Five Features that Retirement Plans Can Do Without
There are many retirement plan features (such as automatic enrollment, automatic escalation, QDIAs, and well-designed loan provisions, to name a few) that add tremendous value to both plan sponsors and participants. However, there are also numerous plan features that I find to be relatively useless, mostly because they are impossible for participants to understand, cause administrative nightmares, and/or add little in the way of benefit to plan sponsors or participants. The top five provisions on my chopping block are:
- The 15-year catch-up election - As detailed in a prior Top of Mind post, the 15-year catch-up election is a relic of a provision from the days when it was impossible to determine how much one could contribute to a 403(b) plan, due to archaic regulations that have since been changed. If you are a 403(b) plan sponsor and still have this provision in your plan, I have just four words for you: Get rid of it!
- Hardship distributions - Does buying a house sound like a hardship? Not to me, either. And that is one of the many problems I have with this plan provision. There are legitimate emergencies that do not qualify as hardship distributions, while some non-emergencies do. In addition, if someone is presumably in the type of desperate financial straits that would necessitate a hardship distribution, why would we make matters worse by having them owe the IRS at tax time, due to the odd way that taxation of the distribution works (ordinary income tax plus a 10% penalty, with generally only 10% withheld upfront). The IRS needs to start from scratch on this provision, perhaps by looking no further than the rules for 457(b) plans, which allow distributions for actual emergencies without a 10% penalty attached to them. In the meantime, plan sponsors should strongly discourage hardship distributions by requiring that loans are exhausted prior to being eligible for a hardship distribution.
- Rollovers/plan-to-plan transfers/contract exchanges - While I can easily move money between bank accounts, moving money between retirement plan accounts, or between recordkeepers within a 403(b) account (which is what a contract exchange is), is generally a lengthy process, thanks to ridiculously complicated regulations and recordkeepers who, quite frankly, want to hang on to your money. Again, these regulations need to be scratched and replaced by a simple transfer provision that allows participants to move money quickly and efficiently between accounts, just like they can with other financial transactions.
- Revenue sharing – This is another term that the average plan participant does not understand. Revenue sharing refers to the practice of investment providers sharing revenue with recordkeepers in exchange for performing some of the duties that the investment provider would typically have to do. Sounds good on paper, but, in practice, it only serves to confuse participants about what they are actually paying for in regard to their retirement plan and investments. Fortunately, at least one major investment provider does not provide for revenue sharing, and a number of others have scaled back their revenue sharing significantly. We can only hope that this trend will continue.
- Non-standard plan definitions of compensation - While many plan sponsors utilize the W-2, or a similar definition of compensation, to determine the amount of employer contributions and/or the elective deferrals a participant can make, some plan sponsors do not (generally to save money). In fact, the regulations allow for just about any plan definition of compensation, as long as it does not discriminate in favor of highly-compensated employees. However, plan sponsors who get creative with their plan compensation definition are generally asking for trouble, particularly if they are among the large number of employers who have endless pay codes in their system, each one of which now needs to be coded as to whether it is eligible for employer contributions/elective deferrals or not. Sound complicated? It is - and I have rarely seen a plan sponsor get it right when challenged upon audit.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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