401k Litigation Update
- Monday, 18 March 2019 10:59
In 2016 and 2017, 107 complaints were filed with the DOL about 401k plans. This is the most since 2008-2009 according to Retirement Study done at Boston College.
Some things are obvious- when markets fall, complaints tend to rise. These complains tend to fall with plans that were not being paid enough attention to typically, and resulted in “hundreds of millions of dollars in settlements…”
Further, the complaints are typically “obvious and preventable. What are the primary complaints:
- Neglecting to have and follow prudent fiduciary policies, procedures and practices.
- Failing to mitigate conflicts of interest
- Offering inappropriate investment choices
- Lacking required transparency
The time to adjust your behavior is before complaints and problems occur, of course. A common theme in the study is that as soon as lawsuits and investigations start, everyone starts getting educated on their fiduciary duties, but thats too late. Also note that these issues are not about investment advice, but about fiduciary processes, so if you have an investment adviser, thats just not enough!
Choosing Funds in your 401(k) Plan
- Sunday, 10 February 2019 07:42
A recent First Circuit Court of Appeals decision puts a special light on the fiduciary standards for selecting, monitoring and changing the investments in your 401k plan. It also supports our ongoing approach to this for our clients. For the full article, click here.
“Moreover, any fiduciary of a plan such as the Plan, in this case, can easily insulate itself by selecting well-established, low-fee and diversified market index funds. And any fiduciary that decides it can find funds that beat the market will be immune to liability unless a district court finds it imprudent in its method of selecting such funds, and finds that a loss occurred as a result. In short, these acts are not matters concerning which ERISA fiduciaries should cry ‘wolf.’”
New Hardship Rules…
- Friday, 21 December 2018 07:38
From Associated Pension Consultants:
On November 14, 2018, the IRS released the proposed regulations on hardship distributions. These proposed regulations provided us with insight into how the hardship distribution rules will be changing in 2019. These changes will impact 401(k) and 403(b) plans that offer hardship distributions.
- What are the main changes to the hardship distribution rules?
- Elimination of the 6 month suspension of deferrals when a participant takes a hardship distribution.
- Participant no longer has to take out a loan before applying for a hardship distribution effective 1/1/19.
- Ability to include earnings in the hardship distribution calculations for 401(k) plans, but not in 403(b) plans.
- Ability to include Safe Harbor Non Elective contributions, Safe Harbor Matching contributions, Qualified Automatic Contribution Arrangement (QACA), Qualified Non Elective Contribution (QNEC), Qualified Matching Contributions (QMACs) as available sources.
- Added “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be provided (regulations had previously referenced only a spouse or dependent).
- Added a new safe harbor expense reason of allowing participants impacted by losses to their principal residence to obtain a hardship if their residence happens to be in a federally declared disaster area.
- Hardship distributions on account of damage to the principal residence that would qualify for a casualty deduction would continue to be allowed and not restricted to a federally declared disaster area. This was clarified in the proposed regulations.
- The general standard for determining whether a hardship is necessary to satisfy a financial need has been simplified and this standard will apply effective 1/1/2020. The general standard is that:
- The hardship may not exceed amount of need, adjusted for anticipated taxes and penalties.
- The participant must have obtained all other available distributions under the plan.
- The participant must represent that he or she has insufficient cash or liquid assets to satisfy that financial need.
- The plan administrator may rely on this representation made by the participant.
- When does the 6 month suspension of deferrals go away?
The proposed regulation prohibits the use of the 6 month suspension of deferrals for hardship distributions occurring on or after January 1, 2020. However, in 2019 special rules apply.
- How should the 6 month suspension be handled on January 1, 2019?
The proposed regulations allow the plan sponsor to decide on any hardship distributions processed in the second half of 2018, as well as any hardships taken in 2019, whether they want to enforce the 6 month suspension.
APC recommends the following procedures to allow participants to continue to save for their retirement:
Hardship distributions processed in second half of 2018 – Should allow participants to restart deferrals on 1/1/19 and not continue the restriction until their 6 month suspension was originally set to end. This is also subject to the rules of the fund company.
New Hardship distributions processed in 2019 – Should not suspend deferrals of the participant for 6 months.
- When do the plan documents have to be amended for the new hardship changes taking into effect?
APC will notify you sometime in 2019 when we receive more guidance from the Internal Revenue Service (IRS) regarding the timeline of adopting the amendment to incorporate the new hardship provisions. Currently, we have no further information pertaining to the plan amendment. However, the IRS will allow plans to start using the more relaxed hardship provisions on 1/1/19 in “good faith” prior to the formal amendment.
- Does the plan have to allow additional sources for hardship distributions?
The plan sponsor does not have to allow additional sources such as Safe Harbor contributions, Qualified Automatic Contribution Arrangement (QACA), Qualified Non Elective Contribution (QNEC), Qualified Matching Contributions (QMACs) in the calculation of the hardship distribution.
2019 Retirement Plan Numbers released
- Sunday, 04 November 2018 06:28
The IRS on Thursday increased the pre-tax contribution limits for employees who participate in a 401(k), 403(b) and most 457 plans to $19,000 from $18,500. That limit also applies to the federal government’s Thrift Savings Plan.
For participants ages 50 and over, the additional catch-up contribution limit, which is set by law, will stay at $6,000.
Meanwhile, IRA contribution limits were raised to $6,000 from $5,500 — the first time the IRS has increased the limits since 2013. The catch-up contribution limit for people 50 and over will still be $1,000.
IRA contribution limits were raised to $6,000 from $5,500 — the first time the IRS has increased the limits since 2013. The catch-up contribution limit for people 50 and over will still be $1,000.
- 401(k) will be $19,000 (catch-up stays at $6,000)
- Maximum compensation is $280,000 (up $5,000)
- Defined Contribution limit is $56,000 (up $1,000)
- Highly Compensated Employee income designation is $125,000 (up for $5,000 for the first time in many years)
- Key Employee is $180,000 (up $5,000)
- IRA finally went up to $6,000 (first time in many years it raised and catch-up remains at $1,000)
- SEP remains at $600 for eligibility purposes (be careful, anybody that earns at least $600 in a year has that year count for eligibility)
- SIMPLE has raised to $13,000 (up $500 for the first time in many years and catch-up remains at $3,000)