A Roundup of Recent DOL and IRS Retirement Plan Guidance

By Ian Beger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

There’s been a flurry of recent government regulation of company retirement plans. Here’s a quick summary:

Electronic Disclosure of Retirement Plan Documents

On May 27, 2020, the Department of Labor published a final regulation making it easier for employers to issue retirement plan notices to participants electronically. Notices can be posted on a website or mobile app or delivered via email. Employees who prefer hard copies can opt out of electronic delivery and receive paper disclosures instead. The DOL rule applies only to retirement plan notices required under ERISA (e.g., summary plan descriptions). It does not apply to notices required by the Internal Revenue Service or employer health plan communications.

Employers are not required to use the new regulation. They may instead rely on an existing DOL rule allowing electronic disclosure in limited situations. Or, they can furnish paper documents by hand-delivery or by regular mail. The new rule is effective July 27, 2020.

Private Equity Investments in 401(k) Plans

For the first time, the DOL has endorsed the use of private equity as an investment option in 401(k) plans. (In a nutshell, private equity is ownership of company shares that, unlike stocks, are not publicly traded.) For many years, defined benefit plan sponsors have invested plan assets in private equity. However, 401(k) plan sponsors have been reluctant to offer it as part of their investment menu because of ERISA liability concerns.

The DOL guidance, issued June 3, 2020, allows plan sponsors to make private equity available as one part of a 401(k) investment option that also offers other, more traditional, investments (for example, a target date fund that also offers stocks and bonds). Plan sponsors cannot offer direct investment in private equity. Proponents of the new rule say that it will open up these investments to rank-and-file employees who have been shut out of the opportunity. Critics say that its risk profile, high fees and lack of transparency make private equity an inappropriate investment for most employees.

ESG Investments

In recent years, defined benefit plan sponsors have been under increasing pressure to take into account ESG (environmental, social and governance) criteria when choosing appropriate investments for plan funds. On June 23, 2020, the DOL proposed a new rule warning that ERISA requires that economic considerations be the sole focus in selecting plan investments. ERISA fiduciaries may not invest in any investment vehicle that is more concerned with satisfying ESG criteria than making money.

The DOL guidance does allow more leeway for offering ESG funds as an investment option under a 401(k) plan.

The regulation is proposed and will not become final until after comments are received and considered by the DOL.

Suspending or Reducing 401(k) Safe Harbor Contributions

Many 401(k) plans offer “safe harbor” employer contributions as a way of automatically satisfying nondiscrimination tests. The contributions can be either matching contributions or across-the-board contributions. One condition for using the safe harbor is that contributions must normally remain in effect for the entire plan year.

In Notice 2020-52, issued June 29, 2020, the IRS allows employers to suspend or reduce safe harbor contributions after March 13, 2020 for the balance of the year, regardless of whether the employer is suffering an economic loss. However, to take advantage of this relief, the employer must adopt a plan amendment suspending or reducing the safe harbor contributions by August 31, 2020.