The Secure Act: What Plan Sponsors Need to Know

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law in December 2019 and makes a number of changes that will affect plan sponsors. Many of these changes are effective immediately or within the next year. Here are some changes that plan sponsors need to know. We have attempted to keep this summary as brief as possible, so if you would like any more detail, please contact our team of Employee Benefit Plan experts here.


Reporting Penalties Related to Form 5500 Will Increase Under the New Tax Code

Applies to: All Plans

The previous IRS penalty for failing to file a required Form 5500 was $25 per day. Under the new tax code, this penalty increases to $250 per day, capped at $150,000 per year. Failure to file Form SSA adds a civil penalty of $10 per day per failure, capped at $50,000 per year. Failure to notify the IRS regarding important plan changes such as plan name or name or address of plan administrator comes with a penalty of $10 per day, capped at $10,000 per failure. Plan sponsors should review their reporting procedures in light of these increased penalties. These penalties will apply to tax returns due after December 31, 2019.


Minimum Required Distribution Age Increases to 72

Applies to: Qualified Plans, including 401(k) and 403(b) Plans

The current age at which retirees must begin drawing on their plan savings is currently 70 ½ . Under the SECURE Act, the new required age will be 72 starting in 2020. For participants who reached age 70 ½ in 2019, plans will still begin distributions by April 1 of 2020, and continue distributions for any participants who reached the required age in a previous year.


New Rules for Part-Time Employees

Applies to: 401(k) Plans Only

For plan years beginning after December 31, 2020, employers will be required to allow employees who work at least 500 hours per year for the last three consecutive years to make elective deferrals. The previous limit was 1,000 hours during a minimum of one year of service. This change will not take in to account any 12-month periods beginning before January 1, 2021, so the earliest a plan sponsor would be required to allow these contributions will be 2024.


QACA Auto Deferral Limit Increases to 15%

Applies to: 401(k) Plans Only

For plan years beginning after December 31, 2019, the automatic enrollment maximum default rate will increase from 10% to 15%. We recommend that plan sponsors begin planning now how to accommodate this change.


Lifetime Income Estimate Disclosures

Applies to: Defined Contribution Plans, including 403(b) Plans

The SECURE Act will require defined contribution plans to provide annual estimates of monthly payments a participant would receive if a qualified joint and survivor annuity or a single life annuity were elected. The DOL is expected to publish a model disclosure, and the plan sponsor’s disclosure requirement will go in to effect 12 months after the DOL publication date.


In-Service Distributions for Childbirth and Adoption

Applies to: Defined Contribution Plans, including 403(b) Plans

Defined Contribution plan sponsors may now amend their plans to allow for distributions of up to $5,000 upon the birth or adoption of a child. Distributions may be made after December 31, 2019 and must be made within one year of the birth or finalization of adoption.


IRS to Issue Guidance on 403(b) Plans

Applies to: 403(b) Plans Only

The SECURE Act has directed the IRS to issue guidance on the termination of 403(b) plans, allowing for distribution of assets in custodial accounts upon plan termination. The act also clarifies that retirement income accounts can cover certain employees of churches or church-controlled organizations.


Additional changes related to the SECURE Act include:

  • Rule Changes for Post-Death Distributions
  • In-Service Pension Distributions Permitted as Early as 59½
  • Nonelective Contribution Safe Harbor Plans Will Have Increased Flexibility
  • Access to Plan Loans Through a Credit Card Is Now Prohibited
  • Portability of Lifetime Income Annuities That Are Removed as Investment Options
  • Consolidated Form 5500 for Unrelated Employer Plans
  • Simplified Reporting Permitted for Small Multiple-Employer Plans
  • “One Bad Apple” Rule Eliminated for Multiple-Employer Plans
  • New Type of Multiple-Employer Plan: Pooled Employer Plan
  • Frozen Defined Benefit Plans Receive Automatic Nondiscrimination Relief
  • “Cadillac Tax” Repealed (Health & Welfare Plans)
  • “Health Insurance Tax” or “HIT” Repealed (Health & Welfare Plans)


If you are interested in more detail or have any questions about these changes, please contact our Employee Benefit Plan team here.

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What are you forgetting?

Reviewing commonly overlooked fiduciary duties

Although retirement plan fiduciaries take their jobs seriously, it can be hard to cover all the bases. That’s understandable, considering the broad scope of fiduciary responsibility as well as the dynamic nature of the retirement plan designs, investment management and legal interpretations of fiduciary duty. Some common pitfalls include failing to identify the plan’s fiduciaries, insufficiently training fiduciaries and spending too much time on inappropriate investments.

Don't forget!

Knowing your fiduciaries

Do you know the identities of all your plan fiduciaries? Fiduciaries should know who else carries the responsibilities. Having fiduciary status — and the liability associated with the role — is a powerful motivator to pay careful attention to the management of the retirement plan. However, the scope of your fiduciary duty varies according to the role taken. Let’s take a closer look at the types of plan fiduciaries:

Named fiduciaries. ERISA requires the existence of named fiduciaries. The plan document identifies the corporate entity or individual serving as the named fiduciary. If they aren’t immediately identified, the plan document will set the requirements for naming them. The named fiduciary can designate and give instructions to plan trustees.

Plan trustees. These are people who have exclusive authority and discretion to manage and control the plan assets. The trustee can be subject to the direction of a named fiduciary. These plan fiduciaries have a broad scope of responsibility.

Board of directors and committee members. ERISA considers individuals — typically the corporate board of directors, who choose plan trustees and administrative committee members — fiduciaries. The scope of their fiduciary duty focuses on how they fulfill that specific function, and not on everything that happens with the plan itself. The law also sees as fiduciaries people who exercise discretion in key decisions about plan administration, including members of an administrative committee, if such a committee exists.

Investment advisors. The named fiduciary can appoint one or more investment managers for the plan’s assets. People or firms who manage plan assets are plan fiduciaries. However, individuals employed by third party service providers can fall into different fiduciary categories. The investment manager who has complete discretion over plan asset investments (known as an ERISA 3(38) fiduciary) has the greatest fiduciary responsibility.

In contrast, a corporation or individual who offers investment advice, but doesn’t actually call the shots (an ERISA 3(21) fiduciary), has a lesser fiduciary responsibility. The advice can be about investments or the selection of the investment manager.

Service providers. If you use service providers, be sure the service agreement clearly specifies when a service provider is acting in a fiduciary capacity.

Anyone who exercises discretionary authority over any vital facet of plan operations falls under a catch-all category of a “functional fiduciary.”

Training your fiduciaries

Given the crucial role fiduciaries play, they must be properly trained for the role. This is a step that’s often neglected and can be of particular concern for company employees who don’t have full-time jobs related to running the plan.

Failing to properly train fiduciaries to carry out their roles may represent a fiduciary breach on the part of the other fiduciaries responsible for selecting them. The U.S. Department of Labor is known to focus on this when it reviews a plan’s operations. Also, have named fiduciaries (such as individually named trustees or members of plan committees) accept in writing their role as a fiduciary.

Providing proper insurance

A sometimes overlooked task includes properly protecting your plan’s fiduciaries against costly litigation and penalties with insurance designed for this purpose. Companies generally cover fiduciaries who also serve as corporate directors or officers through directors and officers or employment practices insurance policies. These generally don’t extend to fiduciary breaches.

And remember, ERISA fidelity bonds protect the plan’s assets from theft or fraud, not from fiduciary breaches. ERISA requires a fidelity bond, but not fiduciary liability insurance. However, given that anyone who is a fiduciary is personally liable for any violation of their fiduciary duties, you should have fiduciary liability coverage, often called an ERISA rider.

Focusing on the wrong investments

Stock market volatility and speculation about changes in Federal Reserve policies (and their resulting financial market impact) can lead plan fiduciaries to rely on retirement fund investment alternatives that focus on narrow sectors and strategies. This can divert fiduciaries’ attention from the investment options where most of their participants are parking the majority of their retirement savings: stable value and target date funds (TDFs).

Neglecting the big picture

Ultimately, retirement plans should prepare employees for retirement. How well that’s accomplished is often referred to as participant “outcomes.” Fiduciaries with broad responsibility for plans that ignore the big picture ultimately are failing participants, and possibly making themselves vulnerable to a charge of neglecting their fiduciary duties. Reviewing the common mistakes regularly can help you avoid making them.

Should you have any questions regarding the information contained in the attached materials or our service offerings, please feel free to contact me directly.

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Seven Prominent Universities Sued Over 403(b) Plan Fees

The 403(b) community has become the target of retirement plan fee litigation. Lawsuits have been filed against Duke, Johns Hopkins, MIT, NYU, UPenn, Vanderbilt, and Yale on behalf of plan participants. The complaints allege that the plan sponsors failed to monitor excessive fees, did not replace expensive, poor-performing funds with cheaper ones, and generally failed to provide appropriate fiduciary oversight in the administration of their retirement plans. These complaints allege that these failures cost tens of millions of dollars in retirement funds. While 401(k) plan sponsors are more than familiar with these types of claims, this is the first time that nonprofit organizations have been targeted. Read more about the recent lawsuits here and here.

Prestigious Colleges and Universities Sued over Retirement Plan Fees

Are the services your plan receives reasonably priced? Knowing the answer is a vital fiduciary duty. ERISA expects more from plan fiduciaries than simply shopping around for plan providers offering rock bottom rates. Rather, the question turns on whether fees are reasonable in light of services provided. So, in addition to knowing how much the plan is paying, you must determine whether the level of service rendered is appropriate. As a plan sponsor, you should: (more…)

New Standards Update Simplifies Benefit Plan Disclosures

As part of its Simplification Initiative, the Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2015-12 to reduce complexity in employee benefit plan accounting. We view this as a welcome change, as it eliminates certain disclosure elements not viewed as useful and reduces the cost and complexity of financial reporting. Here is a brief overview of some of the most significant changes:

  • Fully benefit-responsive investment contracts should now be reported at contract value and no adjustment from fair value to contract value is necessary. Previously, these investments were required to be reported at fair value with an adjustment from fair value to contract value. In addition, certain disclosures (such as those related to average yield) are no longer required.
  • Plans are no longer required to disclose investments that represent 5% or more of total net assets.
  • Plans are no longer required to disclose the net appreciation or depreciation in the investments of the plan by type of investment. The net appreciation or depreciation in investments still is required to be presented in the aggregate on the Statement of Changes in Net Assets Available for Benefits.
  • Plans are not required to break out Level 1 and Level 2 investments by strategy or asset allocation (i.e. large cap, international, fixed income, etc.). Plans are now only required to show these in total at the asset type-level (i.e. mutual funds, common collective trusts, pooled separate accounts).
  • Self-directed brokerage accounts should now be reported as a single line item in the fair value hierarchy table instead of the underlying investments being disaggregated by general type.

This update is effective for all employee benefit plans with fiscal years beginning after December 15, 2015. Earlier application is permitted.

For additional information on the specifics of this ASU, contact your client service partner here at Insero & Co., or contact us at (585) 454-6996 or