PLANSPONSOR - February/March 2018 - 22

25 YEARS OF RETIREMENT PLANS
2004
Changes for DB and
NQDC Plans
MULTIPLE bills affect defined benefit
and nonqualified deferred compensation
(NQDC) plans.
The Pension Funding Equity Act of
2004 (PFEA) provides temporary defined
benefit plan funding relief for plans
beginning this year and next. For context,
in October 2001, the Treasury Department
announced it was no longer issuing
30-year bonds; until then, the bond rate
had been used to measure the funding of
DB plans. The IRS then stepped in and
published monthly yields on the Treasury
bond based on a maturity date of
February 2031; these became used for
benchmarking purposes.
With yields at a lower rate, in some
cases, this was causing defined benefit
plans to appear underfunded and, as a
result, to require larger contributions to
the pension plan. The Job Creation and
Worker Assistance Act of 2002 (JCWAA)
was enacted and provided temporary
funding relief for plan years beginning in
2002 and 2003.
PFEA picks up where JCWAA left off.
The legislation provides other temporary
relief related to defined benefit funding.
This includes: notice requirements for
certain plans relief provisions that apply
to the calculation of quarterly contributions
for 2004 plan years; determinations
of whether a plan is subject to the deficit
reduction contribution (DRC); the ability
to make large deductible contributions by
having the option to calculate deduction
limits using the 30-year Treasury rate;
and the use of 85% of the corporate bond
rate to calculate the PBGC variable rate
premiums.
The American Jobs Creation Act
of 2004 contains one particularly key
section: Internal Revenue Code (IRC)
Section 409A. While the main bill
encourages companies to add jobs in the
U.S., Section 409A establishes a complex
regime for taxation and regulation of
nonqualified deferred compensation
(NQDC)-i.e., income workers earn in
one year but receive as pay in a future year.
The code will regulate NQDC plans, used
to provide supplemental compensation to
key executives.
Many people make tax-deductible
contributions to an employer plan or an
individual retirement account (IRA). In
both cases, the full use of the money is
deferred until a later date, as is the taxation
of the funds. These vehicles are referred to
as " tax-qualified " deferred compensation
arrangements.
NQDC was being invested using
less formal arrangements, such as longterm
incentive plans, severance pay plans,
phantom stock, stock appreciation rights,
certain types of stock options and other
executive compensation practices. Up until
2006
Participant Lawsuits Aim at Revenue Sharing
" FOR many plan sponsors, providers and
advisers these days, the devil has a face
and a name-St. Louis attorney Jerome
Schlichter, " a July 2007 PLANSPONSOR
article will report.
The reason: In 2006, the firm where
he is founder and managing partner,
Schlichter Bogard & Denton, LLP, files the
first participant lawsuits over 401(k) fees.
For many plan sponsors, the subject
is one they know very little about.
The targets for Schlichter's suits
include large employers such as Boeing
Co. and General Dynamics Corp.
According to the claims, the sponsors are
violating their fiduciary responsibilities
by agreeing to excessive recordkeeping
fees-paid for by revenue sharing-and
utilizing retail mutual funds in large
plans that could have gotten lower-cost
share classes.
These lawsuits wake sponsors up
to the reality that they need a clearer
understanding of their plan fees-both
the level of the fees and their structure.
Sponsors begin to question and abandon
revenue sharing.
Just 9.5% of retirement plans pay all
22 PLANSPONSOR.com February-March 2018
administrative/recordkeeping fees by way
of that practice, the 2016 PLANSPONSOR
Defined Contribution Survey will find.
The growing focus on fees will also
help motivate Washington, D.C.,'s subsequent
move toward requiring clearer fee
disclosure to participants. And the legal
victories, and bad publicity stemming
from these lawsuits, will later play a role
in kicking off the " race to the bottom " by
sponsors focused on getting the lowest
fees available.
Schlichter Bogard & Denton will
continue to file suits against corporate
plans, with large targets including Oracle
Corp.'s 401(k) plan. Come 2016, the firm
will play a leading role in fee lawsuits
against major American universities'
defined contribution plans.
When speaking in a PLANSPONSOR
.com interview, in May 2014, Schlicter
will say, " At the end of the day, [plan sponsors]
are handling other peoples' money,
[their] employees' money, and the duty of
anyone handling anyone else's money is
a very strict fiduciary duty. It's a duty to
make sure the interest of the employees is
paramount and exclusive. "
now, all of these arrangements, have been
unregulated.
Congress drew up the new statutory
scheme partly in response to the misconduct
of certain executives associated with
the collapse of Enron.
409A imposes restrictions on both
the timing and substance of deferral elections
under covered plans; the circumstances
under which distributions are
permitted-as well as the timing of certain
distributions-and the manner in which
the rights of service providers may be
protected through funding mechanisms.
Section 409A imposes many complex
rules on NQDC. Fortunately, the IRS has
developed a program to correct Section
409A violations that are quickly discovered
and properly corrected.
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