Ask an Expert - Plan Design
Ask Plan Design Expert By:
Todd Berghuis, J.D.
VP of ERISA Compliance
Ascensus
P.O. Box 979
Brainerd, MN 56401
Phone: (218) 825-5000
Fax: (218) 825-5011
Email: Todd.Berghuis@ascensus.com
Web: http:// www.ascensus.com
Todd Berghuis, J.D., as Vice President of ERISA Compliance, oversees all technical research and compliance activities for Ascensus. The ERISA Compliance Department monitors all legislation, regulatory pronouncements and industry developments affecting qualified retirement plans. The department also ensures these developments are reflected in the firm’s products and services, including their recordkeeping practice. The department serves as liaison to the Internal Revenue Service, Department of Labor and key congressional channels on qualified retirement plans. Additionally, Mr. Berghuis oversees the technical content of the qualified retirement plan documents, which have been adopted by over 400,000 employers, and IRA documents, which have been used to open approximately four million IRAs. His accomplished background makes him a highly regarded speaker at industry conferences and retirement plan programs for attorneys, financial organizations as well as trade associates.
Q: What type of due diligence questions should an employer who is looking for assistance with plan design ask potential consultants?
The sponsor's due diligence should not only be focused on the consultant's background and areas of expertise, but also on their sources of income, how they are compensated and existing vendor relationships. Identifying industry certifications, designations and how the consultant stays current with the latest regulatory influence on plan design as well as trends is also important. Regarding plan design, the sponsor should evaluate the types of plans the consultant works with, i.e., defined contribution, defined benefit, IRA-based, non-qualified, etc., as well as the type of plans the consultant does not work with or recommend. Identifying the percentage mix of each plan type in the advisor's book of business could also be helpful. In addition to ongoing plan design support and methodology, sponsors would be wise to identify the breadth of retirement plan services offered beyond plan level consulting, including special compliance testing, the review frequency of employer goals and employee demographics. As noted, plan level fiduciaries have a duty to understand how the consultant is compensated along with their existing relationships. The answers to these questions will help the sponsor ensure that their fiduciary obligations are met. Specific questions should include: Does the consultant work directly with or are they affiliated with any investment providers, TPA's or recordkeepers? If so, the consultant should describe the relationships, the compensation arrangements and policies/procedures used to prevent potential conflicts of interest. Plunging asset values and increased claims, litigation, regulations and legislation have raised the bar on fiduciaries. As a result, in addition to evaluating the consultant's background, potential conflicts and compensation, plan fiduciaries should be clear about the internal delegation of responsibilities, ensure that the proper procedures are in place and be aware of pertinent investment selection/monitoring issues. |
Q: What types of firms and plan sponsors find "the Roth" appealing as a plan design option?
With the significant growth experienced over the past year, it is apparent that "the Roth" has become a very attractive option for many plan sponsors. Recent studies indicate that approximately 40% of plan sponsors have, or are planning to add, a Roth feature to their plan. An educational campaign for plan participants that provides a comprehensive explanation of Roth benefits, including an analysis of pre-tax deferrals, is instrumental to successful implementation. The inability of high income individuals to use a Roth IRA has made this plan feature particularly attractive to professional services firms such as law firms, medical practices, accounting firms and consulting firms. Moreover, many plan sponsors are adding the feature to attract younger and qualified individuals to replace their retiring baby boomers. While this may be an attractive option for many plan participants, the Roth is not for everyone. Individuals who expect to be in a lower tax bracket at retirement may receive greater benefits by taking advantage of pre-tax deferrals today rather than receiving the tax-free distributions offered by the Roth in the future. |
Q: How versatile is automatic enrollment as a plan design feature?
Automatic enrollment is an extremely flexible plan design feature that can be customized to meet an employer’s requirements and goals. Some of the criteria determined by the employer include who will be automatically enrolled (newly hired vs. existing employees), what contribution rate will apply to the employees automatically enrolled, when and if the deferral will be automatically increased and how the contributions will be invested. The most commonly used default options appear to be age-based target-date retirement funds, risk-based asset allocation funds and managed accounts. A plan with an automatic enrollment feature could be designed to exempt the plan from certain testing requirements. It could also help satisfy ADP testing. The automatic enrollment feature has been especially popular with employers who want to increase their plans’ participation and savings rates. By utilizing the new guidelines for default investments, the employer would also receive fiduciary protection from participants who fail to designate their investment options. |
Q: What are the major trends in plan design today?
Legislation, regulation, litigation and benefit adequacy are driving plan design today. Trends that started a year ago are also intensifying. As a result of the PPA, automated retirement plan features are escalating, including auto-enrollment, auto-deferral and auto-rebalancing. The use of diversified default options has increased, pre-mixed target date type funds are now common and the use of non-mutual fund alternatives is escalating. More plans have implemented written investment policy statements and while plan level investment menus may be simplifying, more plans are offering brokerage options. On the other hand, the practice of investing matching contributions in company stock has declined. Communication, disclosure and the use of outside investment advisory services - including advice & managed accounts - has increased. Investment level due diligence, concern over fees and fiduciary oversight has also intensified. |
