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Fraud Interviews

Posted By NIPA Headquarters, Monday, August 11, 2014
By Chris Ciminera, Supervisor, Belfint, Lyons & Shuman, P.A.

Imagine that I am standing over a cowering plan administrator, in a dark room, shining a single bright light overhead, screaming, “Did you take money from the plan?!” This tactic is better suited to a CSI episode and not an audit of an employee benefit plan. However, in an audit of an employee benefit plan, we as auditors are expected to consider fraud that could have occurred, although there is no guarantee and, accordingly, no assurance we provide, that we will uncover fraud, even if it is happening in a plan. As part of our fraud consideration we are required to perform a fraud interview. Although the scene I described above is far from what actually happens, I have a feeling when I ask a plan administrator or third party administrator if I can schedule a fraud interview, that scene is the first thing that comes to mind.

Why is a Fraud Interview Needed?
As noted above, auditing standards require auditors to consider fraud in the plan. In addition to a number of other procedures, we are required to perform a fraud interview. The enactment of these audit standards was accelerated when fraud occurred at Enron, WorldCom and other large companies. Although those were the high profile cases, there are even more cases that are not reported on the national news. The Department of Labor (DOL) reported that they closed 320 criminal investigations in 2013 with 70 guilty pleas or convictions and 88 individuals indicted. You can also look at this criminal enforcement news release and be amazed at the number of enforcement actions.

And that represents only the instances of fraud that were caught. I can’t imagine the number that may still be occurring undiscovered.

The reason a fraud interview helps uncover fraud is the fact that many individuals who were convicted or associated with those who were convicted later disclosed the fact that if only someone asked them, they would have disclosed it. Although that may not always be the case, it makes sense that they may be less willing to lie if asked directly than to withhold information if not asked at all. In many cases, although an interview may not occur with a specific perpetrator, others inside or outside the organization are able to raise a red flag or guide us to areas that require further investigation.

Why am I Being Considered for a Fraud Interview?
Our selection usually focuses on employees who have direct duties in administration of the plan. However, in smaller companies, this may only include one or two employees who have a hand in administering the plan, besides a trustee, president or other employee charged with oversight of the plan. To avoid interviewing the same employee each year and to make the interview more beneficial, we may question regular employees and third party administrators.

What Does a Fraud Interview Entail?
Unlike the cliché of the interrogation, a fraud interview is performed by asking direct questions about the interviewee’s knowledge or suspicions of fraud, and also will include indirect questions regarding whether the interviewee believes there may be areas of administration with weak internal controls that may be susceptible to fraud. Third party administrators and others outside the organization who have knowledge of the plan processes, are in a good position to help identify such areas of weakness. As a third party administrator has experience with the contacts with the sponsor, they can also point out any difficulties working with certain employees or other little clues that may need a follow-up. This is why we believe third party administrators are a good option for the fraud interview, although they may have never been selected for a fraud interview by other audit firms.

The Fraud Triangle
In the accounting field we have noted a “fraud triangle” where if certain areas are present there is a heightened risk that fraud may be occurring. The fraud triangle consists of three points.
  1. Perceived pressure – for example, financial difficulties at home, financial difficulties at the company, goals to make  certain earnings figures, etc.
  2. Rationalization – for example, I’ll pay back the company once I can, I’m not being paid for the perceived value I provide, etc.
  3. Perceived opportunity – weak internal controls, no management oversight or segregation of duties, etc.

The fraud interview can also help uncover employees who may fit into the three points noted above or expand our knowledge if there is already a suspicion.

So, the next time that you as an employee of the organization, administrator at the organization or third party administrator are asked for a fraud interview, don’t envision the latest CSI episode! Let’s sit down and discuss areas in the plan where others may have the ability, an incentive, or an attitude to justify and perpetrate fraud.

Tags:  Fraud Interviews  National Institute of Pension Administrators  NIPA  NIPA News 

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The Perils of a Non-ERISA 403(b) Plan

Posted By NIPA Headquarters, Monday, July 21, 2014
Non-ERISA 403(b) plans seem to be dropping in popularity among non-profit organizations. Given regulatory guidelines that can be difficult to follow, many plan sponsors are finding it harder to maintain a fully compliant non-ERISA plan. If your non-profit still operates a non-ERISA plan, you may want to give some thought to changing over.

Historically, non-ERISA plans were a popular choice for many non-profit organizations, since they were subject to relatively little regulation. In general, most plan sponsors chose to maintain a plan outside of ERISA to avoid Form 5500 reporting and mandatory audits if the plan had more than 100 participants. 

To qualify for non-ERISA status, plan sponsors had to have “limited involvement” in the plan. For instance, non-ERISA requirements precluded employers from being involved in certain basic plan functions, such as approval of plan-to-plan transfers, distribution processing, and addressing applicable joint and survivor annuity requirements. 

That began to change in 2009 when the Internal Revenue Service implemented new regulations for 403(b) plans. The strategy was to align 403(b) regulations with those used with 401(k) plans. Unfortunately, the new guidelines had many gray areas that made compliance very challenging. For example, a non-ERISA plan that involved the plan sponsor in the disbursement of employee or hardship loans could be considered an ERISA plan. 

Under the current regulatory environment, the distinction between a non-ERISA and an ERISA 403(b) is becoming more obscure. Inadvertent or unintentional involvement by the employer can make the plan subject to ERISA. That means that non-profits run the risk of being penalized by the Department of Labor for breach of ERISA requirements. Just having that risk out there creates an unclear, unsure environment. 

Limited plan sponsor involvement can also hinder efforts to encourage greater employee plan participation. Every plan sponsor wants as many employees as possible to participate in their retirement plan. The more plan sponsors are involved, the more they can ensure their plans have the features that employees find attractive and will allow them the best opportunity to enhance their financial future. 

Changing from a non-ERISA plan to an ERISA plan is not complicated. Generally, organizations need to:
  • Commit to incorporating a 403(b) plan into the organization’s retirement plan objective; 
  • Determine how the new plan correlates with the existing retirement program; 
  • Develop a strategy to create a single 403(b) plan; 
  • Develop a request for proposals to find the most suitable vendor to support your overall objective; and 
  • Create a coordinated communication plan to bring the 403(b) into the overall organizational retirement objective. 

Consider creating a “combined” retirement benefit statement incorporating your former retirement plan and the new ERISA 403(b) savings plan. This will offer participants complete information about the prior plan as well as the one taking its place. Additionally, do not overlook significant compliance issues when moving from a non-ERISA plan to an ERISA plan:

  • Adopt a new plan document (a plan document is already required under current regulations, even for a non-ERISA plan); 
  • Understand and plan for an annual audit if the organization has more than 100 employees—this can be coordinated with audits for the current retirement plan; 
  • File an annual return (Form 5500)—this can also be coordinated with existing filings; and 
  • Create a process for fiduciary management and oversight. 
The most important value of transitioning from a non-ERISA to an ERISA 403(b) plan is the ability to fully integrate it into an organizational commitment to successful participant outcomes. An advisor who specializes in this area can be of tremendous help in assisting non-profits in navigating the changeover smoothly and successfully.

All not-for-profit organizations should understand the compelling need to take an active role in helping their employees succeed in their retirement. Taking control and responsibility for their 403(b) plan makes for good business and happier employees. 


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401(k) Loan Regrets

Posted By NIPA Headquarters, Monday, July 7, 2014

Thinking about taking a loan out of your 401(k) or 403(b) retirement account? Think twice. Nearly half (44%) of employees who took out a loan from their workplace retirement accounts later said they regretted the decision, according to TIAA-CREF’s Borrowing Against Your Future survey. An additional 23% of employees who took out a loan don’t regret it but say they wouldn’t do it again.

The borrowing rates may be good—1% to 2% above the prime rate—but even though you’re paying the loan back and replenishing your 401(k), you’re losing out on earnings. How much will a loan cost you in the long run? A $10,000 loan paid back over five years could mean you’re forgoing more than $3,500 in potential earnings, TIAA-CREF calculates. That’s assuming the borrower is 40 years old, with 25 years left until retirement, and that it’s a five-year loan with 6% loan interest; and that there would have been an 8% return on funds over the next 25 years if the loan had not been taken.

Here are 5 warnings if you’re considering a workplace retirement plan loan.

Calculate the cost of a loan. Before you take a loan, run this TIAA-CREF calculator to see how much it will cost you in retirement security. You can borrow up to $50,000 of your vested balance or 50% of it, whichever is less. Typically you have to pay back the loan within five years. If you don’t pay it back, it’s considered a distribution and you’ll owe income tax and the 10% early withdrawal penalty if you’re under 59 and a half.

Don’t become a serial borrower. Nearly one-third (29%) of employees with workplace retirement plans have taken loans from their retirement plan, and of those who took out a loan, 43% have taken out two or more loans. Nearly half (47%) of those who took out a loan borrowed more than 20% of their savings, and 9% borrowed more than half of their savings, the TIAA-CREF survey found.

Keep up regular contributions. If you do take out a retirement plan loan, it’s important to make new contributions to your plan while you’re paying back the loan. In the survey, 48% of women kept the same contribution rate while paying back the loan, compared to only 39% of men. Millennials (81% of them) were the most likely to decrease their contribution amount during the payback period.

Retirement nest egg v. summer vacation. While the majority of those surveyed took out loans to pay off debt or for emergencies, some employees are raiding their retirement accounts for reasons like home renovations. Even more troubling: 15% of those surveyed said they took out loans to pay for special events like a wedding or family vacation.

Research other options. Before you tap into your retirement account, consider other options depending on your needs: student loans, a home equity line of credit (HELOC) for home renovations, a loan or withdrawal from a permanent life insurance policy. If you have a Roth IRA, you can withdraw your original contributions at any age, free of federal taxes and penalties (but you can’t put the money you take out back in).


Tags:  401(k)  Loans  National Institute of Pension Administrators  NIPA  NIPA News 

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IRAs May Be ‘Hot Button Issue' In DOL's Re-Proposed Fiduciary Rule

Posted By NIPA Headquarters, Monday, June 23, 2014

The issues to watch when the Department of Labor re-proposes its fiduciary rule involve individual retirement accounts, a practitioner said during an audiocast sponsored by Drinker Biddle & Reath LLP.

Although the DOL has regulatory authority of IRAs, the agency doesn't have enforcement authority over these accounts, said Fred Reish, a partner in the firm's Los Angeles office, during the June 5 event.

“And yet the one area where they have limited or no enforcement authority could be the hot button issue,” he said.

Reish said he thinks the re-proposal may include guidance on how far advisers can go when recommending to participants that they take a distribution from their retirement plan and roll it over into an IRA before they become fiduciaries to that plan.

It is possible the DOL will mimic guidance issued by the Financial Industry Regulatory Authority Inc. in December 2013 that said a firm's recommendation that investors roll over their retirement plan assets to an IRA involves securities recommendations subject to FINRA rules, Reish said. 

“If the DOL takes the same position that any recommendation, or many recommendations to take a distribution out of a plan and roll it over to IRAs, even if the adviser is not an adviser to the plan, would cause that adviser to become a fiduciary,” they then would have to make recommendations in the best interest of the participant as a fiduciary, he said.


Tags:  DOL  IRA  National Institute of Pension Administrators  NIPA  NIPA News 

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New Plan Restatement Window Opens

Posted By NIPA Headquarters, Monday, June 9, 2014
Updated: Wednesday, June 4, 2014

Several years ago, with an eye toward leveling its workload, the IRS instituted a cyclical compliance system. Individually designed retirement plans are subject to a five-year remedial amendment cycle based upon the last digit of the plan sponsor’s taxpayer identification number. Employers adopting pre-approved documents, including volume submitter plans and prototype plans, however, are required to restate their plans on a uniform six-year cycle. The current restatement period for such plans officially opens on May 1, 2014, and continues through April 30, 2016. 

While those employers sponsoring volume submitter or prototype plan documents previously were entitled and encouraged to secure individual determination letters by filing a Form 5307 Application for Determination, that option has been all but eliminated. This is based on changes which, though announced by the IRS late in 2011, did not have widespread impact until this new restatement period. 

Adopters of prototype plans must rely upon the opinion letters issued to the underlying prototype plan sponsors and may not seek an individual determination letter. Adopters of volume submitter plans may seek an individual determination letter but only if changes have been made to the pre-approved language. There is a catch, however, in that if the changes are deemed to more than minor, the plan will be considered to be an individually designed plan (subject to the five-year remedial amendment cycle) and will not be eligible for the extended reliance afforded to pre-approved plans. 

We will be contacting all of our clients for whom we prepare plan documents over the course of the coming months to initiate the restatement process. While, for many plan sponsors, the restatement will serve solely to update the language for compliance purposes, it provides the perfect opportunity to revisit the plan design and make any elective changes that may be desired.


Tags:  National Institute of Pension Administrators  NIPA  NIPA News  Plan Restatement 

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7 Misconceptions about Retirement Plan Auto Features

Posted By NIPA Headquarters, Tuesday, May 27, 2014

If you’re like the majority of plan sponsors, then one of the more important goals for your plan may be to increase the rate of employee participation. The evidence is clear that automatic enrollment, in which employees are enrolled in their company plan unless they opt out, is very effective at increasing participation rates.

In spite of how effective auto features are, many sponsors are still holding back from adopting them due to misconceptions. Below are seven common misconceptions plan sponsors have about retirement plan auto features.

Misconception 1: Our employees will resent the perceived loss of control over more of their paycheck.
The concern about upsetting your employees is the most common objection to adding auto features to a retirement plan. But according to a Harris Poll® conducted in 2007, 98% of those currently automatically enrolled agreed with the statement, “You are glad your company offers automatic enrollment.” And in the same poll, 79% of those who opted out of automatic enrollment still agreed with the above statement.

Misconception 2: If too many new participants join the plan, the match will become too expensive.

Adding auto features to your plan may not be as expensive as you think. Most of your higher paid employees are already in the plan and contributing aggressively, so it’s mostly the lower-paid employees who will be auto-enrolled. As a result, the match will be based on percentages of those lower salaries only. Plus, if you start auto features just with new hires, the additional matches will be added gradually over time without causing too much of a shock to your budget.

Misconception 3: If we make everything automatic, employees won’t take responsibility for their own retirement planning.

Most workers want to start saving for retirement, but sometimes need a little help to overcome their own behavioral inertia . By adding auto features, you’re not taking responsibility away from your employees, you’re helping them to start moving in the direction they already want to go. According to the same Harris Poll® referenced earlier, 85% of workers said automatic enrollment helped them start saving earlier than they would have otherwise.

Misconception 4: The extra work and expense to our company doesn’t help our bottom line.

Auto features can actually help make your company more profitable, especially when we consider turnover. Turnover is very expensive, particularly when it involves key executives.

One of the benefits executives appreciate most is the ability to contribute as much as possible to a tax-advantaged retirement plan. Unfortunately, they are often frustrated and irritated by having contributions returned to them at the end of the year because not enough non-highly-compensated workers are participating. Auto enrollment can increase the participation rate of low-to-moderate income employees from 20% up to 80%.

More participation from your rank and file employees means higher limits on contributions for your key executives – just another reason for them to stay with you and not look for greener pastures elsewhere.

Misconception 5: It will be a nightmare trying to administer all these new small accounts when employees leave the company.

The Department of Labor recognizes that keeping track of all your previous employees and administering the accounts created for them through auto-enrollment would be very labor intensive. That’s why the regulations released in 2004 allow automatic distributions and rollovers. If an account balance is under $1,000, the account can be automatically cashed out and the funds sent to the participant. If the balance is between $1,000 and $5,000, the money can be automatically rolled over to a default IRA custodian.

Misconception 6: Establishing a default investment for new auto-enrolled accounts increases our fiduciary liability.

Increased risk of fiduciary liability was a legitimate concern in the past, but not since the enacting of the Pension Protection Act of 2006 (PPA). The PPA says participants “will be deemed to have exercised control over assets in his or her account if, in the absence of investment directions from the participant, the plan invests in a qualified default investment alternative.”

As long as the default investment passes certain qualifying conditions, the liability for the choice of that investment remains with the participant, not the plan sponsor.

Misconception 7: Automatically enrolling employees won’t really have much impact on their retirement readiness.

It’s true that saving 1% toward retirement won’t have much of an impact on a person’s future retirement income, so why not start at a higher rate instead and add automatic annual increases? A recent study by The Principal shows that only 4% more employees opt out of auto-enrollment if the starting deferral rate is 6% instead of 3%9. Plus, if an employer match is included, nearly twice as many participants (61% as opposed to 32%) reach an overall savings rate of 11% or more.

It’s clear that employees overwhelmingly support both automatic enrollment and automatic escalation, and as a result companies are increasingly adding these features to their plans. Automatic features are a simple, cost-effective way to improve employee satisfaction, and adding these features to your retirement plan can make it easier for you to retain highly paid key executives by ensuring they can take full advantage of their tax-favored retirement contributions.

For more information about how automatic features might benefit your company or to add these features to your plan, please contact Pension Consultants at 417-889-4918.


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IRS Says “Control” Thyself: Plan Examinations Focus on Internal Controls

Posted By NIPA Headquarters, Monday, May 5, 2014
Updated: Thursday, April 24, 2014

In 2010 the IRS requested a selected group of 1,200 employers to complete a compliance questionnaire. Based on the responses to those questionnaires, in 2013 the IRS issued a final report with its conclusions.

Among those conclusion – having internal controls is a critical aspect of effectively run and legally compliant plans. And since the report was issued IRS representatives have publicly stated that internal controls will become a significant aspect of plan examinations.  The implication is that plans without, or with poor, internal controls face tougher examinations and more scrutiny.

This makes it well worth it for plan sponsors to understand and have internal controls. The concept is very familiar to the accounting profession, but not so much to the rest of us.  In general, internal controls refer to procedures that affect a plan’s operations, compliance with regulations and financial reporting.

The benefit to the plan and the plan sponsor of having internal controls are many.

They include:

  • A less intensive IRS examination
  • A more effectively run plan
  • A system to detect problems earlier and correct them under generally forgiving IRS correction programs.

Accountants focus on five key areas (and so will the IRS) to determine whether those in charge of a plan have appropriate controls in place:

  1. The Control Environment: This is essentially about the plan sponsor’s attitude, philosophy, integrity, commitment to competence, ethics, and the assignment or delegation of authority.
  2. Risk Assessment Once: the agent understands the control environment, he or she will assess where the risks are and where to put his or her examination focus. Possible risk indicators are manual data entry, changes in personnel, installation of new information systems and other stressors such as corporate acquisitions and other events.
  3. Information and Communication Systems: The agent will look at how information is recorded, processed and reported, how errors are corrected and the communication of that information among the various individuals who have responsibility for internal controls. Communication between those responsible for the overall governance of the plan and those responsible for its direct administration will be especially important.
  4. Control Activities: This examination includes whether there policies and procedures in place, how transactions are authorized, frequency of checks and reviews of work, the safeguarding of assets, the reconciliation of individual participant accounts, and the verification of data.
  5. Monitoring: The agent will want to know about the quality of the plan’s monitoring process. For example, what are its sources of its information and what is the basis for determining the reliability of information and data.

This is not your grandfather’s IRS plan examination.  Expect he IRS to thoroughly probe plans whose control structures are weak.


Tags:  Internal Controls  IRS  National Institute of Pension Administrators  NIPA  NIPA News  Plan Examinations 

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New Flavor of Outsourced Fiduciary for Retirement Plans Hits the Market

Posted By NIPA Headquarters, Monday, April 14, 2014

Retirement plan service providers want to up the ante in the world of outsourced fiduciary services, touting the latest flavor: an ERISA 3(16) fiduciary plan administrator.

The newest offering of fiduciary duty under Section 3(16) of the Employee Retirement Income Security Act of 1974 includes a variety of tasks: choosing, evaluating and monitoring trustees, service providers, investments and the investment adviser to the plan. They also include evaluating the plan's fees and delegating responsibilities to other fiduciaries.

The 3(16) plan administrator fiduciary holds the keys to the retirement plan's day-to-day operation: He or she is responsible for timely reporting and disclosure of participant fees and Form 5500. This person also handles distributions of benefits and administers plan loans and qualified domestic relation orders.

This latest service offering is popping up in an era when plan sponsors have a heightened awareness of their fiduciary responsibilities and are looking to offload some of them so that they can get back to the day-to-day work of running their business. Plan sponsors already can work with certain financial advisers and investment management firms either to share fiduciary duty under Section 3(21) of ERISA or to hand over the investment management duties under Section 3(38).

“Over the last decade or so, plan sponsors have become more aware of the fiduciary liability and responsibilities, so we've seen more services where plan sponsors can outsource fiduciary responsibility to an entity who will monitor the investments or assist in choosing them,” said Rebecca Kaplan, fiduciary compliance consultant at The Angell Pension Group, a third-party administrator.

That interest has heated up.

“In the last 18 months, we've seen a significant increase in activity,” noted Jeff M. Atwell, senior vice president and manager of the trust retirement division at American National Bank of Texas, which provides fiduciary plan administrator services. “Plan sponsors are becoming more informed about their responsibilities, and this is falling in line with what they're doing to comply with other regulatory issues a business owner has to deal with today.”

But there are potential traps for plan sponsors when it comes to relying heavily on outsourcing those duties.

“When plan sponsors use these services, they start to believe they have no continued responsibility to choosing investments, which of course is a fallacy,” Ms. Kaplan said last month at the National Association of Plan Advisors 401(k) Summit in New Orleans.

And not all 3(16) fiduciary services are built equally.

Fiduciary “lite” for 3(16) includes taking transactional burdens off of the plan sponsor and acting as the quarterback. This means overseeing distributions, loans and any other activity that will alleviate the pressure on the employer's office manager, according to C. Frederick Reish, a partner at Drinker Biddle & Reath's employee benefits and executive compensation practice group.

Full-scope 3(16) fiduciary services include decision making, rather than merely lightening the administrative load — for instance, determining whether a domestic relation order is qualified. They also may ensure that elective deferrals are made in a timely manner and ensure that the plan retains its tax-qualified status with the IRS.

“Read the fine print,” Mr. Reish said, referring to the services outlined by a provider of these services. “If they're a 3(16) for less than seven or eight things, then they're 3(16) 'lite,'” he added. “3(16) for everything else would include a robust list of 20 to 30 duties.”

So far, the realm of 3(16) is looking more like the domain for third-party administrators, rather than financial advisers. But advisers working with retirement plans play a key role in screening potential candidates for these outsourced services.

“They can help with the oversight: What experience and expertise does the firm have? Do they know ERISA? What's their privacy policy?” noted Joe Frustaglio, vice president of private sector retirement plan sales for Nationwide Financial.

Other issues for the plan sponsor and adviser to ponder: What kind of insurance coverage does the 3(16) service provider have? Does the provider have a fidelity bond per Labor Department rules that insures 10% of plan assets up to a maximum of $500,000 or $1 million if there's company stock?

Bear in mind that this fidelity bond only covers theft of plan assets and nothing else — it's separate from fiduciary insurance that covers breach of fiduciary duty, said Gary Sutherland, chief executive of the North American Professional Liability Insurance Agency. TPAs may also assume that errors-and-omissions coverage will include the 3(16) services they provide, but most of these policies will exclude coverage pertaining to being a named fiduciary in a retirement plan.

The biggest lesson for advisers and plan sponsors: Outsourcing 3(16) duties or other fiduciary tasks don't let the plan sponsor off the hook if the provider of those fiduciary services misbehaves. There is no such thing as completely outsourcing fiduciary liability, and plan sponsors still have the responsibility of choosing and monitoring their service providers.

“The best thing for advisers to understand is that it's a fiduciary decision to choose that 3(16) provider and to monitor them,” said Ms. Kaplan. “They need to help the plan sponsor understand the responsibilities so that when they choose a 3(16) service provider, the employer knows which duties they've delegated and which duties they will continue to have.”


Tags:  National Institute of Pension Administrators  NIPA News  Outsourced Fiduciary 

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Capturing Rollovers: A Changing Environment

Posted By NIPA Headquarters, Monday, March 31, 2014

Recent developments suggest that FINRA, the SEC and the DOL are working together…or, perhaps, have independently reached the same conclusions.

In the past few months, FINRA has discussed rollover IRAs in five publications. The most important of those being Regulatory Notice 13-45, which creates a fiduciary-like process for recommendations about distributions and IRA rollovers. (By the way, I believe FINRA’s Investor Alert on rollovers is helpful and should be given to prospective rollover customers.) Then, to put an exclamation point on that guidance, both FINRA and the SEC listed rollovers to IRAs as one of its 2014 Examination Priorities for broker-dealers.

Finally, it is commonly expected that the DOL will issue its proposed regulation on the definition later this year…and that the proposal will expand its prior guidance on “capturing” rollovers. Fiduciary status alone increases the scope of the DOL’s jurisdiction and implicates it’s prior guidance (see Advisory Opinion 2005-23A). As a result, a broader definition of fiduciary advice will subject more advisers and providers to that guidance. In addition, it is possible that the Department will try to label any recommendation to take distribution as fiduciary advice (by saying, e.g., that a recommendation to take a distribution is inherently also a recommendation to liquidate a participant’s 401(k) investments – similar to what FINRA has done).

To make this even more “interesting,” we are seeing SEC examinations of RIAs where the SEC is finding ERISA prohibited transactions and asserting compliance violations by RIAs. The question is, will that theme carry over into IRA rollovers?

These changes impact broker-dealers, RIAs and their representatives. Less obviously, they also impact the rollover services of recordkeepers.

Bottom line… the rules are changing. Much more attention must be given to practices and disclosures in the distribution and rollover process.


Tags:  National Institute of Pension Administrators  NIPA  NIPA News  Rollovers 

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Do Your Clients Have ‘Orphan’ Accounts?

Posted By NIPA Headquarters, Monday, March 17, 2014

LIMRA, which provides financial industry research and consulting services, says in a recent blog post that it’s completed a study showing the majority of working Americans age 45 to 75 with more than $100,000 in household assets report having balances left in a former employers’ defined contribution (DC) retirement plan—creating a large number of “orphan” accounts that may not be receiving proper attention and maintenance.

More significant, LIMRA says, is the fact that about two-thirds of those ages 55 to 75 with these orphan accounts had DC plan balances of $100,000 or more. That’s potentially problematic because traditional glide path strategies urge workers in this age range to take action to ramp down equity exposures to protect from market declines that could diminish assets needed in the near future—something that presumably doesn’t happen in most orphan accounts.

For plan sponsors and advisers, orphan accounts can add to the complexity of managing assets and may damage overall plan outcomes by failing to account for participants’ current age and financial situation in setting investment strategies, LIMRA explains.

The firm’s research shows men and women of all ages are equally likely to have a DC plan balance with a former employer (41% vs. 40%). The study finds Americans with household assets of at least $500,000 are more likely to have an orphan account (44%) than those with less than $500,000 (38%).   

Taking those facts into account, LIMRA urges advisers to develop a comprehensive written plan for managing all assets a worker has accumulated—including those dollars in retirement accounts at a former employer. Prior LIMRA research shows that pre-retirees and retirees are more confident in their retirement security when they have a written retirement plan in place and are more likely to take action on setting age-appropriate asset allocations.

In addition, LIMRA says advisers should help their clients account for all of their assets to ensure retirement portfolios are well-designed and invested based on a total picture of an individual’s financial needs and resources.

Further information on LIMRA is available here.


Tags:  National Institute of Pension Administrators  NIPA  NIPA News  Orphan Accounts 

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