Fiduciary Hot Topics – Fall 2023

As the weather turns cool, things in the retirement plan landscape are heating up!

From changes to the Form 5500 to an important SECURE Act 2.0 provision delay, read on for the latest hot topics that may impact your organization’s retirement plan!

Assets in Retirement Plans Top $35 Trillion

  • According to data released by the Investment Company Institute, retirement assets in the US grew by 3.5% quarter over quarter to 35.4 trillion dollars. This is as of the end of the first quarter of the year. These assets represent approximately 31 percent of US households’ net worth.
  • In the private sector, the vast majority of these assets are held in defined contribution plans, but in the public sector significant retirement assets remain in traditional defined benefit pension plans.
  • Some good news is the data show that participants and IRA holders have not reacted to market volatility. By and large, they held the course through the market downturns in 2008-09, 2020 and 2022.
  • The lion’s share of assets in defined contribution plans and IRAs is invested in mutual funds with a large portion in asset allocation tools such as target date funds.
  • Rollovers to IRAs from retirement plans continue to increase every year. Internal Revenue Service records show that in 2020 (the most recent year for which there is data) rollovers to IRAs totaled $618 billion.

Where the Money Is

$35.3 trillion                 Total assets in US retirement plans
$6.9 trillion                   401(k) plans
$1.2 trillion                    403(b) plans
$1.2 trillion                    Other types of defined contribution plans
$12.5 trillion                  IRAs
$759 billion                    Federal Employees Retirement System Thrift plan
$7 trillion                       Government defined benefit pension plans
$3.2 trillion                    Private sector defined benefit pension plans
$2.2 trillion                    Insurance company reserves

Defined Contribution Plan and IRA Assets Invested in Mutual Funds

$4.3 trillion                    401(k) plans – 62% of assets – $1.2 trillion of this is in asset allocation tools, mostly target date funds
$5.2 trillion                    IRAs – 42% of assets – $1 trillion is in asset allocation tools, mostly target date funds

In the Future, Plan Sponsors Will Have to Pay More Attention to Allocating Unused Balances in Forfeiture and Revenue Credit Accounts

  • Historically there has been little formal guidance from either the Treasury Department or the Internal Revenue Service concerning forfeiture and revenue credit accounts. In February, the Treasury Department published a proposed regulation regarding the use and timing of assets held in a plan’s forfeiture accounts. The good news is that the proposed regulation, by and large, conforms to the industry’s prevalent understanding of the use and timing of forfeitures.
  • In the absence of formal guidance, it has been the general understanding that forfeitures may be used in one of three ways:
    • Pay reasonable plan expenses such as recordkeeping fees,
    • Reduce employer contributions, or
    • Allocate to participants’ accounts.
  • A revenue credit account exists where plan investments generate revenue credits to cover the cost of record keeping that exceed the record keeper’s fee. In this circumstance, the recordkeeper allocates the excess to a revenue credit account.
  • It has been the general understanding that the balance in revenue credit accounts may be used in the same manner as the balance in forfeiture accounts, with the exception that amounts in such accounts cannot be applied to offset employer contributions because these credits originate from participant accounts.
  • With regard to timing, it has generally been understood that the balance in forfeiture and revenue credit accounts must be exhausted by the end of the plan year and may not remain unallocated from year to year. The Internal Revenue Service confirmed this in a newsletter issued in 2010 stating that the balance in forfeiture accounts should be allocated by the end of the plan year in which the forfeitures occur. However, the Internal Revenue Service has never made a serious effort to enforce this rule and plan sponsors often allowed the balances in forfeiture and revenue credit accounts to grow year over the year.
  • The proposed regulation confirms the general understanding that these amounts should not remain unallocated indefinitely. With regards to timing, the proposed regulation requires that the balance in a forfeiture account be allocated within 12 months of the end of the plan year in which the forfeitures occur.
  • The proposed rule has an effective date of January 1, 2024. There is a transition rule that treats forfeitures that occur prior to this effective date as if they had occurred in 2024.
  • With clear guidance on the timing of forfeitures, it seems likely the Internal Revenue Service may step up its enforcement efforts.
  • Although this guidance does not mention revenue credit accounts, it may be arguable that similar timing could apply to their usage in similar fashion as forfeiture accounts. It is desired that the final regulation address this.

Changes to Form 5500 Will Allow a Greater Number of Small Plans to Avoid the Annual Audit Requirement

  • From time to time the Department of Labor, the Internal Revenue Service and/or the Pension Benefit Guaranty Corporation make revisions to Form 5500.
  • Revisions made to the 2023 Form 5500 relate to SECURE Act amendments made to ERISA. The changes are intended to improve reporting of financial information and plan expenses. There are new compliance questions concerning safe harbor status and how a plan satisfied certain discrimination and coverage tests.
  • A significant change affects the methodology for determining if a plan has less than 100 participants and is, therefore, treated as a small plan exempt from the annual requirement to retain an independent auditor. Under the current rule, all eligible individuals must be counted, even those who elect not to participate. Going forward only participants and beneficiaries with account balances on the first day of the plan year must be counted.
  • There is a rule known as the 80/120 rule intended to prevent plans with close to 100 participants from regularly falling within and without the scope of a required audit. Under this rule, a plan treated as a small plan in the previous year will continue to be exempt from the audit requirement if has less than 120 participants. This rule works as follows:

IRS Announces Delay for Roth Catch-Up Provision

  • After successful lobbying across the retirement plan industry, on August 25, 2023, the IRS announced a delay in the Roth Catch-Up provision established by SECURE Act 2.0 (Notice 2023-62).
  • SECURE Act 2.0 requires any catch-up contributions for plan participants aged 50 and older to be made to the Roth source for individuals earning more than $145,000 for 2024.
  • The original effective date of this rule was slated for January 1, 2024. However, without ample time to prepare recordkeeping systems and plan documents ahead of the effective date, lobbyists urged Congress to delay the rule.
  • The IRS announced a two-year delay on this provision, now effective on January 1, 2026. Catch-up contributions can continue to be made pre-tax through 2025.
Advisory Services offered through The Ascent Group, LLC, an SEC-registered investment adviser. Securities offered through Triad Advisors, LLC, Member FINRA/SIPC. The Ascent Group, LLC; Alera Group, Inc.; Summit Group of Virginia, an Alera Group Company; and Summit Group 401(k) Consulting, an Alera Group Company, are not affiliated with Triad Advisors, LLC. Representatives do not provide tax or legal advice. Please consult with your tax advisor or attorney regarding your situation.  

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