account balances pay a greater portion of the recordkeeping costs. This also seems fair to the extent it can be reasonably argued that participants with larger accounts balances are more active in their accounts and, thus, use the greater share of plan services.

At the same time, fees increase as plan assets grow, creating the potential for recordkeeping fees to increase significantly without regard to whether there has been

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ergers and acquisitions are complex transactions without even considering the impact of defined benefit plans. This article will discuss the issues before, during and after

a merger or acquisition when the seller has a pension plan.

TYPES OF ACQUISITIONS

There are generally two types of acquisitions. In an asset acquisition, the buyer is not buying the liabilities of the seller, and a pension plan would typically remain with the seller in most cases. This article will not cover the situation of an asset acquisition.

The other type of acquisition is a stock purchase. In this case, all of the assets and liabilities are acquired, and a pension plan of the seller would become the responsibility of the buyer.

This article covers the stock sale and a merger of two companies.

ACQUISITION STRATEGIESAn overfunded pension plan

is a luxury that can be rewarding in an acquisition strategy. An overfunded plan would have a funded percentage of more than 100% in the recent Schedule SB attachment to the IRS Form 5500. If the seller has an underfunded plan, the contributions to the plan may be a drag on the seller’s prof its and may decrease the value of the company. However, the combination of a seller’s underfunded plan and a buyer’s overfunded plan may result in an overfunded plan that requires manageable contributions.

Of course, the buyer may also have an underfunded plan. If combining with a seller’s underfunded plan,

several IRS and PBGC thresholds should be reviewed. For example, the combined plans may result in a PBGC 4010 filing. If the combined plans are over $15 million underfunded and less than 80% funded as measured by the PBGC in the rules that apply to a 4010 filing, the PBGC Form 4010 is required to be filed. The PBGC form 4010 puts the PBGC on alert that future PBGC liability may result. The form asks questions beyond the status of the pension plan, so the combined businesses will have additional scrutiny from the PBGC.

The seller could also have an overfunded plan. The excess of assets over liabilities may be thought to have minimal value to the seller because of excise taxes and ordinary income tax on excess assets at any time the excess assets are distributed. However, the excess assets in the seller’s plan may be

What issues should be considered when pension plans are involved in a merger or acquisition?

Pension Plans in Mergers and Acquisitions

BY JOHN R. MARKLEY

M

DB/ACTUARIAL


date of purchase until the end of the following plan year. For example, for a purchase on Feb. 1, 2018, the transition period would extend until Dec. 31, 2019. During the transition period, the buyer’s plan continues to meet coverage requirements based on meeting those requirements before the purchase. Code Section 410(b)(6)(C) provides guidance regarding this situation.

After the transition period, testing rules under Code Sections 410(b) and 401(a)(4) would apply. The buyer may have previously been able to rely on safe harbor rules to ensure that the plan met benefit compliance requirements. Adding the seller’s pension plan may result in general testing under Code Section 401(a)(4) to meet compliance requirements.

Compliance based on the benefit structures may not be an issue if both plans are frozen.

CONCLUSIONThe purpose of this article is to

alert plan consultants to issues that should be considered when pension plans are involved in a merger or acquisition. Each merger or acquisition is unique. A plan consultant’s knowledge plus experience in mergers and acquisitions can lead to successful mergers and acquisitions, even when a pension plan is involved.

John R. Markley, FSPA, CPC, ASA, FCA, MAAA, founded Markley Actuarial Services in 1985. He has more than 30 years

of experience providing services to qualified retirement plans, and currently serves on the Leadership Council of ACOPA. John received a B.S. degree in math from the University of North Carolina and an M.B.A. from Penn State University.

of the plan. In today’s environment, with both accounting rules and funding requirements based on current market rates, current market interest rates are likely to be the measurement for the liability.

Also, the mortality approach should be specified in the buy/sell agreement. Next year is approaching, and the IRS is planning to change the mortality approach for funding pension plans in 2018.

AFTER THE SALEThe pension plan of the seller

received much attention during the acquisition process. There are still many decisions to be made after the sale.

TO MERGE OR NOT TO MERGE

The pension plan of the seller could be merged into the plan of the buyer. There would be plan administration efficiencies by having a single plan, including one plan document, one IRS Form 5500 to the IRS and one plan audit. The future benefit formula for the combined plans could be the same for all employees, or the formulas could remain as prior to the acquisition if compliance testing permits. (See the next section on compliance testing.)

The combined plans of the buyer and the seller may have more than 500 participants and be subject to “at risk” funding rules, requiring contributions for the combined plans in excess of the individual plans. This would be a reason to not merge the plans.

Alternatively, the plans could be maintained separately. Separate plans could allow more flexibility in future administration. For example, an amount may be available to terminate one of the two plans in the future, but not both.

COMPLIANCE TESTINGIRS rules allow more than

a year to continue compliance testing for each plan separately. The transition period extends from the

extremely valuable to a buyer with an underfunded plan if the excess assets can reduce the required contributions to the buyer’s plan.

Lastly, the buyer may not have a pension plan and may become a sponsor of a pension plan through an acquisition. Pension plans require special knowledge and introduce risk into the acquisition that would not otherwise be considered. A buyer who becomes a pension plan sponsor should hire pension plan experts, including actuaries and related consultants to better understand the risk of pension plans.

BEFORE THE ACQUISITIONDuring the due diligence process

related to an acquisition, a team of experts carefully reviews what they are buying, including the pension plan of the seller. The plan document of the seller’s pension plan should be reviewed to make sure that IRS approval is up to date and that recent required amendments have been made. The operation of the seller’s plan should also be reviewed to ensure that plan terms are being followed.

The buyer wants to be sure that compliance problems are not being purchased. If the seller’s plan does not have compliance problems, merging the seller’s plan into the buyer’s plan is an option.

ADJUSTING THE PURCHASE PRICE BASED ON THE PLAN’S FUNDED STATUS

The purchase price of a company may be determined with an adjustment for the funded status of the seller’s pension plan. The actuarial assumptions for measuring the liabilities of the seller’s plan should be clarified in the purchase agreement. Assumptions as to the interest rate and mortality should be specified in the agreement. As recently as 10 years ago, an interest rate based on the expected long-term rate of return of a plan was possible for determining the liability

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LEGAL/TAX

In a June ruling, the high court held that a plan maintained by an organization that is affiliated with a church qualifies as a church plan regardless of who established it, and is thus exempt from ERISA.

Supreme Court Broadly Interprets the Scope of ERISA’s Church Plan Exemption

BY STEPHEN ROSENBERG AND CAROLINE FIORE

In 1974, when the Employee Retirement Income Security Act was enacted, the federal statute exempted “church plans” from its regulation of employee benefit plans. For practical purposes, this exemption meant

that a church plan, defined as a “plan established and maintained ... for its employees ... by a church,” was exempt from complicated ERISA rules and regulations which protect plan participants and guarantee plan solvency.

Shortly after the legislation was passed, the IRS held that the exemption did not reach hospitals established by an order of Catholic nuns because such hospitals did not involve religious functions. Consequently, in 1980, Congress amended ERISA to augment the definition of church plan, and thus the breadth of the exemption, to state that “[a] plan established and maintained for its employees ... by a church” also “includes a plan

maintained by an organization ... the principal purpose ... of which is the administration or funding of [such a] plan ... for the employees of a church…, if such organization is controlled by or associated with a church.”

However, the 1980 amendment drew a peculiar and perplexing line between plans that are exempt and those that are not. While the amendment initial ly quotes the original 1974 language regarding the def inition of a church plan (which states that is a “plan established and maintained” by a church), it further provides that this def inition includes a “plan maintained ... by an organization” that is associated with a church. The amendment, by its plain language, created a conundrum under which a church plan must be both established and maintained by a church, yet somehow includes church-aff iliated plans which need only be “maintained” by the

church-aff iliated organization. For years after the 1980

amendment was passed, the IRS, Department of Labor and Pension Benefit Guaranty Corporation, which are the federal agencies mandated to administer ERISA, interpreted the statutory provisions at issue as exempting defined benefit plans offered by non-profits that run hospitals and other health care facilities affiliated with religious organizations. According to the agencies, the original definition of a church plan was expanded by the 1980 amendment in order to include any plan maintained by those types of affiliated organizations, regardless of whether a church initially established the plan or it was instead initially established by the affiliated organization — such as a hospital — itself. Federal agencies have applied this interpretation in hundreds of private letter rulings and opinion letters issued since 1982.


religious entity itself to qualify for the church plan exemption. The hospitals answered in the negative, arguing that Congress amended the exemption for the specif ic purpose of including all pension plans maintained by an organization, such as a hospital, aff iliated with a religious entity, regardless of who originally established — or, in other words, created — the pension plan.

On the flip side, the employees answered that the plain text of the 1980 amendment states that a pension plan can be maintained by either, but only established in the first instance by a church.

Oral ArgumentThe argument before the

Supreme Court focused on the seeming oddity of the language chosen by Congress for expanding the church plan definition in 1980, as well as on the costs to the church-affiliated plans if the employees were correct that the plans were not subject to the exemption. During oral argument, several justices focused on the confusion caused by the statutory amendment, noting that it could have been drafted more explicitly. Justice Kagan noted that, “[t]here would be a simple way of accomplishing what [the hospitals] think this provision accomplishes ... [i]t’s very odd language, this statutory language, and I’m wondering why you think that Congress chose to do what you think it chose to do in this perplexing way rather than in a straightforward way.”

It was also clear during oral argument that the justices were concerned about the adverse financial consequences of ruling against the health care providers. Counsel for the hospitals argued that the employees’ complaints sought penalties from her clients of $66 billion. Furthermore, the justices appeared concerned about retroactively imposing such liabilities on the hospitals after they had

Subsequently, the Courts of Appeals for the 3rd, 7th and 9th Circuits affirmed the decisions issued by the district courts. (See Kaplan v. Saint Peter’s Healthcare System, 810 F.3d 175 (3rd Cir.2015); Stapleton v. Advocate Health Care Network, 817F.3d 517 (7th Cir.2016); Rollins v. Dignity Health, 830 F.3d 900 (9th Cir.2016).)

The petitioners before the Supreme Court in Advocate Health Care Network identified themselves as church-affiliated non-profit organizations that run hospitals, as well as other health care facilities, and offer their employees DB plans. Their adversaries on the other side of the case were current and former hospital employees.

Parties’ PositionsBoth sides agreed that a

“church plan” need not be maintained by a church, but could also be maintained by an aff iliated organization and still qualify for the church plan exemption. However, the parties disagreed regarding whether a plan maintained by such an aff iliated organization must still have been originally established by the

SUPREME COURT’S JUNE DECISION

There has been a spate of litigation in recent years challenging the three agencies’ interpretation of the pertinent ERISA statutory provisions regarding the original definition, as well as the subsequent expanded definition, of “church plan.” After extensive examination and analysis, however, federal trial and appellate courts arrived at inconsistent conclusions regarding the meaning of the church plan exemption. Given the financial stakes at issue and the inconsistent outcomes in the courts, it always appeared to be simply a matter of time before the Supreme Court accepted one of those appellate decisions for review.

In Advocate Health Care Network v. Stapleton (137 S.Ct. 1652 (2017)), the Supreme Court considered three different cases in which current and former employees of hospitals filed class actions alleging that their employer’s pension plans did not fall within the scope of ERISA’s church-plan exemption. The main crux of the employees’ argument in the three cases was that the pension plans were not established by a church; the employees argued that ERISA, as amended, requires that all “church plans” originally be established by a church, and that the 1980 amendment to the definition of “church plans” did not mean that pension plans that were, instead, established directly by a hospital, or other entity affiliated with a religious organization, could also qualify for the exemption.

The federal district courts in the three cases consolidated for review by the Supreme Court all originally agreed with the interpretation offered by the employees, i.e., that the amended definition permits organizations affiliated with religious entities to maintain such plans in lieu of the church or other religious institution itself doing so, but did not alter the requirement that the religious entity establish the pension plan in the first instance.

Several justices focused on the confusion caused by the statutory amendment, noting that it could have been drafted more explicitly.”

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of the language at issue, it does not mean that litigation over the application of the exemption to the sizable health care operations run by entities nominally affiliated with religious entities is at an end. As the Court itself noted, the decision does not address other issues raised by the employees, such as whether the hospitals even “have the needed [degree of ] association with a church” to invoke application of the exemption at all. Instead, technically, the decision only resolves the question of whether those hospitals can rely on the exemption regardless of who established their pension plans in the first place. If the history of other Supreme Court decisions addressing only a limited part of an ERISA case brought before it is any guide, this decision will not be the last decision issued by a court on this subject.

Stephen Rosenberg is a partner at the Wagner Law Group in Boston, where he is the head of the firm’s ERISA litigation practice.

He has litigated a wide range of ERISA class action, breach of fiduciary duty, denied benefit and equitable relief cases before trial courts, appellate panels and administrative agencies.

Caroline Fiore is a senior associate at the Wagner Law Group, with extensive experience in ERISA litigation, class action

defense, complex insurance disputes and appellate litigation. A former assistant general counsel with the Commonwealth of Massachusetts, she also represents physicians in professional licensing and disciplinary proceedings.

maintained” by a church, and that Congress, by its 1980 amendment, meant only to bring within the definition of “established and maintained” by a church any plan maintained by a church’s affiliated entity, without regard to who originally established it.

The Court concluded that, although the language of the 1980 amendment could conceivably be interpreted otherwise, the most reasonable and logical conclusion was that Congress, in passing the statutory amendment, did not want to create a requirement that a church must have originally established the pension plan of the affiliated entity, such as a hospital, for the plan to be exempt from regulation under the church plan exemption.

Justice Sotomayor, in her concurrence, noted that she joined the Court’s opinion because she agreed that the statutory text in question compelled the Court’s conclusion. However, she wrote separately because she was troubled by both the relative paucity of convincing legislative history and the resulting policy implications of the decision. Justice Sotomayor noted the size and scale of the hospitals claiming shelter under the exemption, pointing out that in the case before the Court, those entities “operate for-profit subsidiaries ... employ thousands of employees ... earn billions of dollars in revenue; and compete in the secular market with companies that must bear the cost of complying with ERISA.” Justice Sotomayer noted that, given the current reality of the exemption’s use, it was not at all clear that Congress would “take the same action today with respect to some of the largest health-care providers in the country.”

CONCLUSIONWhile the unanimous opinion

of the Court in Advocate Health Care Network established the meaning

relied, in good faith, on the federal agencies’ own view that the plans fell within the scope of the church plan exemption. In fact, Justice Kennedy expressly asked, “aren’t there hundreds of IRS letters approving [these plans]?” Justice Kennedy went on to note that this fact “shows that an entity that had one of these plans ... where there was doubt was proceeding in good faith with the ... assurance of the IRS that what they were doing was lawful.”

A Unanimous DecisionThe Supreme Court issued its

decision in Advocate Health Care Network on June 5, 2017, siding with the hospitals and holding that a plan maintained by an organization, such as a hospital, that is affiliated with a church qualifies as a “church plan,” regardless of who established the pension plan in the first instance, and is thus exempt from the strictures of ERISA.

Justice Kagan wrote the opinion for a unanimous court — a rarity these days — reversing the judgments of all three Courts of Appeals, while Justice Sotomayor filed a concurring opinion. Justice Kagan’s opinion for the Court acknowledges the unwieldy nature of the text of the 1980 amendment, but finds that the most rational interpretation of the language is that Congress intended to place such plans within the scope of the exemption regardless of whether a church, or its affiliated entity, originally established the pension plan at issue.

The opinion rests on the statutory language itself, finding that it means simply that a church plan is “a plan established and maintained ... by a church,” and that a “plan established and maintained ... by a church” must be understood to also “include[] a plan maintained by [an] organization” affiliated with a church. In other words, Justice Kagan and the Court concluded that the exemption expressly applies to any pension plan “established and

BY PETE SWISHER

The History and Future of MEPs and PEPsAre we headed for a second ‘gold rush’ for multiple employer plans and pooled employer plans?

FEATURE

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egislation favorable to multiple employer plans (MEPs) is broadly expected to pass one of these days, and the pooled employer plan (PEP) variant is one of

the likely candidates. This article explores the status of PEP and MEP legislation and what it might actually mean.

First, however, let’s look at the history of MEPs — the “why” that led to today.

Congress has a love affair with MEPs, as a number of industry leaders have observed. The evidence of this is unambiguous — more than a dozen MEP-favorable bills in the past six years, zero unfavorable bills, and bipartisan support across the board. And in September 2016, the Senate Finance Committee did something nearly unprecedented — it passed a pension bill (with a PEP provision) out of the committee on a vote of 26-0, showing unanimous support from both Republicans and Democrats in the U.S. Senate, “where bills go to die,” as the saying goes.

The PEP legislation was viewed as a runaway train — unstoppable — with passage in the spring of 2017 viewed as likely. But the November elections stopped it, or at least delayed it, in the reexamination of priorities that followed the elections. Since then, several new bills favorable to MEPs have been proposed, including a bipartisan and bicameral (i.e., introduced in the same form in both the House and the Senate) PEP bill.1

The consensus today is that the question is not if, but when, MEP legislation will pass, although nothing is certain. So what does this actually mean? The answer is found in both the history and the practical realities of MEP law, regulation and industry practice.

A HISTORY OF MEPSTo understand why Congress feels

Lthat MEP legislation is a good idea, some historical perspective is helpful.

THE ORIGINAL MEPsMultiple employer plans predate

ERISA as well as most relevant tax and securities law. MEPs date to the early 20th Century, and a handful of large MEPs in existence today started at that time. Group trusts, similarly, predate most modern tax, labor and securities laws and regulations. Unions were early adopters of multiple employer programs, and the Labor Management Relations Act of 1947 formalized this variant and called them “multi-employer plans,” a term we must preserve since MEPs and “multis” have different rules.

Legislation and regulation therefore had to account for these preexisting structures, and there was no coordination in terminology or rules — each legislative or regulatory effort viewed existing structures through its own lens and created its own rules and terminologies. Thus we have separate and non-uniform references to MEPs in ERISA and the Code, and we have terms like “Master Trust Investment Account” (MTIA), Common or Collective Trust (CCT), Collective Investment Funds (CIFs — what everyone has taken to calling “CITs” or “Collective Investment Trusts” even though no law or regulation uses that term), 81-100 group trust, Section 413(c) plan (the term for a MEP under the Code), and — of course — multiple employer plan.

The point is that the terms do not describe monolithic, uniform entities. Instead they are simply names created by rules written to govern structures that predated the rules — structures that are defined not by the rules but by trust or plan documents. A trust can therefore simultaneously be an 81-100 group

trust, a CIF and a master trust. A program that allows two or more unrelated employers to join can be both a Section 413(c) plan and a MEP under ERISA — or it can be subject to the requirements of Section 413(c) yet not be a MEP for ERISA purposes due to the DOL’s stance in Advisory Opinion 2002-04A, as discussed below.

Retirement practitioners are confused by this terminology. There is a tendency to think that, for example, an 81-100 group trust is a “thing” — that it is structured a certain way and has established characteristics. The reality, instead, is that there are special plans and trusts (such as MEPs and group trusts) and the regulators apply their rules to these plans and trusts. The plan or trust document defines the thing — not ERISA, not the Code, and not the securities laws, which instead simply dictate how the plan or trust must operate if it wishes to comply with Title I of ERISA, avoid taxation, and avoid the need to register as a security and/or investment company under the ’33 and ’40 Acts.2 In summary, a MEP’s governing documents define it — laws and regulations simply constrain it. The governing documents are the thing; the laws and regulations control the thing.

If you want to understand MEPs, what you probably mean is that you want to understand MEP rules, and things like how to start and run them successfully within those rules. The starting point is to understand that there is a wide degree of variability in how different legislators, regulators and industry members view MEPs. If you seek a document or government treatise that reveals all, get over it — no such simple clarity exists.

That said, MEPs are not more complicated than other plan designs — it’s just that so few people have

1 H.R. 1688 and S. 695, “To avoid duplicative annual reporting under the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974, and for other purposes.”2 The Securities Act of 1933 and the Investment Company Act of 1940 require registration of securities and investment companies. A trust — or a MEP — might be viewed by the SEC as a security and as a mutual fund subject to ’33 and ’40 Act registration, unless the structure qualifies for an exception or exemption.


experience with them. That lack of widespread industry experience translates into inertia. The next five to ten years will change that — everyone will know MEPs in 2027.

The Classic ‘Closed’ MEPs — Related Groups

According to a 2012 study published by the Government Accountability Office (GAO),3 in 2009 MEPs represented 0.7% of all plans filing a Form 5500, or roughly 5,000 MEPs in total. Speaking anecdotally based on the author’s experience, the vast majority of these 5,000 MEPs are related groups — MEPs made up of two or more employers with common ownership or business relatedness that does not rise to the level of creating a controlled group or affiliated service group.4 For example, if Jane Smith owns 20% of four companies and 100% of JS Enterprises ( JSE), Jane owns interests in five separate companies for qualified plan purposes. But if all five companies look to Jane for leadership, a MEP with JSE as the “lead employer” would be a logical structure.

The MEP universe can thus be described as comprising roughly 5,000 programs, the vast majority of which are related groups of employers, and the rest of which come from PEOs, associations, long-standing trade group programs and a few others that meet the MEP definition.

Since most MEPs are related groups, and related group MEPs are based on a lead employer, many MEP plan documents use language that can be interpreted as presuming that there will be a lead employer, since this is the norm. But all other types of MEPs typically have a different sponsorship structure. One of the misunderstandings about MEPs is that the lead employer structure is the only available structure.

The Rise of the Open MEPIn 2002, the IRS published

Revenue Procedure 2002-21, which required Professional Employer Organizations (PEOs) to change how they ran their retirement plans. Prior to 2003, PEOs viewed themselves as “co-employers” with their customers, the “recipients,” for qualified plan purposes. The PEO would therefore offer a retirement plan and make that plan available to the recipients’ workers, using benefit formulas based on the premise that all of these workers were employed by the PEO.

A long chain of legal events challenged the “co-employer” notion in certain respects, with the result that the IRS determined that recipient employers were generally the common law employers of the workers — the PEO was not the common law employer — meaning that the PEO could not simply offer its own plan to recipients’ workers. Rev Proc 2002-21 therefore gave PEOs three options:

1. spin all recipients out into their own single employer plans;

2. convert their plans to MEPs; or

3. have the plan be disqualified if option 1 or 2 wasn’t completed by the deadline in 2003.

The MEP Gold RushPEOs therefore planted the seed

that grew into the notion of the “open” MEP — a MEP in which members were not all part of a single, long-standing trade group or association, or a group of related employers. Industry innovators close to PEOs looked at the PEO MEP structure and said, “Hey, this is cool. We should create a truly ‘open’ MEP that is not tied to the PEO.” A handful of MEP specialists therefore did exactly that, and launched

successful programs.Between 2002 and roughly

2011, therefore, a bit of a gold rush developed. Everyone was going to start their own MEP. The image of prospectors staggering down the street, chunks of gold in one hand and whiskey bottle in the other, is probably a bit unfair in most ways, but not in one important respect: the “gold rush” toward MEPs included some crazy talk. People were going to sponsor their own MEPs and appoint themselves as fiduciaries and service providers. Some planned to involve layers of service providers, investment managers, payroll providers, and others — all receiving compensation — that might have raised costs significantly, in some cases. In other words, there was much talk of MEPs, and some of that talk proposed structures that are not okay.

The 2003-2011 MEP gold rush experience tells us several things:• interest in MEPs was widespread;• knowledge of MEPs was not; and• the gold rush ended when the DOL

threw a wet blanket on the party.

The DOL’s Wet BlanketThe DOL stepped in and said,

in effect, “I don’t think so.” In 2010 and 2011, there were rumblings that the DOL might not like the open MEP structure. To put the issue to rest, there were a number of meetings between the DOL and MEP proponents, including a meeting in the summer of 2011 at which the DOL cast doubt on whether it viewed open MEPs as “single plans” for ERISA purposes. Since this stance was viewed as quashing the concept of open MEPs, those who were sponsoring and running open MEPs at the time were naturally concerned.

In response, TAG Resources, a well-known multiple employer program administrator, requested an advisory opinion. ERISA attorney

3 “Private Sector Pensions: Federal Agencies Should Collect Data and Coordinate Oversight of Multiple Employer Plans,” Report to the Chairman, Committee on Health, Education, Labor, and Pensions, U.S. Senate, September 2012.4 Five companies that are all members of the same controlled group or affiliated service group would be considered a single plan for compliance purposes, not a MEP.

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Bob Toth, who drafted the TAG letter, relayed after the fact5 that:• the DOL often provides an

opportunity to withdraw an opinion request if it appears likely that the result will be unfavorable, and

• the preliminary, informal feedback suggested the result would be favorable; but

• a key event intervened, and that event may have caused the DOL to publish an opinion unfavorable to TAG, and to do so without providing an opportunity to withdraw the request.

That event is what might be called “the Hutcheson affair.” It is worth mentioning because it affects the possible form of PEP legislation if or when it finally comes.

The Hutcheson AffairAn early proponent of MEPs

and fiduciary status for advisors and other service providers was Matthew D. Hutcheson, who had launched several MEP programs. Hutcheson was a fairly public figure, and was an advisor on pension issues to George Martin, former U.S. Representative for California and Chairman of the House Education and Labor Committee.

In early 2012, the DOL became aware of events that caused it to file a civil complaint against Hutcheson alleging various prohibited transactions and breaches of fiduciary duty.6 Ensuing criminal litigation resulted in Hutcheson’s conviction on 17 felony counts, including wire fraud and misappropriation of more than $3 million from the MEPs he served as fiduciary. He was sentenced to more than 17 years in prison.

In retrospect, it seems likely that the Hutcheson case affected the DOL’s actions with respect to the TAG letter.

Advisory Opinion 2012-04AThe TAG request led to the

DOL’s publication in May 2012 ( just two weeks after its filing of the civil complaint against Hutcheson) of Advisory Opinion 2012-04A, the “TAG letter.” The letter said:• Open MEPs are not single plans

for ERISA purposes — they are viewed by the DOL as a collection of single employer plans sponsored by each adopting employer.

• In order to be considered a single plan for ERISA purposes, six factors would be considered based on facts and circumstances. The two most important factors are nexus and control.

Nexus. All adopting employers in a MEP must have a “genuine organizational relationship” or “employment based common nexus” in order for the group of employers to meet the definition of “employer.” And without an employer,7 there can be no sponsor,8 generally speaking. The DOL provided examples of what such a relationship looks like, and the fact pattern is narrow — most existing open MEP providers in 2012 would not qualify.

Control. The adopting employers must control the program. Here is the language from the letter describing the factors that are taken into account for purposes of determining whether a group of employers is “bona fide” and therefore able to act as an employer for adopters:

“…relevant factors in determining whether a purported plan sponsor is a bona fide group or association of employers include the following: how members are solicited; who is entitled to participate and who actually participates in the association; the process by which the association was formed, the purposes for which it was

formed, and what, if any, were the preexisting relationships of its members; the powers, rights, and privileges of employer members that exist by reason of their status as employers; and who actually controls and directs the activities and operations of the benefit program. The employers that participate in a benefit program must, either directly or indirectly, exercise control over the program, both in form and in substance…” (emphasis added)

The fact that adopting employers are treated as “co-sponsors” who are separately controlling the program through the decision to participate was not, in the DOL’s view, sufficient to cause the overall group to meet the definition of “plan sponsor.”

The issue of control and sponsorship is a critical one for understanding what might evolve under PEPs or other legislation. More on this below.

The Practical Impact of 2012-04AIf open MEPs are not single plans

for ERISA purposes, what does this mean? For ERISA purposes, it means that all of ERISA’s provisions must be satisfied separately for each adopting employer. But, because MEPs centralize fiduciary roles and service providers, the practical impact is that each adopter must file a separate Form 5500 — with an audit report, if the adopter is large enough to require an audit — and obtain a separate ERISA bond.

Note that the DOL’s opinion relates only to ERISA: “The Department is not expressing any opinion in this letter on the application of section 413(c) of the Internal Revenue Code…” In other words, whether or not a plan is a “Section 413(c) plan” as defined by

5 At an industry conference presentation.s6 A summary of the various legal actions in Perez v. Matthew d. Hutcheson, Hutcheson Walker Advisors LLC is provided at https://casetext.com/case/perez-v-matthew-d-hutcheson-hutcheson-walker-advisors-llc. 7 ERISA Section 3(5).8 ERISA Section 3(16)(B).


WHAT THE CURRENT PROPOSALS HAVE IN COMMON

The proposals share certain common elements, though few proposals include all of these elements:• Mitigate or eliminate the “bad

apple” rule• Eliminate the DOL’s nexus

requirement• Single Form 5500 and audit• Not override the other DOL

criteria (i.e., it takes more than nexus to make a MEP)

• Audit relief for small/startup MEPs, in some cases

• Securities law issues are not addressed

• The Code’s “single plan” definition for defined contribution plans is not addressed

• Some proposals create a new structure: the pooled employer plan

• All proposals enjoy bipartisan sponsorship and support

Perhaps more importantly, these bills would enshrine MEPs as a significant tool of social policy in the United States The significance of each major provision — or lack thereof — is discussed in more detail below.

The ‘Bad Apple’ RuleTreasury Reg. §1.413-2(a)(3)(iv)

says:

“The qualification of a section 413(c) plan…is determined with respect to all employers maintaining the section 413(c) plan. Consequently, the failure by one employer maintaining the plan (or by the plan itself ) to satisfy an applicable qualification requirement will result in the disqualification of the section 413(c) plan for all employers maintaining the plan.”

The bad apple rule is often cited as a major obstacle to MEP adoption, but MEPs have been subject to this rule for decades without it ever having been applied, to the author’s

jumped in to sponsor legislation overriding DOL AO 2012-04A, while addressing other perceived obstacles to widespread MEP adoption.

Here is a sample of MEP proposals in Congress or from the White House prior to 2017:• S.A.V.E. Act of 2011, reintroduced

in 2015• SAFE Retirement Act of 2013• Cooperative and Small Employer

Charity Pension Flexibility Act of 2013

• USA Retirement Funds Act• Retirement Security Act of 2014,

reintroduced in 2015• Pooled Employer Plan proposed by

President Obama in February 2016• Retirement Security for American

Workers Act of 2016• Retirement Enhancement and

Savings Act (RESA) of 2016In 2017 there have been

additional proposals:• Warner-Sanchez Retirement

Plan Bill, introduced in both the House and the Senate by bipartisan sponsors. Warner-Sanchez takes a bit of a minimalist approach to MEP legislation — rather than addressing who can sponsor one or whether a MEP requires nexus, it addresses only the Form 5500 and audit. It allows a “group of plans” (i.e., those under the control of the same named fiduciaries, and having the same plan year and fund lineup) to file a single Form 5500 (to which the audit requirement attaches). Presumably such plans would not be MEPs for ERISA purposes and would thus need individual bonds for each employer, but otherwise the practical effect is similar to a full rollback of the DOL stance on open MEPs.

• Retirement Security for American Workers Act, which — like RESA, which passed the Senate Finance Committee on a vote of 26-0 — would introduce PEPs.

the Code is a matter for the IRS, not the DOL.

Industry Response Since 2012Industry understanding of

MEPs was limited in 2012, and MEP promoters often reduced the sales pitch to: “You don’t need a Form 5500 or an audit.” When the advantage of having only a single Form 5500 and audit for the entire arrangement disappeared, no one knew what advantages remained — the sales advantage, and therefore the reason to do a MEP, seemed lost.

More importantly, the TAG letter was scary to the industry. Brokers began attempting to sell MEP adopters on moving out of MEPs to single employer plans advised by the broker on the grounds that “the DOL has made MEPs illegal.” The initial response was therefore an abrupt end to the MEP gold rush. Those who were exploring MEPs stopped exploring them. And those running open MEPs responded in one of three ways, for the most part:

1. Get out of the MEP business.

2. Change the structure to a marketing bundle, not a MEP.

3. Retain a single plan document structure but treat each adopter as sponsoring a separate plan for ERISA purposes, with its own audit, bond and Form 5500.

The universe of MEP industry participants therefore shrank back to a small pool of long-term specialists.

CONGRESSIONAL ACTION TO PROMOTE MEPs

The DOL’s stance was widely perceived as limiting the industry’s ability to employ MEPs, but many members of Congress believe that MEPs can improve coverage and governance and reduce long-term costs in the retirement system. A variety of legislators therefore

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ERISA purposes. The “groups of plans” might not be “true” MEPs (i.e., single plans under both the Code and ERISA), but the distinction would be mostly moot because there would be almost no difference between these “groups of plans” and MEPs.

The Audit IssueIs it better or worse for a MEP

to have a single Form 5500? Most observers believe instinctively that it is better to have a single 5500, but employers in actual MEPs today do not necessarily see things this way, because of the audit requirement.

Plans are required to file a Form 5500 in accordance with ERISA’s reporting and disclosure requirements,10 and the audit is actually a part of the Form 5500. In a MEP, having a single 5500 also means having a single audit, which is great for employers who would have had an audit anyway, not so great for small plan filers.

Here are two examples of how audit requirements affect adopting employers in actual application.

Audit plan likes a closed MEP. An employer with fewer than 100 eligible participants has a stand-alone 401(k) that is not subject to the audit requirement in 2014 — it was a “small plan filer.” But by the end of 2015, the employer grew to more than 120 eligible participants, triggering the need to include an audit with the Form 5500. The employer finds the added labor, headaches and expense of the audit to be a burden. In 2017, the employer’s 401(k) becomes part of a closed MEP — a MEP that is a single plan for ERISA purposes. The employer still has to participate in a plan audit, but to a much lesser degree — the auditor will likely involve the employer only one year in three, and then mostly for auditing of payroll, with the remainder of the audit focusing on administrative

disqualifying defect, or requiring plan amendments to prevent future disqualifying events.”

Thus, while “bad apple” is a legitimate concern for MEP administrators and adopters, in actual practice the evidence is that offending employers have been required to correct under EPCRS, that disqualification is viewed as a last resort for MEPs just as it is for single employer plans, and that spinoffs have historically been permitted in lieu of MEP disqualification.

Eliminating the Nexus RequirementThe DOL’s insistence on a

common nexus or preexisting organizational relationship among MEP adopters is at the heart of why open MEPs are not widely promoted today. Overruling the DOL on this subject is therefore the principal focus of all of the MEP bills in Congress. The elimination of the nexus requirement would mean that a Section 413(c) plan (i.e., a MEP for purposes of the Code) would be a single plan under ERISA, regardless of whether the adopters are related. The MEP would therefore file a single Form 5500 with a single audit and bond for the entire arrangement.

One of the MEP bills — the bicameral Warner-Sanchez bill — takes a different approach to the nexus issue. Instead of overriding the DOL guidance, it simply addresses the Form 5500 (and therefore the audit) issue by providing that “groups of plans” may file a single 5500 if they have the same fiduciaries, fund menu and plan year.

This approach, if adopted, is interesting in that it might effectively allow for open MEPs — Section 413(c) plans with no nexus — that are still technically not single plans for ERISA purposes (i.e., AO 2012-04A would still stand) to behave as if they were MEPs for both Code and

knowledge. Experienced MEP providers do not view the rule as a threat any more than the ordinary threat of disqualification to single employer plans.

There are two reasons for this. First, the IRS is not generally in the business of disqualifying plans, thereby harming participants, except in cases of egregious behavior by fiduciaries. Correction under EPCRS9 is the focus, and rightly so, not disqualification. And direct experience with such corrections, including spinoffs of offending employers, suggests that the existing regulatory structure is sufficiently protective of MEP adopters and their employees — that new legislation, while welcome, may not be necessary.

The ability to spin off offending employers (i.e., kick them out of the MEP, then correct their spun-off plan separately) is mentioned specifically in some of the recent MEP bills, but in reality there is already a long-standing precedent for spinoffs that has its roots in the language of the preamble to the Treasury Regulation (i.e., the bad apple rule):

“…in the rare case of total disqualification, hardship could result to the offending and nonoffending employers maintaining the plan. Although no exceptions to total disqualification are provided in the final regulations, it is expected the Service’s administration of these provisions may shelter innocent and nonnegligent employers from some of the harsh results of disqualification. Accordingly, in a proper case, the Commissioner could retain the plan’s qualified status for innocent employers by requiring corrective and remedial action with respect to the plan such as allowing the withdrawal of an offending employer, allowing a reasonable period of time to cure a

9 Employee Plans Compliance Resolution System, the IRS program for correcting plan defects.10 29 USC 1021-1024.


Direct Filing Entity (DFE — a type of Form 5500 filing for entities such as CIFs and insurance separate accounts);

• avoid commingling of adopting employer assets such that each employer’s portion of the arrangement is considered a separate trust; or

• qualify in some other way for an exception to the definitions of “security” and “investment company” or an exemption from registration as such (although no obvious path suggests itself ).

It is important to note that this issue of whether a MEP must register under securities laws applies to all MEPs — not just open MEPs.

The ‘Single Plan’ Definition Under the Code

The way multiple employer plans are written into the Code is that if a plan is a “Section 413(c) plan,” it is required to meet certain requirements in addition to the other qualification requirements.12

A Section 413(c) plan is defined as follows:

“A plan (and each trust which is a part of such plan) is a section 413(c) plan if –i. The plan is a single plan, within

the meaning of section 413(a) and § 1.413-1(a)(2), and

ii. The plan is maintained by more than one employer.The references to 413(a) and

the 413-1 regulation point us to the “single plan” definition under IRC Section 414(l). From the Treasury regulations under 414(l):

“Single plan. A plan is a “single plan” if and only if, on an ongoing basis, all of the plan assets are available to pay benefits to employees who are covered by the plan and their beneficiaries…A plan will not fail to be a single plan merely because of the following:iii. (i) The plan has several distinct

benefit structures which apply

subject to registration under §3(c)(11) of the ’40 Act), but the SEC position is that, in order for the qualified plan exemption to apply, the trust must be a “single trust”:

“Section 3(c)(11) of the 1940 Act, in pertinent part, excepts from the definition of ‘investment company’ any ‘employee’s stock bonus, pension, or profit-sharing trust which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1986’ (i.e., the ‘single trust exception’)…The Commission considers each of the following to be a single trust fund for the ‘single trust exception:’ (1) a trust fund for employees of a single employer; (2) a trust fund for employees of employers so closely related as to be regarded a single employer (e.g., a parent and its subsidiaries); and (3) a trust fund established and controlled by employers and/or a union representing the employees of such employers.”11

In point of fact, most long-standing MEPs operate under a single trust, but a plain reading of the SEC guidance leaves doubt as to whether this approach suffices — though such programs have never been questioned by the SEC, to the author’s knowledge. But in the new world of MEP proliferation, it would be helpful to have clarity on this point for all MEPs — not just PEPs or other newly created structures.

In the absence of an exception or exemption to registration, MEPs cannot avoid registration as investment companies unless they:• use a collective investment fund

(CIF — what the industry has taken to calling a “CIT”), which is less burdensome than investment company registration but still requires a trust document, a bank trustee, an audit and filing as a

functions for which the responsible party is the plan administrator, not the employer. Furthermore, the audit cost is shared across the plan, so it is much cheaper. This large plan filer therefore loves the MEP’s ability to file a single 5500.

Small plan filer does not like getting audited. Contrast this with a small employer which never has 100 or more eligible participants. This employer was never subject to an audit. In 2016, however, the employer became part of the same closed MEP as in the previous example, and therefore became subject to the audit — even though only on a limited basis — and pays a part of the audit costs. Some small employers, upon joining a closed MEP, are therefore not pleased with these added burdens.

The congressional MEP proposals all provide for the ability of a MEP to file a single Form 5500 with a single audit. Because of the perceived burden of the audit for small employers, especially for startup MEPs, some of the proposals provide for audit relief — i.e., no audit is required until the MEP reaches a certain size, such as 500 or 2,500 participants. Such relief would be a significant aid to startup MEPs.

Avoiding Registration Under Securities Law

There is an issue of interest to MEP advocates that the congressional proposals could address, but do not: Is a MEP subject to registration as a security under the Securities Act of 1933 (’33 Act) or as an investment company (mutual fund) under the Investment Company Act of 1940 (’40 Act)?

A trust that serves more than one employer’s retirement plan is generally viewed by the SEC as subject to registration unless an exception or exemption applies. The most logical exemption is the qualified plan exemption (i.e., qualified plans are not

11 From SEC No Action Letter re Honeywell International Inc Savings Plan Trust, Oct. 7, 2002.12 IRC Sections 413(c)(1)-(6).

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It’s Not About Nexus, it’s About ControlThe aspects of MEPs that trip

everyone up are sponsorship and governance questions — who is allowed to be the sponsor, who are the named f iduciaries, who appoints and monitors the named f iduciaries, and, above all, who determines who gets paid and how much?

Consider the typical ERISA plan: An employer sponsors the plan and appoints a trustee and administrator. As long as the sponsor does not wish to be compensated, it can self-trustee and self-administer. Generally speaking, sponsors and fiduciaries cannot get paid for providing services unless their services and compensation are approved by an independent fiduciary.16 Thus, as long as you have employers who are not compensated serving as sponsors, they can appoint fiduciaries and determine how much to pay them.

The key to understanding MEPs is not how to get around the nexus requirement — the nexus requirement does not matter very much unless you care about filing a single 5500. The key requirement, instead, is control. The adopting employers need to have “control in fact.”17 A MEP structure that puts adopting employers firmly in control — in both form and substance — is probably a safe one. A structure that attempts to let service providers sponsor plans and appoint themselves to provide services for compensation is not allowed in single employer plans, and there is no reason to suppose that the regulators will like such a structure any better in a PEP.

The eyes of the industry have been on the nexus requirement and DOL Advisory Opinion 2012-

What’s a PEP?All PEPs are MEPs, but not all

MEPs are PEPs. In other words, a PEP is a type of multiple employer plan, but not all multiple employer plans need become PEPs — at least, not based on a plain reading of the proposals.

The legislative proposals that use the term “pooled employer plan” or PEP create a new type of MEP. The nature of the PEP is that, if it meets certain requirements, it is a single plan for ERISA purposes — thereby overriding the DOL’s nexus requirement. The requirements to qualify for PEP status vary among the handful of proposals out there, but three common elements are:• The PEP must be overseen by a

pooled plan provider (PPP) that accepts responsibility for oversight of the plan as a named fiduciary and as the plan administrator, as defined by ERISA Section 3(16).15

• In some versions, the PPP must be a regulated financial institution — a provision that was created in order to protect participants from the sort of malfeasance seen in the Hutcheson affair described above.

• The adopting employers remain responsible for selection and monitoring of the PPP, and perhaps the plan investments.

What does this actually mean? Can we predict with any certainty, based on these proposals, how PEPs will work? The author thinks not — the practical reality is that: (1) these are just proposals; and (2) the devil is in the details, and the details will be spelled out in regulations.

That said, this stuff is not actually very complicated. The confusion is, in the end, about who’s allowed to get paid.

either to the same or different participants,

iv. (ii) The plan has several plan documents,

v. (iii) Several employers, whether or not affiliated, contribute to the plan,

vi. (iv) The assets of the plan are invested in several trusts or annuity contracts, or

vii. (v) Separate accounting is maintained for purposes of cost allocation but not for purposes of providing benefits under the plan.”The problem with the single

plan definition is that it was written with DB plans in mind, especially Taft-Hartley multiemployer plans, and it is difficult to construct a way in which the language could apply meaningfully to defined contribution (DC) plans. For example, the notion that Bob’s account balance must stand behind Suzie’s benefits claim is not only nonsensical, but conflicts directly with ERISA’s anti-alienation provision.13 Similarly, the notion that assets attributable to Employer A’s participants must stand behind claims by Employer B’s participants makes no sense. As a result, long-standing DC MEPs, in actual practice, do not subject any employer’s or participant’s assets to being taken by other participants.14 Such an arrangement makes sense in a DB plan, but not in a DC plan.

It is important to note that these issues — the securities law “single trust” issue and the Code’s “single plan” definition — have nothing to do with open MEPs. These are issues applicable to all MEPs, whether open or closed, and no currently proposed MEP/PEP legislation includes language that would change the situation.

13 ERISA §206.14 Note, however, that MEP administrators must choose what to do with forfeitures or other unallocated amounts. Most modern MEP documents include language whereby such funds may be applied on either an employer-by-employer basis or on a plan-wide basis.15 See the actual ERISA definition under Section 3(16), and note that meeting this definition is not the same as offering “3(16) services.” The requirement is that the fiduciary must be the plan administrator, not help the plan administrator.16 29 CFR 2550.408b-2(e).17 DOL AO 2012-04A.


retirement industry, it is clear that the industry is gearing up for a new MEP gold rush. Recognition of the benef its of MEPs is now widespread. Advisors and providers are actively seeking MEP knowledge, strategies and solutions. Many are delaying action to see what Congress does, but others are taking action now. What does seem clear is that the use of the multiple employer plan design is poised for signif icant growth.

Pete Swisher, CPC, QPA, TGPC, is the senior vice president and national sales director for Pentegra Retirement Services. He

is known nationally for his work on retirement plan governance. Pete is the author of 401(k) Fiduciary Governance: An Advisor’s Guide.

available structures. For example, an “open MEP” may not be a single plan for ERISA purposes, but how important is it to have a single 5500? And of what use is a MEP audit to a small plan f iler, who would be exposed to the burdens of a payroll audit in a closed MEP yet not in a single-employer plan? The applicability of Code Section 413(c) is based on the tax statute and regulations, not DOL rules. So the fact that a program operating in accordance with Section 413(c) is not a “true MEP” might be irrelevant from a plan sponsor’s or participant’s perspective if key advantages are present.

Some of the benef its of MEPs can be realized through a variety of programs that have arisen in recent years, such as the use of group trusts and marketing bundles going by names such as “aggregation arrangements,” “small plan solutions” or “exchanges.” Such arrangements can include f iduciary outsourcing options and economy of scale, even if they do not enjoy the same degree of simplicity for adopters that is possible in a MEP. It is true, however, that the centralized governance structure mandated by the nature of a MEP is an advantage that is diff icult, if not impossible, to duplicate in other structures.

In short, legislation favorable to MEPs will unquestionably help promote MEPs, but may not actually be necessary from a technical perspective.

A NEW MEP GOLD RUSH?It is unclear if or when new

MEP legislation might be passed, but the consensus on the government affairs front appears to remain that some sort of MEP-friendly legislation is likely, and probably sooner rather than later. From conversations with service providers and advisors across the

04A, when perhaps they should be on the control requirement, and on what happens when plans lack a nice, clean ERISA chain of appointment. For an instructive example of what to avoid, see the DOL’s news release18 about its settlement with the National Rural Electric Cooperative Association (NRECA) — a long-standing trade group MEP provider that was f ined more than $30 million based on the DOL’s contention that the NRECA had appointed itself and determined its own compensation.

The solution is simple: Make sure that the clients are truly in charge of the plan.

The Problem with PEP LegislationThe various PEP proposals

create an entirely new structure — the PEP — but only solve problems for that structure. Existing MEPs (nearly 5,000 of them) would have to convert to PEPs if they wished to gain any advantages offered by the new structure, yet the expense of such a conversion might not be in the best interests of the plan or its participants and adopting employers. For example, if PEP legislation eliminated the bad apple rule, would it be worth the cost and effort of changing the plan to a PEP just to get bad apple protection, especially if the MEP administrator is not greatly concerned about the bad apple rule in the f irst place?

An alternative or supplement to PEP legislation would be legislation that identifies all pertinent obstacles to MEP formation and adoption and addresses those obstacles uniformly for all MEPs.

DO WE ACTUALLY NEED LEGISLATION?

There is an argument to be made that MEP-friendly legislation is unnecessary because the benef its of MEPs can be realized using

18 Available at DOL.gov; search for “NRECA.”

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COVER STORY

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BY BRAD WEXLER AND JOSEPH LUSCAVAGE

Better Together

The truth about HSAs, 401(k)s and retirement planning.


TThere has been a great deal of buzz surrounding Health Savings Accounts (HSAs), much of it centered on potential tax changes that would increase the savings potential offered by these accounts. As an immediate consequence, there has been great angst amongst 401(k) proponents that:• these increased contributions

are a threat to reduce 401(k) participation or even the establishment/continuation of a 401(k) plan; and

• the increased tax revenue necessary to maintain budget neutrality would be generated by requiring Roth deferrals and/or reducing or freezing the Section 402(g) limit.

Since these proposals are not yet defined, much less close to being passed or implemented, this article deals with the current regulations and limits in place for 2017 and 2018.

HSAs and 401(k)s are linked by the tax code and as tax-favored savings programs, they can compete with each other for an individual’s savings attention — when it comes to saving, will it be health care or retirement? The purpose of this article is to help understand plan participants’ options and the roles that employers, advisers, service providers and consultants can play in helping to craft successful retirement outcomes. We also believe that once the dust settles from potential legislation, service providers in this space need to take action to generate increased utilization of HSAs.

A LOOK AT THE BASICSTo better understand HSAs, let’s

outline a few things that they are not. They are not an insurance plan. They are savings accounts held at a financial institution in the account holder’s name; it’s that person’s money and it travels with them.

They are not a Flexible Spending Account (FSA). FSAs are a different type of savings tool, with different

requirements; they are generally best utilized in the short term for tax-advantaged savings to pay predictable medical expenses. FSA money (for the most part) is “use it or lose it” on an annual basis.

Furthermore, don’t confuse an HSA with a Health Reimbursement Account (HRA). An HRA is, in effect, a promise made by a plan sponsor to plan participants to pay some predetermined amount for out-of-pocket annualized medical expenses. Participants do not get to take it with them — HRAs and FSAs play no role after an employee retires.

An HSA is not a retirement plan either. The likelihood of someone saving enough money in an HSA to fill a retirement chest completely is remote. An HSA can be an essential component of one’s overall retirement strategy, but it’s only a part.

What is an HSA and how does it work? IRS Publication 969 defines an HSA as: “a tax-exempt trust or custodian account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses… You must be an eligible individual to qualify for an HSA. No permission or authorization from the IRS is necessary to establish an HSA.”

Eligibility for contribution to an HSA account is predicated on the account owner being covered by a qualified high-deductible health plan (HDHP). The account owner

cannot be enrolled in Medicare or be claimed as a dependent on someone else’s tax return. (For more, see IRS Publication 969.)

HOW DO THEY WORK?An HDHP has a higher annual

deductible than a typical health insurance plan. In 2017, the minimum deductible to qualify is $1,300 individual or $2,600 family coverage (2 or more). The maximum limit on the sum of the out-of-pocket medical expenses in 2017 is $6,550 single or $13,100 as a family that an enrollee must pay for covered medical expenses. (Note: qualified out-of-pocket expenses are defined in Code Section 213(d). These limits are subject to change by the IRS annually. The 2018 limits can be found in IRS Rev. Proc. 2017-37.)

Once eligible, setting up an account is rather easy. Insurance carriers issuing HDHPs will provide a bank or other institution to hold HSA funds. There is usually not a requirement by the HDHP insurance carrier to use a particular institution. Standalone HSA vendors have emerged, so there are other options available with a wide range of capabilities that vary between institutions. Our experience shows that larger banking institutions do not always offer the most robust capabilities — that is, “bigger may not always be better.”

Many institutions require minimum balances and/or assess fees that can range from $2 to $7 per month. Most do not have robust investment options outside of the simple savings rates, and their technology platforms range from simple balance verifications to online account management.

The HSA is a growing and emerging market, so keep an eye out for continued product enhancements. Improvements in technology and competition for balances will only lead to improved services for account owners. Additionally, 401(k) recordkeepers are also

The HSA is a growing and emerging market, so keep an eye out for continued product enhancements.”

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getting involved in the HSA field. The overlap of payroll processing a withheld figure and investing on behalf of a participant is very compatible with their systems (and if increasing one’s HSA means decreasing that participant’s 401(k) deferrals, recordkeepers would still be capturing some of the money, which makes this an attractive addition to the recordkeeper business model).

Funding an HSA may be done via payroll deduction through a typical

Section 125 cafeteria plan. Or, as opposed to 401(k) plans, one may also fund the account directly by simply writing a check. Whatever funding method is chosen, (payroll, direct or a combination thereof ) the IRS limit must not be exceeded for a particular tax (calendar) year. In 2017, those limits are $3,400 single, $6,750 family coverage; in 2018 they will be $3,450 and $6,900 respectively. For those age 55 or older, the law allows for an annual $1,000 (for 2017) “catch up”

contribution for each covered person enrolled in the HDHP.

It is important to note that an HSA can only be held by a single account holder; no joint accounts are permitted. Therefore, a dependent covered under a HDHP who is 55 or older must open a separate HSA account and fund his or her $1,000 “catch up” into that account.

Once the HSA has been funded, in full or in part, the account can be used to cover out-of-pocket medical

FEATURE HSA 401(k)

Responsible party Employee Employer

Account Individual Group

Eligibility HDHP Per plan document

Fee disclosure Maybe Yes

Employer plan No Yes

Availability for spendingAny time but only qualified medical

expenses are tax freePlan rules, generally retirement

Investment fund lineup Offered by institution Fiduciary-selected lineup

Minimum investmentTypically $2,000 - $3,000, for ability to invest in market (varies by institu-

tion)None

Employee education Up to employee Plan advisor and sponsor

Investment options Per institution Available

Annual maximum (2017) $3,400 per individual/

$6,750 per family $18,000 for elective deferrals

“Catch up” amount (2017)55 and over $1,000 per covered de-

pendent50 and over $6,000

Tax-free distributions In accordance with IRC 213(d) Roth only

Minimum distribution requirements NoneAge 70½ (more than 5% owners); otherwise

the later of 70½ or retirement.

IRS penalty for pre-retirement distri-bution or non-qualified expense

20% penalty and ordinary income taxYounger than 59½: 10% penalty plus

ordinary income tax. Roth: 10% penalty and taxes on earnings if not held for 5 years

Post-retirement non-medical ex-pense

No penalty (regular tax only)Regular tax only (other than qualifying Roth

distributions)

Loans No Yes


servicing the plan will have to address compensation and fiduciary concerns and compliance. As discussed above, while HSAs can be set up through the employer, the plan participant is the owner of the account. They can roll over an HSA to another provider if they don’t like their employer’s option.

HSAs VERSUS 401(K)sWith that background on HSAs

complete, let’s take a quick look at the primary component of an individual’s retirement strategy, the 401(k) plan. In a nutshell, they offer the opportunity to save on either a tax-deferred or Roth basis up to $18,000/$24,000 (2017 limits) annually from a participant’s paycheck. Many plans offer a company contribution as well. The contributions can be invested into a well-diversified portfolio constructed by the plan sponsor and its advisors, many of whom are functioning as fiduciaries to the plan and its participants. And of course, the money saved within a 401(k) plan is intended to be used for retirement, not for everyday medical expenses. See the accompanying table for a comparison of the features of HSAs and 401(k)s.

BALANCED APPROACH TO RETIREMENT SAVING

An August 2016 Money magazine1 article estimated that, “The average couple retiring today… will need $260,000 to cover medical costs in retirement.” The HSA does offer an opportunity to set aside tax-preferred money toward that goal. To do so, a person will need to save reserves

expenses on a tax-preferred basis. Code Section 213(d) defines what Uncle Sam views as “medically necessary expenses.” (These are further defined in IRS Publication 502.) Generally, medical expenses that are prescribed by a physician and/or are not cosmetic in nature are allowed. It is important to note that an HSA account holder does not have to provide proof at point of payment, but must provide it if audited. If the IRS finds that an amount was withdrawn from an HSA not in compliance with Section 213(d) prior to retirement, they will assess a 20% penalty, interest and back taxes.

It is our opinion that an HSA is a tool that presents opportunities throughout a participant’s life. It provides savings, growth and distributions in a tax-advantaged way. Deposits to the HSA account do not show as gross earnings on a W-2 if funded with a cafeteria plan (not taxed: federal, state, local or FICA); the balance grows tax free; and qualified disbursements are not taxed.

On the flip side, however, HSAs don’t receive the same level of scrutiny and oversight as 401(k) plans. With the fee disclosure requirement of those plans, plus the Department of Labor’s new fiduciary rule, 401(k) plan fees are now required to be more transparent and reasonable. Financial advisers, who in most cases will be considered fiduciaries, face stricter rules about giving investment advice to 401(k) participants compared to HSAs.

Additionally, a broker/dealer or Registered Investment Advisor firms

Recordkeepers and trustees can work together

to offer united lineups, consolidated participant statements and access.”

1 O’Brien, Elizabeth, “Your Retirement Health Care Tab: $260,000.” Money.com, Aug. 16, 2016.

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in his or her HSA for spending later (post-retirement) above the amounts spent each year on out-of-pocket medical expenses.

Remember, funding an HSA means one will have high medical insurance deductibles to satisfy each year. This may be simply beyond the means of many people. For those who establish an HSA, we expect to see a portion deplete their account annually.

However, for those enjoying good health and with the ability and discipline to fund their HSA each year and not make any withdrawals, we see a vehicle that allows assets to accumulate toward inevitable post-retirement medical expenses on a triple tax-preferred basis. To better serve this population, we believe that education and more innovation is required.

While the rules governing HSAs and 401(k) plans are determined by Congress, the features and usefulness of these instruments are often determined by the marketplace. Health care and retirement savings have typically been served by different players. The messaging to participants can be influenced by the roles, products and responsibilities that each player represents.

Regardless, the industry will adapt. We believe that a melding of the investment options and the fiduciary roles is on the horizon. A balanced approach based on the needs of the retiree will continue to be the most successful path. Understanding all the options available, the knowledge of how to exploit each for their strengths, the ability to adjust to opportunities that present themselves and the discipline to execute a strategy have not changed. In the end, all the HSA represents is another option to complete — or at least supplement — the retirement planning puzzle.

Both types of accounts have strengths. We believe that understanding those opportunities will lead to a balanced outcome. The HSA has application across a person’s

working life, but it is not a retirement plan. Low contribution limits and weak investment options will not allow individuals to acquire enough wealth to carry them through their golden years. Catch-up amounts are larger ($6,000) in 401(k)s than in HSAs ($1,000) and can begin earlier (age 50) in 401(k)s than in HSAs (age 55). An HDHP will save money on insurance premiums, take that savings and fund the HSA sufficient to meet annual deductibles. Anything less increases a person’s tax burden by paying for out-of-pocket medical expenses on a post-tax basis.

Individual considerations become important factors for next step. Factors to consider include:• how far out from retirement the

individual is;• general health condition;• job stability; • level and comfort of self-

administration sophistication; • tax liability; and • remaining discretionary dollars.

IMPACT ON THE INDUSTRYEstimating health care costs

and retirement needs is difficult for participants to think about, much less take reasonable and well-timed action. Of course, financial/plan advisers are well situated to provide important guidance and education in these areas, and insurance advisers bring to the table a deep understanding of how available medical insurance options will either fill gaps or create financial holes for individuals.

Recordkeepers and trustees can work together to offer united lineups, consolidated participant statements and access, and we expect to see these product enhancements occur in the future. While coordinating numerous areas of expertise from a variety of providers will be time consuming, it can also constitute a valuable service and create opportunities for all involved.

According to a January 2017 InvestmentNews.com article,2 the

largest contingent of the U.S. labor force consists of Millennials, who have the highest adoption rate of HDHPs, and therefore have access to HSAs. Since most Millennials would rather interact with a website than a person, it may be difficult to reach them. Nonetheless, being able to speak with Millennials about HSAs may prove to be a valuable way to gain access to this growing market.

Communication strategies that assist workers, especially Millennials, with how to blend valuable benefit options that they may feel are in competition for their paycheck dollars are critical. While health benefit brokers often share the tax advantages of the HSA with health plan participants, not all are licensed and/or comfortable providing investment advice for these accounts. This is an opportunity for collaboration among industry professionals, and it adds value to those we serve. Retirement plan advisers and consultants who take the time to incorporate HSA education and strategy into their practice will be stronger in the long run.

The bottom line? Incorporate into your practice’s strategic plan all the tools available to you. This is an opportunity for the retirement plan industry to add value. Help those you serve understand and maximize their available benefit options for today’s needs and their future goals.

Brad Wexler, QPA, QKA, CPFA, is a retirement plan consultant. He concentrates his practice in the total design of retirement plans.

Joseph Luscavage, PAHM, FAHM, is vice president of employee benefit services for Tycor Benefit Administrators, Inc. He

concentrates his practice in the sales and marketing of insurance benefit services.

2 Pottichen, Aaron, “Why retirement plan advisers should care about the HSA market.” InvestmentNews.com, Jan. 11, 2017.

FEATURE

BY JOEY COLEMAN

Creating a remarkable client experience early in the relationship

can guarantee a client for life. Here’s how.

The First 100 Days

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The one constant you are in control of is the plan sponsor’s experience when doing business with you.”

Throughout the financial services industry, disruptive trends are leaving retirement plan professionals worried about the future. More

and more clients are shifting their 401(k) plans to fintech up-and-comers like WealthFront and Betterment. Plan advisors are worrying about lost business and confused clients due to potential changes in DOL rules and regulations. And rising uncertainty in the political arena at both the national and state levels is leaving everyone wondering what’s coming next.

In this turbulent world, it’s difficult to keep driving business forward. And yet that’s exactly what needs to happen. The one constant you are in control of is the plan sponsor’s experience when doing business with you. If you can make that experience remarkable, clients will not only happily continue to do business with you, but they will bring along their friends and colleagues.

How do you get clients to understand how you are different than everyone else? You show them.

You might be saying, “But there are multiple clients, employees and points of contact within the companies I work with, not to mention all of the plan participants! How am I supposed to create a remarkable experience for all of these people?”

I’m going to show you how. But first, let’s discuss why you should care.

RETENTION STARTS AT THE SALE

Nearly every business spends a huge amount of time, money and energy hoping to land new clients. Prospecting, “filling the funnel,” and “qualifying leads” occupies the focus of the sales and marketing teams. This results in the client acquisition function getting most of the attention

and the majority of the resources within an organization.

And yet, in almost all businesses, where so much effort is spent trying to convince people to become clients, virtually no effort is spent trying to keep the clients once they join.

So what happens? Clients leave. The average business loses between 20-70% of new clients within the first 100 days of the new client relationship. After all the effort to get new clients to “sign up,” they are running out the back door as quickly as you bring them in the front.

Regardless of the industry, the numbers are staggering. In banking, the new client defection rate is 32%. In mobile technology, it’s 21%. In software-as-a-service (SaaS) it’s 20%. In information products it’s 35-50%. In auto-repair it’s 68%.

I may not know the new client defection rate in your firm or organization — but what’s frightening is the fact that, statistically speaking, you probably don’t know what it is either.

What I do know is that at the 2017 401(k) NAPA SUMMIT, one of the sessions focused on sharing the results of a survey of plan sponsors

conducted by NAPA and The Plan Sponsor University (TPSU). Last year, 12% of the survey respondents switched plan advisors. I would posit that across the industry at large (beyond the survey respondents) that number is probably closer to 20% or more.

Even if it’s only 12%, that still means a dramatic impact on your business operations when those clients leave. Research also shows that the decision to leave is happening faster and faster in the client lifecycle.

MORE PAPERWORK ISN’T THE SOLUTION

Many of my clients in the financial service industry are quick to point out that completing the paperwork to sign up and start working together often takes more than 100 days, so their early defection rate isn’t that high at all.

Stop and consider that observation — which, if we’re honest, is scary in and of itself. Instead, ask yourself this question: If new clients weren’t contractually bound or stuck in the mire of completing the paperwork to start working together, would they stay?

If we’re being honest, chances are that many would leave because the “early days” of the relationship definitely aren’t our finest.

The loss of newly acquired clients has a staggering impact on the bottom line. In most businesses, it takes months and sometimes more than a year before the cost of acquisition is recuperated. If the customer leaves before that threshold is reached, the business loses money that will never come back.

LOSING CLIENTS COSTS MORE THAN MONEY

Losing a client costs a business in far more ways than direct revenue: • For every lost client, prof its

decrease because the general costs of operating the business are spread across a smaller client base, which means that prof it-


per-client goes down with each departure.

• Without solid client retention, sustaining a business is nearly impossible. The constant fluctuation in revenue makes planning and forecasting futile and managing an ongoing operation difficult.

• Every time a client leaves, team morale suffers. Just as employees start to get excited about a new project, the client decides to stop working together. This is the equivalent of having an incredible first date, only to have your date walk out halfway through the second date. The emotional impact on those left behind is underestimated and underappreciated.

• The emotions associated with losing a client are often felt in the moment, yet seem to be forgotten before any changes are made to stop these types of losses from happening in the future. This ongoing emotional rollercoaster wears on your management team and your employees.

Each of these costs is significant on their own, but when combined, the impact can be disastrous.

WHY DO CLIENTS LEAVE? Clients leave because they feel

neglected after the sale is made. After being wined and dined,

courted and wooed, chased and pursued, the relationship changes and the excitement wears off. As contact decreases, so does the connection, and eventually the client starts to feel forgotten.

But don’t just take my word for it. The NAPA/TPSU survey found that 24% of sponsors switched advisors because of unresponsiveness — proving that feelings of neglect can lead to direct consequences for your business.

STEP INTO THE CLIENT’S SHOES

If you look at the situation from the perspective of your clients, they

probably see plan administration as something slightly above a necessary evil. In most instances, it’s categorized as a compliance issue. The clients know they need to do it, they think they could use some help, but they have no desire to immerse themselves in the details, nor do they know how to measure “success.” As soon as they decide to work with you, they are almost certainly working on other tasks and losing focus. If you do a good job of creating a series of remarkable experiences early in the relationship, you can keep their attention and reinforce the decision to work with you.

YOU NEED A ‘FIRST 100 DAYS STRATEGY’

The best way to keep clients is to have a “First 100 Days Strategy.” By implementing a specific plan that takes into account the emotional stages your new clients experience, you can onboard them properly and make sure they continue to work with you for a long time. There are eight phases that every client has the potential to experience, and if you meet the client at each step along the way, you can maximize your interactions and gain a client for life.

The eight-phase model takes a client from the first interaction with you all the way to the point where they are a raving fan. Every client has the potential to travel through

all eight phases, yet most businesses fail to guide the client all the way through to the final phase. In fact, most stall out somewhere between Phase 5 and Phase 6, missing out entirely on the benefit of loyal clients and raving fans.

Let’s consider each phase in the client journey and what you can do to make the interactions in that phase remarkable.

PHASE 1: ASSESSIn the Assess phase, the client is

deciding if he wants to do business with you. He is learning what to expect from your organization, and he is sharing (explicitly and implicitly) his expectations for the relationship. This is what most people would refer to as sales and marketing.

The Assess phase finds a prospect company considering you as their service provider. They are likely weighing the option of working with you, with one of your competitors, or most often keeping things “the way they are.” In these conversations it’s important to determine what the prospect is really looking for and identify what they are trying to accomplish. (More on that in Phase 6, Accomplish.)

In addition, you need to give prospects a preview of what they can expect when working with you. Do you respond in a timely fashion? Do you answer questions directly? Do you anticipate things that may be important but that haven’t been mentioned? How you interact with a prospect during the Assess phase foreshadows the interactions a client will have.

PHASE 2: ADMITThe Admit phase begins when

the client admits she has a problem or a need and believes that you — that is, the company or organization — can solve it. As a result, she signs on to have you administer the plan. This is often referred to as “the sale” and sadly, in most businesses, it is where the client-focused initiatives end.

The loss of newly acquired clients has a staggering impact on the bottom line.”

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When a new client agrees to have you oversee the plan, she has made a significant commitment to the relationship and you should acknowledge that with enthusiasm and excitement. By letting the client know that you are eager to work together, you establish the foundation for the relationship on a high-energy, positive feeling.

PHASE 3: AFFIRMThe Affirm phase is more

commonly known as “buyer’s remorse.” Almost every businessperson has heard of the buyer’s remorse concept, yet few businesses do anything in this phase to counter their client’s feelings of fear, doubt and uncertainty about the decision he made.

Almost immediately after selecting you, the client will begin to doubt his choice. You can reinforce the decision by sharing your plans for working together, outlining a clear sequence of “next steps,” and reiterating the expertise that you will bring to the relationship. By repeating back his key goals and desires (which you identified in the Assess phase), you can assuage the client’s fears and doubts.

PHASE 4: ACTIVATEThe Activate phase begins with

the first major post-sale interaction. I refer to this phase as Activate because it is important to energize the relationship and propel it forward. At this point in the client journey, the relationship officially kicks off and the business begins to deliver on the promises made during the Assess phase.

In many plan administration relationships, the Activate phase involves reams of paperwork, meetings and otherwise “not exciting” activities. While certainly these activities are necessary, they don’t need to be boring. Explore ways to bring a sense of enthusiasm and excitement to the first interactions you have with

your clients. Something as simple as bringing snacks to a kick-off meeting can set the tone for a relationship that goes beyond “business as usual.” Doing pre-meeting reconnaissance to identify the plan sponsor’s favorite foods or snacks shows an attention to detail while also making your client feel special.

PHASE 5: ACCLIMATEIn the Acclimate phase, the

client learns about your f irm’s way of doing business. Many businesses risk failure in this phase, because they have delivered their product or service dozens (if not hundreds) of times, and assume that everyone in the world knows the process and what will happen next. For the client, however, this may the f irst time he’s ever experienced this way of doing things. In this phase, the client needs to acclimate to your business’s way of operating and he needs you to hold his hand along the way to make sure the ride is smooth.

Sometimes the simple act of keeping a client informed as to where he is in the process is enough to create a feeling of connection and confidence. Providing a clear roadmap (a visual diagram works well), with milestones and regular progress updates, is one of the best ways to acclimate a new client.

Continuing to check in along the way and creating opportunities for client input and feedback will show how responsive you are to the client’s wants and needs.

PHASE 6: ACCOMPLISHThe Accomplish phase of the

client experience occurs when the client achieves the result she was seeking when she decided to do business with your company. This may be the first time that your service delivers on the hopes she had when deciding to work with you. During this phase, the client’s initial expectation for the end result is met (something that doesn’t happen with every product/service).

Reaching the Accomplish phase is only possible when you know what the client hoped to accomplish when she initially started considering you (back in the Assess phase). By tracking these original desires and then reporting back to the client once they are accomplished, you can reaffirm the original decision and highlight the progress and achievements made during the client lifecycle. This shows the client’s investment was well made and proves the value you delivered.

PHASE 7: ADOPTIn the Adopt phase, the client

takes ownership of the relationship. The client adopts the business and starts to lead the charge on deepening and strengthening the relationship. The client proudly shows his support and affinity for the brand. Only after a client has adopted the business’s way of operating and taken an ownership stake in the relationship can he move to the final phase.

As the relationship deepens, the client will start to be more proactive in reaching out to you. You should continue to be in regular contact, but when the client takes the initiative to come to you, you should honor his efforts by acknowledging what is needed and then working to deliver it.

The pinnacle of a client relationship is achieved when the client starts to refer new business to you.”


PHASE 8: ADVOCATEIn the Advocate phase, the

client becomes a raving fan, zealous promoter and referral engine all in one. In this phase, the client becomes a built-in, unpaid, un-commissioned marketing representative, singing your praises far and wide to other potential clients who might benefit from your service.

There is a stark difference between a client being “satisf ied” with you and feeling “ecstatic” about the relationship. The NAPA/TPSU survey reported that 53% of plan sponsors were “satisf ied” with their advisor, a trend that is fal ling compared to the previous survey’s f indings of 70% satisfaction. While this trend shows tremendous opportunity to grow your business with new plan sponsors, it also warns of fal ling attitudes that may exist within your own client base.

The pinnacle of a client relationship is achieved when the client starts to refer new business to you. Make sure to recognize and, where appropriate, reward this behavior. One of the best ways to know that your clients are ecstatic about the relationship is when they are referring new business to you.

MAKING THE MOST OF THE EIGHT PHASES

All eight of these phases are the same for every business. They show up in the same order, regardless of the type of client you serve, the industry they operate within, or your product or service offering.

All clients go through the initial phases. If you help them along the way, they will continue through the process, eventually arriving at the final phase where they become advocates for you and your business.

Now you’re familiar with the eight phases. If you’re interested in exploring ways to create remarkable experiences in each phase, I’ve put together a “First 100 Days Starter Kit” that you may find useful in brainstorming and implementing

new ideas. You can download your free starter kit at http://www.joeycoleman.com/planconsultant.

I wish you all the best in creating remarkable experiences for your clients in the First 100 Days and beyond.

Joey Coleman is a recognized expert in customer experience design and an award-winning speaker at national and international

conferences. He helps organizations retain their best clients and turn them into raving fans via his entertaining and actionable keynotes, workshops and consulting projects. Learn more at JoeyColeman.com.

Without solid client retention, sustaining a business is nearly impossible.”

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Compassionate Compliance

Here are some valuable tips on how to align your services with your sales and conversion process.

BY LAURIE SKATTUM

Not every new retirement plan relationship arrives neatly packaged and running

efficiently. These difficult client situations can be a great opportunity to differentiate your firm and team of professionals.

With the many cookie-cutter products and services that litter the retirement plan landscape, deep expertise in plan design, regulatory compliance and/or f iduciary services can be a great benef it to the growth of your practice. However, we all have our standards and thresholds.

Before we get any further, let’s def ine what we mean by “diff icult” or “challenging” plan circumstances. I would ascertain that most of us make tweaks, updates or revisions when beginning a new plan relationship. Yet there are times when a plan is operating out of compliance before it arrives on our door step. Payroll problems, lack of ownership engagement or interest, or consistently late deferrals can complicate a conversion experience. There may be times when a previous plan provider has

MARKETING


as we ensure all clients — difficult or not — receive exceptional service during the sales and conversion process.

THE IMPORTANCE OF YOUR CULTURE

In addition to the communication skills within your sales and conversion teams, how you develop and maintain your culture affects how difficult clients are handled. Here are four recommendations:

1. Hire good people — people you can trust and who are aligned with your values.

No need for explanation here.

2. Align your team with your vision for how your business will grow and how your clients will be serviced.

Clarity of vision from management and leadership will align everyone in terms of metrics, activities and progress. Mission statements and value propositions that hang isolated on a wall are useless if they are not practiced and preached daily. Organizational vision is clear when success is well defined and all team members see how their individual activities connect to the larger mission. Clear vision affects your hiring. It affects your service-level agreements. It affects how you conduct business.

Also, every team member should understand the math behind your company financials. Regular meetings connecting front-line activities with company profitability is a good practice and can help your team understand what leads to new plan profitability versus volume attainment.

By taking these first two steps, you can align activities with vision

COMMUNICATION IS KEYAs mentioned above, a smooth

ride begins with your sales team. The conversion experience is challenging and we all know how vulnerable a new relationship can be during those first 90 days. Employing knowledgeable sales team members allows for issues to be recognized at the outset. One strategy is to utilize your Customer Relationship Management (CRM) system to ensure prudent questions are asked throughout the sales process. By incorporating a sales conversation checklist, you can unify the information required to be collected prior to a conversion. In many cases, this may involve specialists from other areas of your department who can supplement and strengthen the salesperson’s relationship.

Then, your conversion team should be matter-of-fact while also using appropriate compassionate communication skills, such as buffer words/phrases, statements of understanding, and warmth and empathy. Being direct is not effective when delivered in a cold, formal manner. However, being forthright and honest highlights your expertise and protects any ambiguities or misinterpretations that may occur. Establishing this strong relationship at the outset — based on content knowledge, trust and integrity — can buffer a direct recommendation based on compliance concerns from a previous provider.

For all ASPPA members, the Code of Professional Conduct identifies the professional and ethical standards with which we must comply. Our Code guides us

created service expectations that may not f it within your team’s framework.

The challenge in these situations is not the level of service or expertise you provide. Rather, it is how you communicate the need for compliance and best practices with a plan sponsor and/or participants who may or may not believe or know they are doing anything wrong. Also, how you ensure that your team is consistent and unified in the type of business they source can provide boundaries for what type of situations you are willing to assume. Having consistent standards and not assuming that every business which comes through the door can alleviate many problems before they arise. As a former colleague of mine consistently stated in meetings: “Just tell me where the foul lines are and I’ll stay on the field.”

EMOTIONS AT PLAY There is a delicate dynamic

at play during the conversion process. As you bring up best practices or compliance issues that the plan sponsor may not be implementing, the sponsor may react emotionally and get defensive or upset. In many cases, pride and ego become obstacles in the path of the new provider, despite the issue being carried over from a former relationship. It is very difficult to convince via logic and reason when emotion is driving, especially for situations involving complex ERISA challenges. From the moment your sales team engages with a difficult conversation throughout the life of the relationship, maintaining a focus on the emotions at play is a key component of success and retention.

It is very difficult to convince via logic and reason when emotion is driving.”

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CONCLUSION

Through a clarity of vision and the integrity of your employees, the conversion process begins to lay the foundation of trust that your new retirement plan relationship is built upon. As it is the first impression a plan sponsor has of your organization, it deserves your focus and attention.

Laurie Skattum, MBA, QKA, TGPC, is the Conversion Coordinator of Retirement Plan Services

for Heartland Financial USA, Inc. She is responsible for leading and directing the implementation qualified plan provider transition and services, involving both bundled and unbundled models.

Retirement Plan Services are offered through

Dubuque Bank and Trust, a subsidiary of

Heartland Financial USA, Inc. Products offered

through RPS are not — unless specifically noted

— FDIC insured are not bank guaranteed, and

may lose value.

as your team will understand why certain plans are unprofitable, why certain service levels cannot be sustained, and why some compliance issues may necessitate moving on from a possible sale.

3. Ensure a consistent message through your sales and conversion marketing resources.

From a foundational perspective, the easiest, simplest way to ensure your message is not misunderstood is to be clear and consistent throughout your sales and conversion marketing and client resources. We’ve al l heard of the “bait-and-switch” practice, where the sales team promises one route and the service team cannot/will not deliver on that promise. For instance, did your sales team create an understanding of monthly education meetings when you know that is not your usual service level? Your marketing resources can guide al l through the conversation and clearly def ine the parameters for your relationships.

4. Address issues immediately.For every new relationship,

accelerating trust is an integral component of the early conversion process. When a hiccup happens between the sales team and the conversion team, it can place doubt in the mind of the sponsor. Addressing the issues immediately — either individually with the employee or through a well-def ined corporate policy — will keep problems from becoming consistent.

Being forthright and honest highlights your expertise and protects any ambiguities or

misinterpretations that may occur.”

Turn to the ASPPA Code of Conduct for Help

ASPPA has a well-defined Code of Conduct that guides professional expectations in difficult situations. Below are three examples where the Code of Conduct can help avoid trouble and define our role as professionals.

Advertising“Member shall not engage

in any Advertising with respect to Professional Services that the Member knows or is reasonably expected to know are false.”

Communications“A Member who issues a

Professional Communication shall take appropriate steps to ensure that the Professional Communication is appropriate to the circumstances and its intended audience.”

Control of Work Product“A Member shall not perform

Professional Services when the Member has reason to believe that they may be altered in a material way or may be used to violate or evade the Law. The Member should recognize the risk that materials prepared by the Member could be misquoted, misinterpreted, or otherwise misused by another party to influence the actions of a third party and should take reasonable steps to ensure that the material is presented fairly and that the sources of the material are identified.”


So you’ve decided to start your own small business in retirement plan services!

Starting and operating your own business is an incredibly rewarding experience, but it involves a lot of complications you don’t experience when working under someone else’s umbrella. Throw on your organizational cap and check out some things to consider before heading out on your new business venture.

DEVELOP A FINANCIAL PLANUnless you have unlimited capital

at your fingertips, money is likely your biggest concern when it comes to owning your own business. How much money do you need? Let’s drill down into your specific financial situation.

First, divide the money you will be spending on your new

business into two groups: startup and recurring. Startup expenses include computers, office furniture, software acquisition fees, lease deposits and your first batch of office supplies — everything you need to get yourself up and running on Day 1. Recurring expenses happen regularly — primarily monthly — and include rent, insurance, software subscriptions, continuing education and postage.

Second, add in your personal expenses. You need to be able to keep the lights on at home as well as in your office. Hopefully, you already have a personal budget, which means this step is done. If not, it’s time to start one by listing your monthly expenses for health insurance, groceries, car payments, rent or mortgage, etc.

Now that you have all your cash outf lows, it’s time to think

BUSINESS PRACTICES

Tips on Starting a Retirement Plan BusinessHere are some important things to think about before you take that leap.

BY MIKE EDWARDS

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about inf lows. This plays into the marketing plan addressed below, but how much do you expect to earn for each client you take on? And how many clients do you think you can realistically acquire in the f irst six months, f irst year or f irst two years? How often will the clients pay you?

It can feel like you are making these estimates in a vacuum, but this is an area where you can lean on your prior experience to come up with projections. In the end, you want a realistic monthly revenue number to include in your overall budget.

Next is the scary/exciting part. Comparing your expected income to your expenses each month, what is your net cash flow? For the first few months at least, it’s going to be negative, since it takes time to build a portfolio of clients and get cash in the door. But at some point it will turn positive, and then you are profitable!

Determining how you are going to keep yourself and your family afloat before you reach that point of profitability is a very important piece of the financial puzzle. Assess what savings, credit cards, family loans, bank loans or small business loans you have available. Also, how much in startup costs and recurring expenses can you rack up before you are in financial jeopardy? Be realistic and establish a stopping point to protect yourself.

A useful benchmark in this process is to calculate a break-even point. Assuming an average revenue per client, how many clients would you need to pay your startup costs? Then, how many clients would it take to pay your monthly expenses for six months, and then the first year? This provides both a point where you can feel financially in the clear and you have an initial number of clients to target.

REACH YOUR MARKETOn that note, how are you

going to get the clients you need? It’s unlikely you’ve gotten this far without some thoughts about who your clients will be and where they will come from, but it’s important to have a written marketing plan to steady your course.

To start, what does your typical client look like? Consider how many participants are in their plan, what size are the plan assets, and how much is being contributed each year. What types of clients can you easily access through your professional network? What client size can you support with your initial staff and resources? What types of services will they want and what can they pay you? I can’t tell you how many times I’ve been asked by referral sources what my “bread and butter” client base is. You don’t have to commit to only taking on 20-person construction company 401(k) plans, but a target client type will definitely help you focus your efforts.

Then, what sets you apart from your competitors? Whether they state it or not, the question on any potential client’s mind is going to be: why you? Take some time to think about how you want to distinguish yourself. Do you have the lowest fees, the most experience, the best client service, or some combination? What are you going to do to bring clients in the door and keep them there? This marketplace identity gives you a cohesive message to spread to contacts and potential clients and generate interest in what you can offer.

Finally, how are you going to reach these clients? Now more than ever, there are plenty of ways to contact large groups of people, including the following.

Social Media • Send an introductory e-mail

to your professional network through LinkedIn.

• Use Twitter to send

retirement plan related updates to your followers.

• Record a video regarding plan topics and upload it to YouTube.

• Establish an informational and visually pleasing website.

Print Media • Design some nice business

cards, and keep them with you!

• Send a letter to your network notifying them of your new venture.

• Develop a brochure summarizing your services and mail a copy to local businesses.

In Person • Join a professional

networking group.• Sponsor a booth or table at an

industry event.• Volunteer on the board of a

local charity.Whatever you choose to do,

remember who you are targeting, and stick with a consistent message about what you offer.

LIMIT YOUR RISKAs the famous phrase implies,

when you are a business owner, the buck stops with you. An assessment of the risks you will be encountering will help set you up for success.

Protect Your Data Data breaches, ransomware

and other viruses are in the news with alarming consistency. And we all know the horror of hitting the power button and being greeted with a blank screen. At a minimum, password protect your computer so if it is stolen or left in a public area, access is restricted. Get antivirus and anti-malware programs, keep them up to date, and do regular scans of your computer. Back up your hard drive in case of data loss, either on another physical drive which you keep in a safe location


HAVE A SUPPORT NETWORK

It is vital to have friends and family on board as you start this process. Every small business owner needs people to lean on when things get rough. Make sure you take time away from the office to be with the people who care about you.

This is a very exciting time in your career! Take a deep breath, trust the plan you’ve laid out, and enjoy the self-employment journey!

Mike Edwards, CPA, QKA, is the CEO of Edwards Pension Services, Inc., a TPA firm he started January 2016. He has 11 years of

plan consulting experience and focuses on personalized service in the small plan market.

have available on the open market or through your spouse.

Lastly, get professional liability insurance. This is most likely not included in your general business policy, and is crucial to guard your assets in case you make a mistake. Clients can sue you whether you did anything wrong or not, and legal bills pile up fast. Look for an insurer specializing in your area of expertise.

Get Assistance When You Need itOwning a business requires

wearing a lot of hats. You are the CEO, head of HR, accounting manager and director of client service all in one. Chances are, you aren’t well versed in all of these areas. So don’t be afraid to ask for help when you need it. There are a wealth of bookkeepers, HR resources, ERISA attorneys and IT professionals who can train you as you get started, or pitch in on a regular basis.

or with a cloud storage product. Evaluate methods of secure data transmission. Mail, fax, email and secure file sharing all have their own benefits and weaknesses to consider. We deal with a lot of sensitive data, from dates of birth to Social Security numbers, so do your research, select an appropriate product, and use it consistently.

Obtain InsuranceThe last thing you want is for

unexpected losses to sink your brand-new ship. Make sure you have general business insurance to cover injury, property losses, contract disputes and other items that your insurance professional will point out. You can even get add-ons for things like cybersecurity. While current health insurance requirements may be changing soon, you don’t want a major illness in your family to sideline your new livelihood. Review the policies you

STRENGTHEN YOUR BENEFITS PACKAGEStrong compensation and benefit packages attract the best candidates. Our professionals can help you understand tax, accounting, and compliance requirements and transform your benefit program into an asset for employees.

CLAconnect.com

Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.

12-2787 | ©2017 CliftonLarsonAllen LLP

WEALTH ADVISORY | OUTSOURCINGAUDIT, TAX, AND CONSULTING

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In the spring 2017 issue of Plan Consultant, we began a four-part series of articles on Section 10 of the Code of Professional Conduct, “Professional Integrity.” Section 10 requires ARA members to perform professional

services with “honesty, integrity, skill, and care.” So far, we’ve discussed honesty (in the spring issue) and skill (summer). In this issue, we’ll focus on care.

The word “care” can be defined in several ways, each of which has relevance to the pension professional’s obligations under Section 10 of the

Code. First, the word “care” can mean paying serious attention to doing something correctly. Inherent in that notion is the idea that the work should be done well enough to avoid harm (in this case, to the plan) or risk (in this instance the risk that the plan will be harmed or a malpractice suit will be brought if the practitioner isn’t careful enough). For the pension professional, then, providing services with care means devoting sufficient time, attention and resources to an engagement so that it is done correctly, avoids harm

ETHICS

The third of our four-part look at the essential elements of professional integrity.

Precept 10, Part 3: Understanding CareBY LAUREN BLOOM


How much time, attention and resources should a pension professional commit to a particular job?”

to the plan, and does not put the practitioner at risk of being sued successfully.

How much time, attention and resources should a pension professional commit to a particular job? It depends. Each assignment is different, and each makes its own demands on the professional. Different engagements require different levels of effort, depending on factors ranging from what the practitioner has been asked to do, how complex the plan is, how reliable plan data is, how responsive the sponsor and other advisors might be, and the like. However, to satisfy Section 10, each project should be done completely and correctly, regardless of how much or how little time and attention the practitioner must devote to doing so. If an assignment is especially complex, the practitioner will need to dedicate more time and attention to it. However, even the simplest assignments still should be given enough effort to be done well. The pension professional who neglects small projects and clients to devote more energy to big ones may soon f ind him- or herself in considerable trouble.

To reduce the risk of malpractice the practitioner should, in principle, dedicate at least as much time, effort and resources to each individual project as a “reasonably prudent” professional would under similar circumstances. In practice, that principle can be ill-defined and confusing. Reasonable people can and do differ about what should be done in any given situation, so reference to a hypothetical “reasonably prudent professional” standard can be less than helpful. It may be more useful to say that before starting work, the pension professional should develop a well-considered estimate of the amount of time and attention a project will need, then build in an extra margin to allow for unforeseen complications and review. Having done so, he or she should then work

subjective definition of care, this definition may also be the most important for the pension professional to keep in mind. Routine processing of nearly identical projects year after year can dampen the professional’s enthusiasm, leading to lack of interest and improper care. Conversely, working for difficult clients or attempting to complete engagements that are rife with challenges can generate frustration to the point where the practitioner is tempted to cut corners just to get the job done. In both cases, however, careless work can haunt the professional long after immediate boredom or irritation have subsided. To do outstanding work, the practitioner needs to care about the quality of the work despite whatever difficulties arise, keeping emotions at bay until the engagement is completed.

H. Jackson Brown Jr., author of Life’s Little Instruction Book. once wrote, “Remember that children, marriages, and flower gardens reflect the kind of care they get.” The same might be said of pension plans. Devoting adequate time and resources to each engagement, providing the necessary services and advice to keep the plan solvent and in compliance with applicable law, and caring about providing high quality work are all hallmarks of the pension practitioner’s dedication to professionalism. They are also essential elements of compliance with Section 10.

Lauren Bloom is the general counsel & director of professionalism, Elegant Solutions Consulting, LLC, in Springfield, VA.

She is an attorney who speaks, writes and consults on business ethics and litigation risk management.

diligently and attentively until the engagement is finished to the satisfaction of both the practitioner and the client.

“Care” can also consist of providing what is necessary for the well-being, maintenance and protection of someone or something. While this aspect of care is most easily explained in reference to children, the infirm or the elderly, it applies to the work of the pension professional as well. Pension plans not only need to be set up correctly, they need to be managed and maintained in accordance with law and good business and professional practice over an extended period of time. Without proper long-term management, plans fail and participants suffer. For the pension professional, then, taking care with a particular engagement may mean looking past the task at hand toward the long-term viability of the benefit plan and providing services and advice that will not only meet an immediate need, but will support the plan’s health over time. In doing so, the pension professional takes care of not only the plan, but the participants as well.

“Care” can also be understood as attaching importance to or being interested in something, i.e., “caring about it.” While arguably the most

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Enrollment. Fiduciary duties. Ever-changing laws and regulations. The complexity of

plan administration. Reasons aplenty for a plan sponsor to seek an outside vendor to serve their retirement plan — and, most important — the participants.

Plan sponsors like OB-GYN Associates, P.C. of Cedar Rapids, Iowa. It’s the largest OB-GYN office in the Cedar Rapids area, which means many things, including that the practice must have a large enough workforce to serve its many clients. That, in turn, means that their Practice Administrator, Tom Kaloupek, is one busy fellow — even without his retirement plan responsibilities.

Kaloupek is a generalist who manages all aspects of the business, he says, adding that he is “certainly not an expert in financial planning” and

“certainly not up to speed as to the changes that have been made and those potential changes currently sitting in or expecting to be reviewed/discussed through the legislative process.”

Most would agree with Kaloupek when he observes that “the rules, regulations and opportunities continue to evolve and change at an ever increasing rate. It is difficult to keep up with and have an understanding at a level necessary to make sound decisions.”

That came into sharp relief when OB-GYN Associates was due to bid out their plan. “We were actually happy with our retirement plan for the most part. It was fairly flexible and offered a wide variety of investment options,” Kaloupek recalls. However, he says, “So much has changed in the past few years and we just felt it was time to ensure expenses were still in line with industry standards, etc.”

SUCCESS STORIES

Getting Professional Help in an Advisor SearchEngaging an expert third party can be a boon to the advisor search process.

BY JOHN IEKEL


In addition to a custodian/recordkeeper, OB-GYN Associates also was looking for an advisor. “The first thing we look for in an advisor is a company who is willing to assume as much fiduciary responsibility/liability as the law will allow,” Kaloupek says. “Companies who are willing to assume this level of risk have a significant stake in the relationship. With that said, we trust they will then manage and scrutinize investment options and in a timely manner make the necessary changes in the best interest of our most precious assets, our employees and retirees. We look for an advisor that is willing to spend the necessary time to keep our board up to date on our plan, education, recommendations, etc. It is also very important that our advisor is available at any time to discuss and/or meet with our employees not only during the initial registration once they become eligible for the plan but also be willing to meet with our employees and their spouse at a convenient time and place to educate and advise not only on the assets the employee may have in our plan but also assets they may have in other plans/accounts.”

A HELPING HAND Kaloupek decided to seek

assistance with the advisor search process. He says he “needed an expert in the field to develop a meaningful RFP, set up the interviews, moderate each of the interviews, summarize the information, list the pros and cons and offer an unbiased opinion,” adding that he wanted someone “to seek clarification when necessary, ask probing questions and ‘call BS’ when needed.”

Kaloupek engaged Mary Patch, managing director with Dubuque’s Williams Group, whom he had met a decade earlier. “It’s helpful for the client to have someone on their side of the table,” says Patch, adding, “He just wanted to do what was right.”

Patch started by doing a needs analysis with Kaloupek, and used it

as the basis for an RFP that was “all customized from start to finish,” he reports. “The client would never get to the right place without a customized process,” she said.

Patch prepared spreadsheets for Kaloupek on each advisor, and made sure she was present and took notes at each interview. They “stepped up their game” because she was there, she said, noting that only one advisor objected to her being present. “It was eye-opening for him,” Patch recalls. There were many problems with the firms that responded to the RFP, she said, concerning fee structure, who does what, lack of ERISA knowledge and bad retirement readiness reports. “Many were woefully unprepared,” she recalls, adding, “even the client noticed.”

This kind of involvement is “going to be a trend in the industry,” Patch predicts, because of the need to get the help of someone familiar with the investment side. “There’s a big hole in this industry — trying to pair the employer with the right recordkeeper.”

The advisor they chose, Kaloupek reports, assumes a significant amount of the fiduciary responsibility and risk. “They manage our assets and the various investment options making the necessary changes per the criteria they have set and have shared with our Board. They are available to our employees for one-on-one

counsel. Additionally, they continue to monitor and advise based on past, current and future legislative action.”

Even better, Kaloupek says that their advisor and the vendor they chose “were willing to work together and allow for a ‘hybrid’ model of sorts.” They also run semi-annual employee meetings together as a joint venture.

PROOF IS IN THE PUDDING“Our profit sharing/401K plan

is a major benefit to our employees and provides a competitive advantage while recruiting and certainly plays a role in our long-standing record of long-term employee retention,” Kaloupek reports. “We have 100% plan participation in our profit sharing plan and approximately 85% of our employees contribute in to the 401(k) plan as well, he adds. He says that their goal is to increase 401(k) participation to 98% through the use of the educational materials and planning tools the vendor offers.

Kaloupek said that he considers the effort to have been worth it. “I would consider our recent evaluation process and ultimate decision to make some changes a success. I feel we have a very cost-effective, user-friendly platform that offers a wide range of investment options supported by two very good partners.”

Kaloupek has some suggestions for other employers that may be considering making such changes. “It is a lot of work, but I would recommend putting your plan out to bid every five years. If you are not a resident expert in financial planning and understanding in detail plan options, I would not hesitate to pull in an unbiased third party to help establish your RFP, set up and direct the interview process, summarize the information, cull out the pros and cons of each proposal and seek their unbiased opinion prior to making your decision,” he recommends.

There’s a big hole in this industry — trying to pair the employer with the right recordkeeper.”

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BY YANNIS P. KOUMANTAROS AND JJ MCKINNEY

I love turning in receipts. Seriously — getting the receipt from the vendor, finding the appropriate place in my pocket, wallet or business tote, then remembering where I put it when I get back to the office, removing the piece of gum I stuck to it, and putting it into a tray for our CFO to scrutinize and then ask for more information. To make the expense official, if memory serves me, I will scribble an incomprehensible note at the top of the receipt identifying who was with me.

Thank you, Receipt Bank, for crushing my favorite memory exercise and communicating my expense straight from the lunch table to our bookkeeping software with the snap of a picture — following my business lunch selfie, of course.

Receipt Bank captures the pertinent data from the receipt, using algorithms I still do not understand. Expense, date, location and credit card used all transfer regardless of the last time my favorite restaurant changed the ink tape in the credit card machine. You can also snap up multiple receipts together to further save precious time. The app keeps track so I can review and add notes before I publish the information to Accounting.

Single-user accounts start at $14.99 per month for 50 items processed, and multi-user options start at $25 per month for 50 items processed. And with their Fair Usage Policy, Receipt Bank will honor a three-month average before asking you to consider changing your plan.

If you are tired of paying for an employee’s time to review and key receipts into your bookkeeping system, give Receipt Bank a try via their 14-day free trial.

TECHNOLOGY

“Chase the vision, not the money, the money will end up following you. — Tony Hsieh” is the type of motivation you can put on point to inspire your day.

Secret Entourage blends the wake alarm with inspiring or motivational quotes to kick your business-ready self into gear. Secret Entourage is a company that specifically supports entrepreneurship and leadership endeavors for its clients. Their alarm application (currently only iOS 7.0 or later compatible) is a “free” or pay-for resource depending on the level of service and frequency that you need to be motivated. For a $5.99 one-time fee, unlock all of the features, including multiple alarms and wallpaper options, to hit you up with a burst of motivation and get you from your morning status meeting to your afternoon Frappuccino.

Some mornings I just want to stay in bed. I miss my bed before my feet hit the floor. My bed is comfortable and it always treats me with the respect I deserve. Motivation is key on such mornings to advance myself to the coffeemaker. Now, we cannot all awake to the soothing sounds of a symphony, like Eddie Murphy in Coming to America, or a lively fiesta-infused mariachi band as we all are wont, but we can awake to motivating thoughts and quotes from business leaders we may or may not recognize.

CHEAP TECHNOLOGY PRACTICAL TOOL #1: Receipt Bank (www.Receipt-Bank.com)

#1

CHEAP TECHNOLOGY PRACTICAL TOOL #2: Daily Motivational Quotes Alarm Clock (www.secretentourage.com)

#2

WORK SMARTER BY LEVERAGING CHEAP TECHNOLOGY


Yannis Koumantaros, CPC, QPA, QKA, is a share-holder with Spectrum Pension Consultants, Inc. in Tacoma, WA. He is married and procreating — ladies, I know this is a heart-breaking reality. He is a frequent speaker at national conferences, and is

the editor of the blog and newsroom at www.SpectrumPen-sion.com.

JJ McKinney, CPC, QPA, QKA, ERPA, is a shareholder with Retirement Strategies, Inc. in Au-gusta, GA. He is a husband of one, father of nine, thinks email is a terrible way to communicate, is a frequent speaker, a compulsive editor, and loves to

Pension Geek-Out at www.rsi401k.com.

Every year, we typically feature some Microsoft products on the Office 365 chassis because the engineers at Microsoft have finally caught up with the rest of the development world with respect to productivity and workplace collaboration. Meet Microsoft Teams, the new chat-based workspace in Office 365. This tool is a game-changer and comes free with Office 365. The best part about it is the seamless integration with other fantastic

CHEAP TECHNOLOGY PRACTICAL TOOL #3: Microsoft Teams (https://products.office.com/en-US/microsoft-teams/group-chat-software)

#3 Office 365 productivity tools like Skype for Business, Outlook, OneNote, SharePoint and PowerBI.

If you start using Microsoft Teams, three things will happen in your business: (1) internal emails will decrease significantly; (2) remote staff will feel more connected to the day-to-day; and (3) clients will receive faster answers and better service.

At first, I will admit I was skeptical, but after using this tool for a couple of months, I am an even bigger Microsoft believer. Now you can see content and chat history, post emails into threads to keep teams aware, schedule meetings, link content, and create a hub for today’s teamwork!

CHEAP TECHNOLOGY PRACTICAL TOOL #4: Microsoft Flow (https://flow.microsoft.com/en-us/)

#4Microsoft Flow has saved me at least 10 hours per

week. The tagline “Work less, do more” is so true because Microsoft has again created a free tool with Office 365 that creates automated workflows between your favorite Microsoft and non-Microsoft apps to get notifications, save files, synchronize, collect data and more.

This free tool makes all of us office junkies appear to be sophisticated engineers. In the old days, you had to learn to write code. But in the new days, you just visualize the algorithm (think if/then statement) and viola, code is written for you in the background. Microsoft has even created templates and crowd-surfed the most common workflows.

My favorite? Save any email attachment to a Microsoft OneDrive folder I have specified. Rather than right-clicking “save” then finding the right folder, a robot does it for me and all I have to do is look at the folder every day and delete the stupid attachments (such as all you people who “attach” photos of your logo to your email signature)! Never again miss an email with an attachment, and tons of other workflows too to help you trick your boss into thinking you actually work 80-hour weeks!

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The current environment has proven to be very challenging for service providers and the plan sponsors with whom they work.”

ASPPA/ARA GAC Submits Two Comment Letters to the DOL

The ASPPA/ARA Government Affairs Committee continues to represent the interests of

our members in Washington, DC. Following is a summary of two comment letters that were recently filed with the Department of Labor.

BEST INTEREST CONTRACT EXEMPTION

Obviously, one of the big regulatory projects currently underway is the review being conducted by the DOL with regard to the fiduciary regulation (and related exemptions). To recap, the regulation became applicable on June 9, 2017, along with the Best Interest Contract Exemption (BICE) (and other related exemptions). Until Jan. 1, 2018, however, a transitional rule under the BICE only requires compliance with the exemption’s “Impartial Conduct Standards.” The DOL issued a Request for Information (RFI) on July 6, 2017, seeking comment on whether the BICE transitional relief should be extended beyond Jan. 1, 2018, as well as on other matters related to the regulation and associated exemptions.

ASPPA/ARA GAC filed a comment letter on July 18, 2017, recommending that the transitional relief under the BICE be extended until a date that is at least 6 months

after the date on which the DOL makes effective any changes to the regulation or exemptions. An extension such as this would avoid the potential burden of fluctuating compliance standards and pose minimal risk to the interests of retirement investors.

The GAC letter also recommended that the DOL adopt a new “levelized fee” class exemption that would be available alongside the BICE. The “levelized fee” exemption would have four core

components. First and foremost, compliance with the same “Impartial Conduct Standards” that apply under the BICE.

Second, any fee received by the fiduciary must be “level,” but unlike the BICE, level fee status can be achieved through offsets, rebates and similar structures.

Third, the compensation that is expected to be received must be disclosed in advance. For this purpose, the disclosures made to satisfy ERISA §408(b)(2) would suffice. (For non-ERISA arrangements, disclosures patterned after the 408(b)(2) disclosures would be required.)

Lastly, special rules would recognize that investments which are not subject to a fee would be exempt from having to have a fee that is level with other investment alternatives. Examples of these types of investments would include self-directed brokerage accounts, cash, money market funds and company stock investments.

ASPPA/ARA GAC is hopeful that the DOL will look favorably upon the comments we made in our letter. It is likely we will know fairly quickly if the transitional relief under the BIC exemption will be extended beyond Jan. 1, 2018. The decision on whether to offer an alternative prohibited transaction

GAC UpdateBY CRAIG P. HOFFMAN

Recent comment letters addressed the BICE and ERISA §408(b)(2) issues. Here’s a summary of them.


exemption is likely to take much longer.

ERISA §408(B)(2)A somewhat related issue was

the subject of a comment letter filed with the DOL on June 22, 2017. That letter addressed concerns that have been raised with regard to compliance with ERISA §408(b)(2) in conjunction with the fiduciary regulation becoming applicable on June 9, 2017.

ERISA §408(b)(2) requires covered service providers to make certain disclosures to responsible plan fiduciaries in order to avoid engaging in a prohibited transaction. Under DOL regulations, an initial disclosure must be provided to the responsible plan fiduciary “…reasonably in advance of the date the contract or arrangement is entered into.” If, after the initial disclosure, there is a change in the information, a covered service provider must update the disclosure in a timely fashion. In most cases, the new information must be provided to the responsible plan fiduciary “…as soon as practicable but not later than 60 days from the date on which the covered service provider is informed of such change unless such disclosure is precluded due to circumstances beyond the covered service provider’s control, in which case the information must be disclosed as soon as practicable.” (See ERISA Reg. §2550.408b-2(c)(1)(v)(B).)

One of the items that must be disclosed in the 408(b)(2) notice relates to whether the covered service provider will provide, or reasonably expects to provide, services as an investment advice fiduciary. Needless to say, as a result of the fiduciary regulation becoming applicable on June 9, 2017, many service providers are now facing the question of whether their activities will make them fiduciaries. If so, when is the updated 408(b)(2) notice due?

ASPPA/ARA GAC’s comment

letter made note of the fact that the current environment has proven to be very challenging for service providers and the plan sponsors with whom they work. For many, it is unclear whether their status as a fiduciary will be permanent or short-lived because of the ongoing DOL review. Similarly, there is uncertainty as to what exemptive relief may be available given the reexamination of the BICE and the potential for one or more new “streamlined” exemptions.

As a result, the GAC comment letter recommended that DOL issue interpretative, sub-regulatory guidance recognizing that the Department’s ongoing review of the fiduciary regulation, the associated uncertainty as to the outcome of that review and the potential for plan sponsors to be confused are extraordinary circumstances beyond the control of covered service providers. The letter urged

that the Department characterize these extraordinary circumstance as sufficient to preclude the immediate distribution of an updated 408(b)(2) notice. Instead, the updated notice should be given “as soon as practicable.” ASPPA/ARA GAC urged the Department to provide a safe harbor under which the updated 408(b)(2) notice would be considered timely if given no later than March 31, 2018.

Another important recommendation in the ASPPA/ARA GAC letter related to the ability to correct errors or omissions in an updated to a 408(b)(2) notice. Generally, an erroneous notice or a notice with an omission can be corrected up to 30 days after the covered service provider becomes aware of the error (provided the service provider had otherwise acted in good faith and with reasonable due diligence). The final 408(b)(2) regulations clarified that this corrective option applies to both the initial 408(b)(2) notice as well as to any required updates to the notice. What is not entirely clear is whether the complete failure to provide an updated notice could be viewed as an “omission” eligible for correction under the regulatory provision. The ASPPA/ARA GAC comment letter recommended that clarifying guidance allow for correction in these circumstances noting that in all cases, the service provider must be acting in good faith and with reasonable due diligence to use the correction procedure.

ARA GAC continues to enjoy good relations with the regulators in Washington. The dialogue is ongoing on many topics of importance to our membership.

Craig P. Hoffman, APM, is General Counsel for the American Retirement Association.

There is uncertainty as to what exemptive relief may be available given the reexamination of the BICE and the potential for one or more new ‘streamlined’ exemptions.”

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