Final regulations on automatic enrollment and default investment
alternatives are expected to be released in April, Labor Department
official Erin M. Sweeney said March 21 at a BNA sponsored
conference.
Panelists also discussed other defined contribution plan issues,
such as employer stock fund investments and distribution options. W.
Thomas Reeder, benefits tax counsel in the Treasury Department's
Office of Tax Policy also discussed legislative changes affecting
nonspouse distributions, phased retirement, and normal early
retirement age.
Automatic Enrollment.
The Pension Protection Act in Section 624(a) added a new Section
404(c)(5) to the Employee Retirement Income Security Act providing
that a fiduciary would not be liable for any loss as a result of
automatically investing a participant's account in a qualified default
investment alternative (QDIA) provided certain conditions are met.
Sweeney, a senior benefits law specialist at the Employee Benefits
Security Administration, said the final regulation on automatic
enrollment would take into account many of the comments received in
response to proposed regulation 29 C.F.R. Section 2550.404c-5.
Sweeney said the Labor Department received comments centered on two
major notice issues. First, she said, employers were concerned with
the “drop in paycheck” issue. The proposed regulation
requires that a participant be provided at least 30 days in advance
with notice that investments will be made in a QDIA. This means when
employees begin a new job, their first three or four paychecks are
higher, and then drop when they become enrolled in the plan. As a
result, employees often ask to be taken out of the plan, she said.
Many employers commented they want immediate enrollment so
contributions are withdrawn from the first paycheck, which makes
employees less likely to question them, Sweeney said.
The second issue is whether employers should make the automatic
enrollment notice separate so it does not get buried in other plan
documents, she added.
Another issue that received many comments was the transfer
provision, which says that any participant invested in a QDIA may
transfer assets to another investment alternative without financial
penalty. Sweeney said commenters asked for clarification on this
issue, commenting that some fees, such as redemption or liquidation
fees are inherent to the investments themselves, and that it would be
unfair not to require participants to pay these fees. Commenters also
said it would be hard to contract with plan providers if fees were
outside the employers' control.
The definition of a QDIA also was addressed by commenters, Sweeney
said. A QDIA must be managed by an investment manager as defined by
ERISA Section 3(38), or be a registered investment company. Commenters
asked whether a plan sponsor or fiduciary would be allowed to be an
investment manager if they set up an asset allocation model or engaged
a consultant to do so. In addition, commentators questioned whether
bank trustees would be included as investment managers, she said.
Sweeney said she was expressing her personal opinion and not
necessarily the opinion of her agency.
Helen Morrison of Treasury Department's Office of Benefits Tax
Counsel said Treasury has not yet begun the final regulations for
automatic enrollment, which are to have an effective date of Jan. 1,
2008.
Employer Stock Funds.
In November 2006, IRS released in Notice 2006-107 transitional
guidance and model language for notices of diversification rights to
participants in defined contribution plans with publicly traded
employer securities. It also advised that regulations, forthcoming
under new tax code Section 401(a)(35), would incorporate the
transitional relief detailed in the notice (229 PBD, 12/1/06; 33 BPR
2809, 12/5/06).
Reeder said the Treasury Department was seeking comments on the
model notice but that proposed regulations have not yet been
started.
Reeder said the most common issue raised by commenters regarding
employer stock funds concerned restrictions or conditions on
divestiture rules (ROC rules). For example, he said commenters asked
whether employers could restrict day trading on employer stock but not
for other investment options.
Nonspouse Distributions.
In discussing Section 829 of the PPA that allows rollovers by
nonspouse beneficiaries of certain retirement plan distributions,
Reeder pointed out that the statute did not give nonspouses the same
rights as spouses. But he did say that before the PPA, the spouse of a
deceased plan participant could rollover money from the participant's
plan into the spouse's own individual retirement account, which a
nonspouse beneficiary could not do, he said.
Now, under the PPA, although rollovers into nonspouse beneficiary
IRAs are permitted, such rollover IRAs must be in the name of the
decedent for the benefit of the beneficiary. Those types of IRAs
already existed for situations where the beneficiary inherited money
from another IRA. Now, under the PPA, they exist on rollovers from
qualified plans, he said.
The rule in Notice 2007-7 (7 PBD, 1/11/07; 34 BPR 105, 1/16/07) on
the PPA provision does not allow a rollover of the required minimum
distribution that is due during the year of death, Reeder said. He
advised that the rule did not give beneficiaries more rights than they
would have had under the plan--if they had been able to leave the
inherited money in the plan--except under one condition: if they take
the money out in either the year of death or the year following
death.
Under that condition, he said, they could put the money in a
rollover IRA and switch from the five year method of required minimum
distribution, which is based on when the participant died, to
“stretch” the payments over their own life expectancy,
which officials believe was the intent of
Congress.
Rollover Notices.
PPA Section 1102 provides for modification of the qualified joint
and survivor notice and the notice under tax code Section 402(f) for
recipients of rollover distributions, which advise affected
individuals on the consequences of removing money from a plan when the
employee is leaving a plan-sponsoring employer. Treasury officials are
working on a new Section 402(f) model notice, which Reeder said was
“in dire need of an overhaul.” He encouraged anyone who
has designed an effective Section 402(f) notice--that is not the
current model--to consider sharing it with IRS and Treasury.
A safe harbor to the notice requirement has generated a “hot
button” discussion about the amount of disclosure required on
how plan fees would be affected depending on whether the participant
leaves the money in the plan or takes it out, Reeder said. A common
rule of thumb that he suggested for sponsors to consider is,
“What would you want your mother to know about the fees in the
plan?” He also advised that the notices, which participants
would use to form their decisions on whether to leave the money in the
plan, should include information that discloses to what extent and
whether the fees are subsidized by the
employer.
Phased Retirement, Normal Early Retirement Age.
Reeder said officials were preempted in their proposals related to
a system on phased retirement that could allow workers to begin
receiving proportional qualified plan distributions starting at age
591/2, which stirred controversy because it took into account
reductions in the level of work performed. Since then, Congress has
endorsed distributions made at age 62 irrespective of the shift in the
level of work performed. Officials will not proceed with the previous
pro rata proposal now, he said.
But Reeder said officials will continue with final guidance to
address the issue of early normal retirement age and are looking for
consistency in establishing a realistic age standard. He said
officials are considering whether individuals would be able to take an
early retirement subsidy at age 62 before they
retire.
Simplifying Annuities.
Henry C. Eickelberg, staff vice president of human capital
processes for General Dynamics Corporation, gave a presentation on the
challenges and opportunities of trying to offer annuity products to
Section 401(k) participants. He discussed the efforts of a group of
large companies that are pushing the insurance industry to offer
cost-effective and real annuity products that are available, with low
commission fees, to the general public. Information on the products
can be found at the Web site: www.elmannuity.com, he said.
By Andrea Ben-Yosef and Sheila R. Cherry
Further clarification on how rollover beneficiaries can take
advantage of the new PPA rule is at www.irs.gov/ep.