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Employer - FAQ

What are the benefits to offering a retirement plan to employees?

An employer sponsored retirement plan has the potential to provide benefits to both the employee and the employer. Below are a few of the benefits:

  • Employee Wellness – By offering a retirement plan, employees can set aside money and build a strong financial foundation for retirement. Employees may also be more productive at work due to feeling less stressed about their finances.
  • Tax Deductions – For qualified retirement plans contributions made by the employee AND employer are tax deductible, which can result in tax savings and allows employee funds to grow at a quicker rate.
  • Attract and Retain Talent – Offering competitive retirement plan benefits can help an employer attract and retain top talent.

What is the Employee Retirement Income Security Act (ERISA)?

The Employee Retirement Income Security Act (ERISA) was passed in 1974 with the purpose of protecting the interests of employee benefit plan participants and their beneficiaries. The law requires plan sponsors to provide specific plan information to participants at designed intervals. Additionally, ERISA established standards of conduct for plan managers and other fiduciaries to ensure they are acting in the best interest of plan participants.


What is a fiduciary?

Under ERISA a fiduciary is: A person or entity who exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so.

The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.


What is an ERISA 3(21) fiduciary?

An ERISA 3(21) fiduciary advisor typically serves in a co-fiduciary role sharing liability with the plan sponsor when administering the investment component of the plan. A 3(21) advisor may render investment advice for a fee or compensation, have any discretionary authority or control regarding management of the plan or over the management or disposition of its assets, or have any discretionary authority for the administration of the plan.

Plan sponsors may elect to hire a 3(21) fiduciary advisor to assist in configuring and monitoring the investment program available to the participants. By hiring a 3(21) fiduciary advisor the plan sponsor does not alleviate their fiduciary responsibility, but instead shares the responsibility with the chosen advisor.


What is an ERISA 3(38) fiduciary?

An ERISA 3(38) fiduciary advisor typically assumes the role of an investment manager, which means the advisor has the power to manage, acquire, or dispose of any asset of the plan. In addition, a 3(38) advisor must be a bank, insurance company, or a registered investment advisor (RIA) under the Investment Advisors Act of 1940 and acknowledges in writing that they are fiduciary with respect to the plan.

By hiring a 3(38) fiduciary advisor the plan sponsor is able to alleviate their fiduciary obligation for managing the investment program, however, they must establish prudent monitoring and oversight procedures to ensure the 3(38) advisor is meeting their fiduciary obligations to the plan participants.


What is an ERISA 3(16) fiduciary?

Unless otherwise stated in the plan documents, the plan sponsor assumes the role of the plan administrator. An ERISA 3(16) fiduciary serves as the retirement plan administrator responsible for managing the day-to-day operations of the plan which include meeting ERISA reporting requirements, disclosure requirements, filing the correct plan paperwork, and making the required disclosure to plan participants.


What is a third-party administrator (TPA)?

A third-party administrator is an entity that assists with the day-to-day operations of the retirement but does not share in or assume any fiduciary responsibility. A third-party administrator services include plan design, compliance testing, filing the Form 5500 with the IRS, and ensuring the plan meets the requirements to retain qualified status.


What is a recordkeeper?

A recordkeeper typically provides the main online platform where plan participants will log into and where payroll data is uploaded. Services provided by a recordkeeper can include processing enrollment forms, managing and tracking participant investments, classifying the type of contributions, producing plan documents required to be delivered to participants, managing and maintaining the record of 401(k) loans, producing participant account statements, and providing support services.


What is an Investment Policy Statement (IPS)?

The Investment Policy Statement (IPS) for an employer sponsored retirement plan serves as the business plan for managing the investment program. The IPS defines the purpose and objective of the plan, bodies of law governing the plan (i.e. ERISA), duties and responsibilities of the parties involved (committee members, custodian, advisors), due diligence criteria for selecting investment options, procedures for controlling and accounting for investment expenses, and criteria for monitoring investment options and service vendors.


What is a safe harbor provision for a retirement plan?

A safe harbor provision allows for a 401(k) plan to avoid year-end discrimination testing if certain features are provided to plan participants. A 401(k) meets the safe harbor requirements by either:

  • Matching participants eligible contributions dollar-for-dollar, up to 3 percent of the participant’s compensation, and 50 cents on the dollar for the participant’s contribution that exceeds 3 percent up to 5 percent of compensation
  • Making a nonelective contribution equal to 3 percent of compensation to each eligible participant’s account

An newer type of safe harbor plan is called a Qualified Automatic Contribution Arrangement (QACA), and it offers the benefit of avoiding year-end discrimination testing if the following requirements are met:

  • The plan’s default deferral rate starts at a minimum of 3% and increases at least 1% annually up to no less than 6%
  • A Qualified Default Investment Alternative (QDIA) is offered as the default investment option for participants that decline to make an investment election upon enrollment in the plan
  • The employer matches 100% of the first 1% of the compensation deferred and matches 50% of contributions between 1% and 6% of compensation deferred or can elect to make a nonelective contribution of 3% of compensation to all participants, including those who have not contributed to the plan
  • The matching employer contributions for participants are 100% vested after no more than two years

Each year the employer must make either the aforementioned matching or nonelective contributions.


What is a Qualified Default Investment Alternative (QDIA)?

The qualified default investment alternative was introduced in the Pension Protection Act (PPA) that was signed into law in 2006. With the signing of the PPA, impediments for employers adopting automatic enrollment were removed and specific guidelines were introduced regarding plans with automatic enrollment and corresponding default investment options.

A qualified default investment alternative (QDIA) is a default investment for participants who are automatically enrolled in the 401(k) plan but decline to elect an investment option. The intent is to ensure that an investment qualifying as a QDIA is appropriate as a single investment capable of meeting a worker’s long-term retirement savings needs. By offering a QDIA and meeting additional criteria the plan sponsor can obtain safe harbor relief from fiduciary liability for investment outcomes.

There are four types of QDIAs:

  • A product with a mix of investments that takes into account the individual’s age or retirement date (an example of such a product could be a life-cycle or targeted-retirement-date fund)
  • An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (an example of such a service could be a professionally-managed account)
  • A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (an example of such a product could be a balanced fund)
  • A capital preservation product for only the first 120 days of participation (an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax)

It is important to note that by offering a QDIA and meeting the required safe harbor criteria a fiduciary does not absolve the duty to prudently select and monitor QDIAs.


What is a highly compensated employee (HCE)?

A highly compensated employee (HCE) is defined as an individual in a qualified retirement plan who:

  • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received.
  • For the preceding year, received compensation from the business of more than $120,000 (if preceding year is 2018), and if the employer chooses, was in the top 20% of employees when ranked by compensation

The compensation amount for a highly compensated employee is indexed each year and may be adjusted. The amount of compensation to classify an employee as a HCE is $120,000 in 2018 and is $125,000 in 2019.

The classification of highly compensated employees is used to perform year end discrimination tests for a qualified retirement plan to ensure the benefits of the plan do not favor employees that receive high amounts of compensation. Employees who do not meet the criteria for a HCE and classified as non-highly compensated employees (NHCEs).


What is year-end discrimination testing for a qualified retirement plan?

The Employee Retirement Income Security Act (ERISA) requires several tests each year to prove qualified 401(k) plans do not discriminate in favor of employees with higher incomes.

There are three categories of non-discrimination testing:

  • Compliance Testing (ACP/ADP)
  • Top-Heavy Testing
  • Minimum Coverage & Participation Testing

The compliance testing involves the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) test. The ADP test compares the average salary deferral percentages of highly compensated employees (HCE) to that of non-highly compensated employees (NHCE). The Actual Contribution Percentage (ACP) test compares the average of the percentage of matching contributions and after-tax employee contributions for HCEs versus NHCEs. If a plan fails the ACP or ADP test, the employer must take corrective action in the 12 month period following the end of the plan year in which the failure occurred.

The top-heavy test looks at the overall benefits that have been accumulated by key employees. Typically, if more than 60% of the overall assets in the plan are attributable to key employees, then the plan is top-heavy and certain minimum benefits may need to be provided to the non-key employees. If a plan fails the top-heavy test the plan sponsor must make a minimum contribution to the non-key employees, which is typically 3% of compensation.

The minimum coverage and participation test evaluates if the group of employees in the plan satisfy section 410(b) of the IRS tax code. The test determines if the plan benefits at least 70% of employees who are not HCEs, if a percentage of NHCEs which is at least 70% of the percentage of HCEs benefiting under the plan, or if the average benefit percentage of the NHCE is at least 70% of the average benefit percentage of the HCEs. The plan must meet one of the aforementioned requirements to pass the minimum coverage and participation test. If the coverage and participation test is failed then plan sponsors must bring the plan into retroactive compliance by the end of the plan year.


What is a financial wellness program?

A financial wellness program is a comprehensive personal finance curriculum delivered to plan participants covering topics which include: budgeting, saving, credit cards, debt management, student loans, home purchase, retirement, social security, taxes, and insurance. Financial wellness programs provide education to participants to empower them to make sound financial decisions.