the dana report
May 2019 Issue
A publication of Dana Consulting Group, Ltd. 
In This Issue
Dana Consulting Group, Ltd. and Jennings Law Firm, Ltd. were established to provide employers with a single source of comprehensive legal and consulting services relating to retirement plan and employee benefit matters.

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The IRS has updated its retirement plan corrections program (called EPCRS) that significantly expands the errors that can be corrected without filing with the IRS or paying a filing fee.  High on the list of errors that can now be self-corrected are retirement plan loans that have gone bad.   For example, a participant takes a loan and his employer's payroll dept fails to start withholding loan payments.  The IRS now permits that loan to be fixed without filing with the IRS or paying a penalty. 
Our Comment:  Errors occur and the IRS is making it easier to correct them.  That said, if you do not correct an error and the IRS discovers it on audit, it gets very expensive at that point to correct.  We strongly urge plan sponsors and their advisors to review their plans to see if there are any potential errors that should be corrected now.
Readers of the dana report know we have been tracking the Illinois Secure Choice Savings Program since the underlying law was passed in 2015   Illinois finally rolled out the program after years of delays and employers who are subject to this law may voluntarily enroll their employees before November 2019.  Beginning in November, their website says enrollment is mandatory with penalties being assessed for non-compliance. 
California is rolling out their own state-run retirement program for private businesses and by 2022, any employer with less than five employees must enroll in their program.
Illinois claims that all fees charged to participants will not exceed 75 bps but nobody at the Illinois Treasurer's Office or Ascensus (the company running the program for the state) can say what happens if the actual costs exceed the 75 bps. 
We have expressed our view that these state-run programs are unlikely to make participating employees much in earnings.  The Illinois public pension system competes with New Jersey for the worse run, and most underfunded, state public pension system in the US.  One of our questions has been why would Illinois want to get into the private pension system when it cannot run its own prudently.  In any event, November is going to be here quickly enough and employers who are going to be forced to enroll their employees in the program (or face penalties) should consider setting up a REAL retirement plan like a 401(k) plan. 
If you would like additional information on the Illinois Secure Choice program or how to set up a real retirement plan, you should give Lee T. Jennings in our office a call (630) 802-7644
Nobel laureate Richard Thaler (he won the 2017 prize for his work in behavioral economics) wants to permit Americans to transfer part of their 401(k) account balances to Social Security to "purchase" higher SS benefits.  Allowing retirees to send  money to SS would deliver an inflation-adjusted annuity, guaranteed by the federal government at "a fair actuarial adjustment" over retiree's lifetime. He says (and these are his words) this is preferable to having a "fly-by-night insurance company in Mississippi" paying these retirees.  He believes the SS Administration (ie, the federal government) is better equipped to handle any (again his words) "calamitous increase in life expectancy."  He acknowledges this is a "pet idea" and may be viewed by some as a "wild and crazy idea."
Our Comment:  The trustees of the Social Security trust fund have been saying for years that they will run out of money unless Congress takes action to more align contributions with benefits.  So far Congress has refused to even consider that topic.  So handing over more money to SS does not seem like a great idea to us.  But, of course, we have never won a Nobel prize.


In February, a class action lawsuit complaint was filed by a participant in the T-Mobile 401(k) plan against Fidelity Investments for self-dealing and breach of fiduciary duty.  Our purpose here is not to review the merits of the lawsuit but to discuss what is driving this.
Investment companies serving the retirement plan industry have been seeing significant reduction in fees earned from retirement plans (called fee compression).  Fee compression has become such a significant problem that service providers have become more and more aggressive in looking for new revenue sources.  Just one example is that Fidelity announced they intend to charge for using Vanguard funds on their 401(k) platform. 
These service providers go to extraordinary lengths to distance themselves from any fiduciary duty to their customers' plans.  Fiduciary status imposes higher standards of duty, which they don't want.  Service providers want to be able to deal with their customers with a primary goal of benefitting themselves.

This is perhaps an unintended consequence of fee compression.  Everybody wants to buy a Cadillac but pay for a Yugo.  We cannot tell you how many times we are invited to submit a service and fee proposal so that we can be "spread-sheeted."  Our firm "sells Cadillacs" and refuse to price them as Yugos.  One of our long-time clients just acquired a company and inherited their 401(k) plan that is sponsored through their payroll company (one of the big ones).  Our client told us the monthly fees to the payroll company exceeded employee 401(k) contributions.  You can be sure that payroll company is not holding themselves out as a fiduciary.
Locating missing participants is an ongoing challenge for retirement plans, particularly when they are looking to be terminated.  IRS guidelines consider a retirement plan terminated only after all assets are paid out.  This is also, however, an issue with the US Labor Dept. 
A recent article from Groom Law Group raises some interesting points for plan fiduciaries and their advisors to consider.  First, it matters to the Labor Dept what actions the plan took to identify and locate missing participants.  For example, terminated participants have a right to leave their money in the plan if their vested account balance exceeds certain dollar thresholds.  So an employee who terminates and likes the funds in the plan (and the lower fees being charged over an IRA option) may very well elect to leave the money in the plan.   That participant is not missing just because he/she terminated and left their money in the plan.  Secondly, terminated participants generally fall into two categories:  (1) those to whom the plan sends a communication that is returned as undeliverable and (2) those to whom the plan sends a communication that requires an affirmative response or action by the participant, and the participant fails to respond.  In the latter case, just because the participant fails to respond does not mean he/she is missing.
ERISA does not expressly impose a duty to plan fiduciaries to track down missing participants.  That said, the Labor Dept has issued guidance (Field Assistance Bulletin 2014-01) imposing that duty.  More importantly, the FAB addresses how to deal with missing participants when the plan is terminating. 
What has created "a problem," per the Groom article, is that the Labor Dept has objected to various procedures plans have adopted to deal with missing participants.  One major area relates to defined benefit plans (including cash balance plans and money purchase plans).  Normally benefits under these plans are to commence at normal retirement age, although the IRS permits commencement to be deferred to the participant's RMD date.  The Labor Dept seems to question the validity of this deferment unless the participant requests it.  Another practice (which we see less and less of anymore) is to transfer a participant's account in a 401(k) plan to the forfeiture account and disposed of there.  If the lost participant turns up, the participant is entitled to the payout, generally not adjusted for earnings.  The Labor Dept is now objecting to that apparently.
Our Comment:  In Labor Dept audits we have represented plans in, we have seen the agents becoming more and more aggressive in objecting to what the plan is doing.  Plan fiduciaries need to carefully document their practices for dealing with missing participants.  While this documentation does not automatically insulate the fiduciaries, it does document a process for considering and resolving missing participants.