DOL Fiduciary Rule/Prohibited Transaction Exemptions Become Effective. The Department of Labor’s expanded definition of “fiduciary” and related prohibited transaction exemptions became effective June 9. Recognizing this guidance will likely be revised, the DOL has developed a “transition exemption” to address financial conflict of interest issues between June 9 and December 31, 2017. Specifically, until December 31, 2017, an investment advisor with a financial conflict of interest must provide investment advice that is prudent and in the “best interest” of the investor rather than in the advisor’s interest (or the advisor’s employer’s interest). In addition, the advisor cannot charge more than reasonable compensation for its services and cannot make misleading statements about investment transactions, compensation, or conflicts of interest. While Union Bank does not expect the new rules to materially affect its retirement plan services, we will continue to update you on any changes in this guidance.
Washington Update. Tax reform, which is expected to impact retirement plans, remains on Washington’s agenda. Most of the publicity involves possibly moving toward a Roth-based model (rather than a pre-tax model) for participant elective deferrals. In addition to the potential so-called “Rothification” of 401(k) plans, the following retirement-related legislation has been introduced recently and may gain traction in the coming months:
- Similar legislation has been introduced in the House (H.R. 2030) and Senate (S. 940) to address participant loans and other retirement plan “leakage” issues. In most cases, an outstanding participant loan amount is offset against the participant’s account balance and taxed upon termination of employment. The proposed legislation would extend the time for rolling over the loan offset amount to an eligible retirement plan, thus allowing a participant to preserve more of his/her retirement savings. In addition, the proposed legislation would eliminate the 6-month prohibition on making elective deferrals after receiving a hardship distribution.
- A bipartisan bill has been introduced in the Senate (S. 1383) to increase participant retirement savings. The bill hopes to accomplish this goal through: (a) allowing unrelated employers to jointly sponsor a retirement plan to minimize retirement plan costs on an individual employer basis; (b) permitting mid-year adoption of a safe harbor 401(k) plan in certain situations; (c) increasing tax credits for small employers that adopt retirement plans; and (d) revising Form 1040-EZ to make participants more aware of the “saver’s credit.”
Union Bank will keep you informed of legislation that may affect your retirement plan.
Roth and Automatic Enrollment Features Gain in 401(k) Plans. Vanguard has released its “How America Saves, 2017.” The report includes data from the retirement plans Vanguard services. Union Bank noted the following from the report:
- At the end of 2016, 65% of Vanguard plans offered Roth deferrals. This is up from 49% in 2012. And while participant use of a Roth feature has not dramatically increased in these five years, the Vanguard report showed younger participants (age 34 or younger) are much more likely to make Roth deferrals compared to participants who are older than age 55.
- Plans offering automatic enrollment features have increased by 300% since 2007. Moreover, two-thirds of plans with automatic enrollment also include automatic annual deferral increases.
If you would like to discuss how adding Roth and/or automatic enrollment and escalation features might benefit your participants, please contact your Union Bank Relationship Manager.