The New Challenges of Operating a Retirement Plan

Enterprise Iron Financial Industry Solutions, Inc.

Operating a retirement plan in 2021 is a complex and time-consuming endeavor. Effective administration of the plan requires experience and expertise in numerous disciplines including accounting, finance, operations, compliance, and investment performance, among others. Enterprise Iron helps our clients navigate these complexities with a high degree of competency and expertise.

Our comprehensive Fiduciary Assessments are led by our Accredited Investment Fiduciary (AIF) and Analyst (AIFA) employees who leverage the prudent practices espoused by Fi360 and CEFEX.

As the year 2020 faded into the sunset and 2021 dawned, many Recordkeepers, Retirement Plan Consultants, and leading industry publications released numerous articles jammed with information advising employers about all the tasks, participant notices, and regulatory reports that sponsors of 401(k) plans must complete, file, or provide to be compliant with IRS and DOL rules.

Depending on which firm published the article and the point of view of the author, the actual number of discrete tasks that the average 401(k) plan must complete for each plan year varied from 22-55 regulatory tasks. As every plan is unique, the actual number of tasks depends on the specific characteristics of that plan. To complete these tasks, extensive data and information need to be obtained from Recordkeepers, Custodians, TPAs, and Internal Systems and then shared with Regulators, Participants, Trustees, and Service Providers such as accountants and attorneys. Surprised? The intricacies of administering a retirement plan have increased significantly over the past ten years.

Peter Lohri

In 2020 alone, three specific pieces of legislation added even more complexity:

1. The SECURE Act changed the rules regarding the start date to take RMDs to age 72. The Act also changed the rules for the distribution of Inherited IRAs.

2. The CARES Act was crafted to provide relief during the COVID-19 pandemic, waived most RMDs for 2020, and increased the limit on 401(k) loans to $100,000. It also created a new coronavirus-related distribution, The COVID Related Distribution Exception (CRD), which allows families to take a total distribution of up to $100,000 from their individual 401(k), 403(b) or IRA plans if the participant or their spouse was affected by the virus. For any eligible individual, the standard 10% early withdrawal penalty for any distribution before age 59 ½ was waived. In addition, CRD allows any taxes on the distribution to be paid over three years or avoided completely if the distribution is repaid within three years. If the distribution is repaid, it will be treated as a 2020 rollover and no tax will be due.

3. The last piece of legislation was COVIDTRA. This innovative new law created a permanent Qualified Disaster Distribution that enabled any qualified plan participant to take a distribution of up to $100,000 per qualified disaster for anyone adversely impacted by a qualified disaster such as a flood, hurricane, etc. This new exception also stated that in addition to avoiding the early withdrawal penalty and a three-year repayment period, any distribution cover under this provision would not be subject to 20% mandatory withholding.

The new year will bring even more changes. Major changes include the launch of Pooled Employer Plans (PEPs), changes to MEPs and a new requirement to track the work hours of part-time employees over three years so that they can become eligible to participate in a retirement plan.

Multiple Service Providers

Today, an average 401(k) Plan Sponsor/Administrator is likely to work with multiple service providers to help manage and administer their plan. The most common partners are Investment Provider, Payroll Provider, Investment Advisor(s) Attorney, Recordkeeper Accountant, and TPA Educational Consultant.

Quite often one provider plays multiple roles, e.g., Investment Provider and Recordkeeper. Typically, each of these providers is an expert in the individual services they offer, but sadly there is usually little or no coordination among providers. This results in overmatched Plan Sponsors who are uncertain or unaware of their fiduciary responsibilities. While there are many service providers, there are even fewer partners.

I Am Now a Fiduciary?

The average employer establishes a retirement plan with the goal of providing retirement benefits for their employees and their beneficiaries. Few employers, especially small business owners who employ a large percentage of the U.S. workforce, understand that by establishing and managing a retirement plan, they become a fiduciary – or someone who is managing assets on behalf of another person in a position of trust. Serving as a fiduciary imposes yet another set of responsibilities and duties. While fiduciary responsibilities can be delegated to third-party experts the ultimate responsibility, typically in the form of oversight and monitoring, still rests with the employer.

The Newest Risk

Over the last decade, plaintiffs, class action lawyers, DOL auditors, and insurers have increased their focus on whether or not an employer is operating a plan in a prudent manner. Scores of lawsuits alleging imprudent behavior have been filed against name-brand Fortune 500 firms and prominent universities. In virtually every case, the ultimate settlement amounts were in the millions of dollars. The reason why these cases were lost is not arcane – they’re at the very heart of managing a retirement plan and are generally avoidable.

These plans were found to have:

  • Paid higher than market rates for recordkeeping services
  • Offered underperforming investment funds
  • Provided a more expensive mutual fund share class when a less expensive one was available
  • Failed to benchmark investment fees for similar size plans

Today, the number of ERISA class action lawsuits continues to skyrocket. The year 2020 saw over 200 cases filed, an 80% increase over the number of 2019 cases and two times the number of cases filed in 2018. In 2021, the number of cases is expected to increase even further. The ominous note here is that the number of cases filed against smaller plans – less than $100M in AUM and <1000 participants increased dramatically. That trend is all but certain to continue or escalate.

How to Respond to These New Challenges

The best response to any challenge is to assess the situation and understand what is working and what is not working. The next step is to address the areas that need attention with diligence and expertise.

Enterprise Iron has a deep history of delivering success to our clients and given the complex operating environment facing every retirement plan, we believe every Retirement Plan Sponsor needs a partner with comprehensive knowledge and understanding of the retirement plan industry to coordinate and synchronize activities across multiple service providers.

Our Team works with the Plan Sponsor, the named Plan Administrator(s), the Plan Trustee, and all other Service Providers to ensure that the Plan Sponsor understands and discharges their fiduciary obligation and operates in the best interest of the plan participants. Enterprise Iron delivers a comprehensive end-to-end Fiduciary Assessment of the plan administration led by our Accredited Investment Fiduciary (AIF) and Analyst (AIFA) certified employees who leverage the prudent practices espoused by Fi360 and CEFEX.

Our goal is a properly managed retirement plan that:

  • Costs less to operate
  • Reduces fiduciary risk
  • Provides better retirement outcomes to participants

We are ready to be your go-to partner that provides the guidance and expertise you need to succeed!