2020 Action Items for Retirement Plan Sponsors | Practical Law

2020 Action Items for Retirement Plan Sponsors | Practical Law

An Article discussing developments that should be considered by retirement plan sponsors in 2020. This Article focuses on three items employers should review in the year ahead: retirement plan policies, procedures, and communications material for Setting Every Community Up for Retirement Enhancement Act (SECURE Act) compliance; whether to include mandatory arbitration of dispute provisions in their retirement plans; and policies and procedures related to cyber and data security.

2020 Action Items for Retirement Plan Sponsors

Practical Law Article w-022-9030 (Approx. 7 pages)

2020 Action Items for Retirement Plan Sponsors

by Practical Law Employee Benefits & Executive Compensation
Law stated as of 29 Jan 2020 • USA (National/Federal)
An Article discussing developments that should be considered by retirement plan sponsors in 2020. This Article focuses on three items employers should review in the year ahead: retirement plan policies, procedures, and communications material for Setting Every Community Up for Retirement Enhancement Act (SECURE Act) compliance; whether to include mandatory arbitration of dispute provisions in their retirement plans; and policies and procedures related to cyber and data security.

Review Retirement Plan Policies, Procedures, and Communication Materials for SECURE Act Compliance

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which is part of the Consolidated Appropriations Act, 2020, was enacted on December 20, 2019, and has numerous provisions changing the laws governing qualified retirement plans (see Legal Update, Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements). Many of these provisions are effective immediately.
Changes that became effective on the SECURE Act's enactment or for plan years after December 31, 2019 include:
  • The required minimum distribution (RMD) age. The age for taking RMDs has increased from 70.5 to 72. This change is effective for individuals who turn age 70.5 after December 31, 2019.
  • 401(k) automatic enrollment. For 401(k) plans with an automatic enrollment feature, the maximum default contribution rate has increased from 10% to 15% after the first year of participation.
  • An annuity safe harbor. The SECURE Act creates a new fiduciary safe harbor for retirement plans that select an annuity provider and increases the portability of lifetime income options.
  • Withdrawal for birth or adoption. A new penalty-free withdrawal of up to $5,000 on the birth or adoption of a child is available for participants in a retirement plan or individual retirement account.
  • Small employer tax credits. Small employers (with 100 or fewer employees) that establish a retirement plan or add automatic enrollment features can take advantage of increased tax credits.
  • 401(k) safe harbor. Notice requirements for nonelective employer contribution safe harbor 401(k) plans eliminated and changes permitting 401(k) to be amended to become nonelective 401(k) plans.
  • Portability of lifetime income options. Participants in defined contributions plans may make a direct rollover to a retirement plan or IRA if the lifetime oncome investment is no longer authorized to be held as an investment option.
Future effective dates will apply to changes impacting:
  • Lifetime income disclosure. A new required disclosure about lifetime income includes an estimate of the amount of monthly annuity income from the participant's retirement benefit.
  • Multiple employer plan (MEP) access. A new type of MEP, called a pooled employer plan, would allow unrelated employers to participate in one benefit plan. The SECURE Act includes tax changes to encourage participation in MEPs.
  • Retirement plan administration. Changes include combined reporting for groups of plans on the annual Form 5500 filing.
In response, plan sponsors should:
  • Establish procedures to implement the new requirements and review communication materials.
  • Identify qualified retirement plans that will need amendments. Under the SECURE Act, the deadline for amendments is the 2022 plan year.
  • Monitor the issuance of regulations or guidance from the IRS and the Department of Labor on the SECURE Act's provisions.
(See SECURE Act Compliance Chart.)

Review Whether to Include a Mandatory Arbitration Provision

The increased risk and expense of litigation under the Employee Retirement Income Security Act of 1974 (ERISA) has caused many plan sponsors and plan fiduciaries to search for methods to reduce the likelihood that they will be sued and to reduce the expense of unavoidable claims. One method to help alleviate these risks can be to include a mandatory arbitration provision in a retirement plan.
For more information on arbitration provisions in retirement plans, including class action waivers, see Practice Note, Arbitration Provisions for Retirement Plans. For sample summary plan description (SPD) language, see Standard Clause, SPD Language, Arbitration of Disputes for Retirement Plans.

Current Law

Retirement plans and employment agreements may include provisions requiring participants to arbitrate certain claims relating to the administration of the plan and the investment of plan assets. The law is currently changing regarding:
  • The enforceability of arbitration provisions.
  • Whether participants and beneficiaries may be required to arbitrate their claims.
  • Whether participants and beneficiaries may be required to forego class action litigation to resolve their disputes.
The enforceability of arbitration provisions was recently challenged in Dorman v. Charles Schwab Corporation, which held that ERISA claims are arbitrable (934 F.3d 1107 (9th Cir. 2019)). In Dorman, the Ninth Circuit held that provisions in plan documents requiring individual arbitration of plan-related disputes are enforceable (934 F.3d at 1107). It remains to be seen whether other circuits will follow suit.
Employers that decide they would prefer to arbitrate rather than litigate, may wish to consider including arbitration and class action waiver provisions in their plan documents and SPDs, rather than potentially relying on employment agreement language (see Standard Clause, SPD Language, Arbitration if Disputes for Retirement Plans).
(See Arbitration Provisions for Retirement Plans: Current Law.)
In deciding whether to utilize arbitration provisions, plan sponsors should consider the advantages and disadvantages of arbitration provisions.

Advantages and Disadvantages of Arbitration Provisions

Arbitration has been viewed as having both advantages and disadvantages as a dispute resolution method.
Advantages of using arbitration include:
  • Costs can be lower compared to litigation.
  • Disputes can be resolved faster compared to litigation.
  • Proceedings can be less formal than litigation.
  • Discovery is more limited in arbitration than litigation, which can result in an additional cost savings.
  • Arbitration can be friendlier to defendants as arbitrators may have a favorable bias towards corporations they are often responsible for paying arbitrator fees.
  • Arbitration is generally private and there is no public docket.
Disadvantages of using arbitration include:
  • Certain circuits are friendlier to employers and plan sponsors so employers may want to take advantage of those circuits.
  • Arbitration can be more expensive than litigation.
  • Parties must live with arbitral awards, even when arbitrators make serious errors in reaching their conclusions.
  • There is limited ability to challenge an arbitration decision.
  • Class action litigation may have advantages for plan sponsors as defendants may prefer to resolve all potential disputes arising out of the same facts and circumstances in one forum.
Plan sponsors should weigh these factors, consider their particular circuit and situation in deciding whether to include arbitration provisions.
(See Practice Note, Arbitration Provisions for Retirement Plans: Arbitration Provisions as a Risk Management Tool.)

Review Policies and Procedures Related to Cyber and Data Security

Retirement plans can be susceptible to cybersecurity and data security attacks because they:
  • Have significant assets.
  • Maintain important information regarding participants and beneficiaries (for example, social security numbers, bank account information, and dates of birth).
To prevent attacks, plan sponsors, fiduciaries, and practitioners assisting these parties should understand how to stop potential attacks and implement protection policies and procedures. Policies and procedures should cover:
  • A strategy to identify and assess cybersecurity risk. This includes policies and procedures to:
    • prevent attacks; and
    • address contingency plans in the event of an attack.
  • Monitoring service providers and vendors to ensure they have up-to-date cybersecurity practices.
  • Participant education.
  • The proper insurance policies for the plan and fiduciaries (see Practice Note, Insurance for ERISA Fiduciaries).
(See Cybersecurity for Retirement Plans Toolkit and Practice Note, Cybersecurity and Data Security Considerations for Retirement Plans.)

Strategy to Identify and Assess Cybersecurity Risks

Employers should have an overall strategy to identify and assess cybersecurity risks, including policies and procedures to prevent attacks and address contingency plans in the event of an attack. The procedures should address:

Service Providers and Vendors

It is increasingly common to provide information security-related provisions in retirement plan service agreements, primarily to address the service provider's responsibilities regarding securing participant-level data.
(See Practice Note, Negotiating ERISA Service Provider Agreements.)

Participant Education

Many breaches occur due to participant error. Participants should be provided with education on:
  • Cybersecurity risks.
  • Best practices to assist in preventing these risks.

Proper Insurance Policies

Employers should review their cyber insurance coverage. Cyber insurance can assist with the mitigation of risks by offsetting costs involved with recovery after a cybersecurity breach or similar event. Companies may wish to either have specific cyber insurance policies or riders to existing policies which can cover employee benefit plans.
(See Practice Note, Insurance for ERISA Fiduciaries.)