Retirement Plan Industry Update – Q1 2018

April 18, 2018

Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®


The End of the DOL Fiduciary Rule

On March 15, 2018, the court ruled that the Department of Labor (DOL) exceeded the authority granted by Congress and employed a different definition to the term “fiduciary” than Congress intended under ERISA.

Implications of this verdict:

 Effective May 7, 2018

  • The definition of an “investment advice for a fee” fiduciary under ERISA will revert to the five-part test created in 1975. In order to claim fiduciary status, all of the following conditions must be satisfied.
    • Advice is provided regarding the value of property or a recommendation is made regarding the purchase, sale, or retention of property.
    • Advice is provided on a regular basis.
    • Advice is provided pursuant to a mutual agreement or understanding (written or verbal).
    • Advice will serve as a primary basis for the investment decision.
    • Advice is individualized to the needs of the recipient.
  • The expanded definition of “fiduciary activity” to include rollover recommendations and investment recommendations to individual retirement account (IRAs) will no longer apply.
  • There will be no best interest contract (BIC) exemption, and all amendments to other prohibited transaction exemptions will no longer apply.
  • The DOL review of the fiduciary rule per a White House memorandum will cease as there will no longer be any rule to review.

It is likely that the DOL will decline its opportunity to request a rehearing.

(Empower Retirement, 2018)


401(k) Plan Nondiscrimination Testing

Plan Sponsors should understand the fundamentals of 401(k) nondiscrimination testing. It is prudent to be familiar with the types of contributions tested, the methods used, and the remedies plans have if they fail.

The Employee Retirement Income Security Act (ERISA) requires a variety of tests each year to confirm 401(k) plans do not discriminate in favor of employees with higher incomes.

The Internal Revenue Service (IRS) defines a “highly compensated employee” as an individual who:

  • Owned more than 5% of the interest in the plan sponsor business at any time during the year or the preceding year, or
  • For the preceding year, received compensation from the plan sponsor business of more than $120,000.

Tests to Know:

The actual deferral percentage (ADP) test compares the average of salary deferral percentages for highly compensated employees (HCEs) with the average of salary deferral percentages for non-highly compensated employees (NHCEs). This test applies to pre-tax and Roth elective deferrals. The primary purpose of this test is to verify that all participants, both HCEs and NHCEs, are benefitting from the plan.

The actual contribution percentage (ACP) test compares the average of the percentage of matching contributions and after-tax employee contributions for NHCEs versus HCEs. The primary purpose of this test is to verify that the actual usage of the plan feature is widespread and not used solely by the HCEs.

There is also a test to verify that the 401(k) plan is not top-heavy. If more than 60% of the overall assets in the plan are attributable to key employees (different from HCEs), then the plan is top-heavy and certain minimum benefits may need to be provided to the non-key employees. According to the IRS, a key employee is any former or deceased employee who: at any time during the plan year was an officer making more than $175,000; was an owner of more than 5% of the business; or was an owner of more than 1% of the business and making more than $150,000 for the plan year.

Consequences of Failing:

If a plan fails either the ADP or ACP test, the employer must take corrective action in the 12-month period following the close of the plan year in which the error occurred. The IRS describes two methods for correcting a failed ADP or ACP test:

  • Determine the amount necessary to raise the ADP or ACP of the NHCEs to the percentage need to pass the tests, and make qualified nonelective contribution to all eligible NHCEs in that amount, and
  • Distribute excess contributions, adjusted for earnings, to the HCEs. If any matching contributions are not 100% vested for the participant, the applicable percentage must be forfeited.

If the plan is found top-heavy in a plan year, the plan sponsor is required to make a minimum contribution to the non-key employees.

(Couch, 2014)


Lost, But Not Yet Found

The DOL has drastically increased the number of audits of retirement plans with participants who cannot be located in conjunction with the distribution of owed benefits. The DOL has directed its focus to Form 5500 filings disclosing high numbers of terminated vested participants who are not receiving payments. As a result, on March 5th the Government Accountability Office called on the DOL to issue further guidance for plan sponsors actively searching for missing participants.

The responsibility of plan sponsors to locate missing plan participants is required under both ERISA’s fiduciary standards and the Internal Revenue Code’s required minimum distribution requirements. As outlined in Field Assistance Bulletin 2014-01, the DOL interprets this responsibility as a requirement for plan fiduciaries to make reasonable efforts to locate missing participants in connection with a plan termination. Similarly, the DOL declared that failure to take the minimal steps outlined in the Bulletin would amount to a violation of fiduciary obligations.

Moving forward, plans and fiduciaries may be affected by the re-introduced bill titled “Retirement Savings Lost and Found Act of 2018”. The Act would establish a national online registry that would allow individuals to locate the plan administrator of any plan with respect to which the individual is a participant, and it would enhance certain plan reporting requirements.

(Cross, 2018)


Financial Literacy

Financial literacy among adults in the United States is shockingly low. The TIAA Institute and the Global Financial Literacy Excellence Center found that adults answered, on average, only 50% of financial survey questions correctly.

“Less than one in five U.S. adults demonstrated a relatively high level of personal finance knowledge by answering more than 75% of the survey questions correctly,” Annamaria Lusardi, academic director of GFLEC, said in a statement. “Low levels of financial literacy, among not only the young but also people close to retirement, show we need to step up the effort to promote financial knowledge across the entire population.”

The survey asked 28 questions, covering eight areas of functional knowledge:

  1. Earning: determinants of wages and take-home pay
  2. Consuming: budgets and managing spending
  3. Saving: factors that maximize accumulations
  4. Investing: investment types; risk and return
  5. Borrowing/managing debt: relationship between loan features and repayments
  6. Insuring: types of coverage and how insurance works
  7. Comprehending risk: understanding uncertain financial outcomes
  8. Go-to information sources: recognizing appropriate sources and advice

(Sullivan, 2018)




Works Cited

Empower Retirement. (2018, March 21). Instant Insights: Fifth Circuit rules to strike down DOL fiduciary rule. Retrieved April 13, 2018 from

Couch, N. (2014, December 1). 401(k) Nondiscrimination Tests Explained. Retrieved April 13, 2018 from

Cross, A. (2018, March 16). Send Out the Search Party: The DOL and Other Agencies Focus on Plan Efforts to Locate Missing Participants (Part1). Retrieved April 13, 2018 from

Sullivan, J. (2018, April 4). Just How Low is 401(k) Financial Literacy? Retrieved April 13, 2018 from