Roles and Agencies
Beneficiaries - A participant in a benefit program is required to name a beneficiary. In a retirement plan, the named beneficiary may be entitled to benefits should the plan participant die. If the beneficiary is a spouse and the participant dies, the beneficiary may treat the retirement account as his or her own. Beneficiaries, for reporting, disclosure and plan administration purposes, must receive the same services, rights and privileges originally granted to the participant, until such time as the plan benefits have been exhausted.
Custodian - An organization or entity that holds the securities for an individual or other entity. In the retirement arena, a custodian generally keeps track and holds the securities for a plan. Typically, a custodian is a financial institution, like a trust company, bank, insurance company, mutual fund company, transfer agent or brokerage firm. A custodian is not considered a plan Fiduciary but does provide services to a plan in a fiduciary-like capacity.
Directed-Trustee - An organization or entity that provides limited trustee services based on the direction of a plan trustee. In a retirement plan, those services are generally limited to providing audited trust statements and Forms 1099R and 945 reporting services. A directed-trustee is not generally involved in making investment decisions or recommendations for the plan nor do they monitor the plan's assets for conformance with the investment policy statement.
ERISA - The Employee Retirement Income Security Act of 1974, as amended. This benefits legislation prescribes minimum standards for private pension plan administration and investment practices. It also created the Pension Benefit Guaranty Corporation (PBGC) that insures defined benefit retirement plans. The following agencies have jurisdiction under ERISA: the IRS for tax qualification issues; the Department of Labor for fiduciary standards and reporting and disclosure; the PPCG for insuring defined benefit plans; and the Justice Department for enforcing criminal violations of ERISA.
Fiduciary - Someone who acts for the benefit of another in a retirement plan. The Employee Retirement Income Security Act of 1974 (ERISA), defines a Fiduciary as any individual who manages plan assets or operations. Their duty is to act in the best interest of the Plan Participants and Beneficiaries. Qualified retirement plans usually have at least three fiduciaries - the Plan Sponsor or Employer, the Trustee and the Plan Administrator. Other individuals who may act as Fiduciaries are Investment Advisors or other individuals with discretionary control over the assets or operation of the plan and receive a fee for providing those services.
Investment Advisor - The individual(s) or organization(s) that provides investment advice to a plan or Plan Participant for a fee. The investment advisor has either discretionary authority with regard to the investments of that plan or participant or with the advice that is relied upon by the participant or plan in making investment decisions as defined in ERISA, Section 3 (21). Typically an investment advisor is not an employee of the Plan Sponsor or the trustee but an independent entity engaged by the plan officials. Retirement plans do not require the use of investment advisors, but when applicable, the advisor becomes a Fiduciary to the plan.
Participants - An employee who meets the eligibility requirements for entry into a company's benefit program is called a participant. For retirement plans, an employee may be a participant even though they do not make or receive contributions into their account.
Plan Administrator - The legal entity or individual responsible for the day-to-day administration of a benefit program. The Plan Administrator may enlist the services of a Third Party Administrator (TPA) to help them perform their responsibilities. Ultimately, however, it is the Plan Administrator that is responsible for managing the plan and providing benefits in accordance with the plan document, ERISA, the Internal revenue Code (IRC) and all applicable laws and regulations. In order for a benefits program like a retirement plan to receive preferential tax treatment, the plan must comply with all IRS rules and compliance regulations. These laws are enforced by the IRS and include provisions of ERISA. The Plan Administrator is a Fiduciary to the plan.
Plan Sponsor - The employer(s) or organization(s) that establishes and funds a benefits program. Typically, a Plan Sponsor is an employer, labor union or a group of employers. The Plan Sponsor is always a Fiduciary with respect to a qualified benefit plan.
Third Party Administrator (TPA) - An organization that provides record keeping and administrative services to a benefits program. In retirement plans, a TPA typically provides actuarial and/or accounting functions for the Plan Administrator. The TPA essentially keeps the records necessary to determine the benefits attributable to each employee in accordance with the plan document. TPAs can also provide compliance services, generate participant statements and provide Annual Report Form 5500 drafting services. A TPA is generally not a Fiduciary to the plan and a plan is not required to have a TPA if the Plan Administrator performs those services in-house.
Trustee - An individual(s) or organization(s) with responsibility to oversee the investments in a benefits program, typically a retirement plan. The duty of the trustee is to ensure that the rules of ERISA are followed when executing their fiduciary duties. A discretionary trustee has the authority to make investment decisions for the trust. In a retirement plan that permits participants to direct their own investments, the trustee is responsible for selecting appropriate investments for the plan and reviewing these options as necessary to ensure adherence to the investment policy statement. Trustees to a retirement plan are often officers of a corporation, a joint board of employers and union officials, or an institution like a trust company.
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Conduit IRA - If an employee wants to move funds from their current plan and would like, in the future, to transfer those to another retirement plan, they may utilize an Individual Retirement Account (IRA) as a conduit Individual Retirement (conduit IRA) account. The conduit IRA acts as a temporary holding facility and preserves the individual's ability to move funds from that account into another retirement plan. Contributions permitted to be made to that IRA are the initial deposit made from a single retirement program. In essence, no regular IRA contributions or deposits from any other retirement program may be made to that IRA. For an employer to accept a rollover from a conduit IRA, the Plan Administrator must verify that the funds originally come from a plan that receives its preferential tax treatment from the same section of the Internal Revenue Code as the current plan. For example, if the conduit IRA was funded solely from assets rolled over from a Money Purchase Plan and the employer maintains a JF(k)/Profit Sharing Plan, the plan may accept that rollover because both plans received preferential tax treatment under IRC, Section 401(a). However, if the money in the IRA originally came from a 403(b) plan, the current company's JF(k) would not be permitted to accept that rollover because the 403(b) plan receives its favorable tax treatment under IRC, Section 403(b).
Custom Document - All benefits programs and retirement plans require the use of a written plan document and must be established in accordance with a plan instrument. In retirement plans, one method for providing a plan document is to have it specifically drafted for a single plan. These documents are generally drafted by an attorney and should be submitted to the IRS for review and approval. (Approval is issued in the form of a Letter of Determination. These types of plan documents are the most expensive to develop and are generally used by large companies.)
Prototype Document - All benefits programs and retirement plans require the use of a written plan document. One method for complying with this requirement is for a plan sponsor to adopt a prototype plan document. A Prototype Document is generally drafted by a financial institution or a large retirement services provider. A Prototype Document contains two components: 1) a master plan document and 2) associated adoption agreements. A master plan document is a compendium of all permissible provisions that a plan using this program may adopt. An associated adoption agreement is a checklist that permits the plan fiduciaries to select the features of the master plan prototype that are appropriate for their benefit program. If the plan utilizes a standardized adoption agreement, there is no need to submit the document for IRS approval. If the plan utilizes a non-standardized adoption agreement (selected features that may, if not properly implemented, create a compliance problem) the plan should be submitted to the IRS for a Letter of Determination. The sponsor of the prototype program submits the master plan document and adoption agreement to the IRS for approval, granted in the format of an Opinion Letter. This is the least expensive method that can be used for adopting the program outside of utilizing forms created by the federal government for IRA-funded retirement plans such as Simplified Employee Pension and SIMPLE IRA plans.
Summary Plan Description (SPD) - Benefit plans subject to ERISA's reporting and disclosure requirements must provide eligible participants with a document that describes the plan provisions in easy-to-understand language. The Summary Plan Description must be provided to the employee within 120 days after the plan is established or within 90 days after the employee becomes eligible to participate - whichever is later. When a plan is amended or a provision is changed, employers must either issue a new SPD or a Summary of Material Modification (SMM), which is a description of the amended position(s).
Volume Submitter Document - All benefits programs and retirement plans require the use of a written plan document. One method for complying with this requirement is for a plan sponsor to adopt a Volume Submitter Document. A Volume Submitter Document differs from a prototype document in that it can be customized more readily for the plan sponsor and is available on more types of plans, i.e., New Comparability Plans and Age-Weighted Profit Sharing Plans. Volume Submitter Documents should be submitted to the IRS for approval in the form of a Letter of Determination. While less expensive to initiate and maintain than a custom document, Volume Submitter Documents are generally more expensive than prototype documents. The sponsor of a volume submitter document is generally a financial institution or retirement plan service provider that receives an opinion letter on the document and, if applicable, associated adoption agreements.
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Plan Funding and Contribution Terms
Bond - A debt instrument, essentially a loan made to the bondholder. There are a variety of bond types, most of which pay a specified interest rate and often pay principal to the bond holder until such time as that debt is satisfied.
Contribution - Funds deposited into a retirement account are termed "contributions." Contributions can come from a number of sources: from the employer, the employee, an employee's previous retirement plan or conduit IRA (rollover), or a combination of these. Employer contributions are generally tax deductible and the earnings are not taxable until they are withdrawn from the plan.
Employee After-Tax Contributions - Some plans, like Profit Sharing and JF(k)/Profit Sharing plans, may permit employees to make after tax contribution. The contributions deferred to the plan from a participant's salary are still subject to Federal and state income tax, but the earnings grow tax deferred. When the funds are withdrawn, participants need to determine the basis for tax purposes. The portion of the withdrawal subject to earnings is taxed. The portion of the withdrawal that is attributable to contributions is not taxed. These contributions are never subject to a vesting schedule.
Employee Pre-Tax Contributions - Employees in certain types of retirement plans may be permitted to make pre-tax contributions (i.e. JF(k) Profit Sharing, SIMPLE JF(k) Profit Sharing, SIMPLE IRA, SARSEP and 403(b) plans). In those plans, the amount of money deferred from salary into the plan is not currently subject to federal income tax. However, depending on the state, this money may still be subject to state income tax. The earnings -- like with employer contributions -- grow tax deferred. The participant is only subject to tax when funds are withdrawn from the plan. These contributions are never subject to a vesting schedule.
Employer Contributions - Benefits under a plan are generally funded by the plan sponsor/employer. Certain plans require the employer to make a contribution. These plans include Defined Benefit Plans and Money Purchase Plans. Other plans provide the employer with the ability to make contributions at their discretion each year. Those plans include profit sharing, JF(k)/profit sharing, 403(b), Employee Stock Ownership, and Simplified Employee Pension Plans, to name a few. All employer contributions with the exception of IRA-funded plans, may be subject to a vesting schedule.
Forfeitures - If an employee leaves the service of an organization sponsoring a retirement plan and the employee is not fully vested in those retirement benefits, the amount of money not vested is called a forfeiture. Forfeited funds remain in the plan and may be used for one of the following, as specified in the plan document:
- To restore previously forfeited funds. (If a terminated employee returns to the sponsoring organization within five years of their departure, they may be entitled to have the funds restored to their account.)
- To be used by the Plan Sponsor to offset future contributions.
- To be used by the Plan Sponsors to pay the administrative expenses of the plan, like record keeping costs, trustee fees, consulting fees, attorney fees or accounting fees.
- To be re-allocated to the accounts of remaining participants.
Investment Policy Statement - ERISA requires that all qualified retirement plans invest assets in accordance with a written funding policy; for most retirement plans, this is called an Investment Policy Statement (IPS). This statement specifies how the plan is to be funded, how investment decisions are to be made, and how investments are to be monitored. Today, many plans fail to establish and/or update and comply with their IPS. It is the duty of the trustee and other plan Fiduciaries to establish and ensure compliance with the IPS.
Matching Contributions - Plans that permit either pre-tax or after tax employee contributions generally may allow the employer to match those contributions with employer funds. The formulas for this type of contribution vary and can even be determined annually, at the Plan Sponsor's discretion. The reasons most employers match are to: 1) attract and retain employees and 2) to encourage employees to save toward their own retirement. By making matching contributions, the employer often assists the plan in passing compliance tests. In some plans, matching contributions may be subject to a vesting schedule.
Mutual Funds - A mutual fund is a collection of individual investments packaged into an investment product and sold in shares to investors. In actuality, each individual mutual fund is its own corporate entity established in accordance with the Investment Company Act of 1940. Depending on the type of fund, investments in a mutual fund may include, but are not limited to, stocks, bonds, insurance products, real estate, corporate debt instruments, loans, mortgages and other marketable securities. A mutual fund may be part of a family of funds under the management of one company, but it operates as an individual entity. The administrators of the fund pay the costs of administering, staffing, trading, distribution, transfer agency and operating expense, and obtain profit from an expense ratio charged to each mutual fund share. Generally, those expense ratios range from .18 to 2.8 percent of the value of the fund depending on the share class.
Non-Elective Contribution - Certain plans, in order to comply with plan rules, may opt to make an annual, non-elective contribution to each eligible employee in lieu of a required matching contribution. Plans that offer this non-elective contribution option include Safe Harbor JF(k), SIMPLE JF(k) and SIMPLE IRA plans. The contributions, unlike most matching contributions, may not be subject to a vesting schedule.
Rollover Contributions - Retirement plans may permit a participant to rollover funds from their previous employer's plans or from a conduit IRA into the participant's new plan. In general, funds may only be rolled over or transferred from one plan to another if the previous plan received its tax qualification status from the same section of the Internal Revenue code. For example, qualified plans like defined benefit, profit sharing, JF(k)/profit sharing and money purchase plans receive preferable tax treatment under Internal Revenue Code (IRC), Section 401(a). So, an employee who came from a company with a money purchase plan could, if the new plan permits, transfer their account balance from that money purchase plan into the new company's JF(k) plan. However, if that employee came from an employer that had a 403(b) plan, those funds could not be transferred into the JF(k) plan, because 403(b) plans get their tax qualified status from IRC, Section 403(b).
Rollover IRA - A Plan Participant may be permitted to withdraw funds (usually based on termination of employment) and to deposit those funds into an Individual Retirement Account (IRA). In a qualified plan where the employee's account balance never exceeded $5000, the Plan Sponsors may require that the funds be distributed to the participant. In order to maintain the tax-qualified status of those funds, an employee may elect to roll that money directly into an IRA. If the employee would accept funds from a plan directly, they have 60 days from the date of distribution to roll these funds into an IRA. However, in most cases, the funds received would have been the total account balance minus the required 20-percent Federal withholding. The total account balance could still be rolled to an IRA but in this instance, the participant would need to fund the 20-percent for Federal taxes withheld out of his or her own pocket. Nearly all retirement plans permit IRA rollovers, except for 457 plans.
Securities - Items of value that may be purchased by an individual or retirement plan as an investment.
Stock - A security of a corporation whereby shareholders receive ownership in that corporation. Some stocks pay dividends based on corporate profits while other stocks only grow in value based on the growth value of the company.
Vesting - In a qualified retirement plan (like a Defined Benefit Plan, JF(k) or Profit-Sharing Plan) the plan document may require a participant to work a set number of years of service for the sponsor organization or employee organization to receive full ownership of employer contributions. This is known as vesting. There are two types of vesting schedules:
- Graded vesting - In a graded vesting schedule a participant will receive an additional percentage ownership of all prior and future employer contributions made on their behalf for each year of service completed. Under a graded vesting schedule, employees may not be entitled to 100 percent of the employer's contribution and associated earnings until they work at least 7 years for the employer.
- Cliff vesting - With cliff vesting, an employee will receive no vested benefit until they have worked a specified number of years. After that period of time, they will be 100 percent vested in all employer contributions. The longest period of time an employee may go unvested using the cliff-vesting schedule is five years.
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