Plan Sponsors Ask 2015

Q: What are some of the key points we need to keep in mind in handling forfeitures?

A: When a plan participant terminates employment, his or her unvested account balance becomes subject to forfeiture. These amounts arise when employer contributions to the participant's account are not 100% vested.

Most plans provide that forfeitures occur after five consecutive one-year breaks in service. Other plans provide for immediate forfeiture upon distribution of a participant's vested account balance. In any case, forfeiture provisions should be spelled out in the plan document.

Internal Revenue Service rules specify four ways in which forfeitures can be used. They can:

  • Reduce future employer contributions.
  • Pay reasonable plan expenses.
  • Be allocated among participants as additional contributions.
  • Restore previously forfeited participant accounts.

Handling forfeitures is a discretionary function under ERISA, so fiduciaries managing them must act in the best interests of participants and beneficiaries.

As far as timing, the Internal Revenue Code generally requires that forfeitures are to be distributed on an annual basis.

Correction activity, such as removing an erroneous employer contribution, and missing participants may provide challenges to plan sponsors with respect to forfeitures. Other issues may come up in a plan termination. Be sure that your plan document and administrative procedures are fully documented as to how forfeitures will be managed.

See http://tinyurl.com/VanguardForfeitures for a helpful overview of this topic.

Q: Can simplifying the enrollment process enhance the likelihood that employees will complete the enrollment process and save at a higher rate?

A: Recent research by Fidelity Investments indicates that an easy enrollment method can definitely increase enrollment and savings rates.

The researchers noted that a large number of employees don't complete the traditional enrollment process due to complicated forms and having to decide how much to save and how to invest. A wide range of financial literacy levels and numerous investment options contribute to this failure.

They tested both the standard enrollment method, in which the user chooses a savings rate and investment option, and an easy method, which provided a guided enrollment process offering three prepackaged options, each including a specific savings rate and a single investment choice.

The results of the experiment were that participants greatly preferred the simplified method over the standard enrollment process 78% to 22%. Also, the participants' average deferral rate was 8.3% under simple enrollment versus 6.5% in the traditional enrollment experience.

The researchers concluded that a guided, simplified enrollment approach may improve retirement saving outcomes and have a positive effect on participants' savings rates.

Details of this study are at http://tinyurl.com/FidelityEnrollment.

Q: Can you suggest an easy-to-understand overview of fiduciary responsibility that we can give to new members of our planís administrative committee?

A: J.P. Morgan Asset Management recently published a helpful guide for fiduciaries. A Plan Sponsor Fiduciary Guide: Understand Your Fiduciary Role is a resource for those new to plan sponsor responsibilities. It also could serve as a refresher course for those who have been involved with plan administration for some time.

The guide covers the primary duties of a fiduciary, defines who is considered a fiduciary, and addresses how to limit risk.

It also includes an informative discussion of ERISA Section 404(c), as well as an introduction to QDIAs (Qualified Default Investment Alternatives) and how to meet the related regulations. Plan expenses are also described.

Practical guidance about establishing a plan committee is included, as is an ERISA compliance checklist.

The ICI's report is at http://tinyurl.com/JPMFiduciaryGuide.

For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

Kmotion, Inc., P.O. Box 1456, Tualatin, OR 97062; 877-306-5055; www.kmotion.com

© 2015 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan's legal counsel or tax advisor for advice regarding plan-specific issues.