Advisory Committee on Tax Exempt and Government Entities (ACT ...

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PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCE401(k) – Governmental employers which formed 401(k) plans before May 1986 mayoffer such plans, but formation of governmental 401(k) plans was precluded thereafter.Congress amended IRC Section 401(k) in 1996 to clarify that Tribal Governments mayestablish 401(k) plans. “Grandfathered” 401(k) plans are offered by a number of State,local and Tribal governments. In response to NAGDCA’s 2007 Defined ContributionPlan Survey, 14% of respondents reported offering this benefit.Federal Thrift Savings Plan - The Thrift Savings Plan (TSP) is a 401(k)-like definedcontribution plan offered to Federal employees. It operates under regulations publishedin Title 5 of the Code of Federal Regulations, Parts 1600 – 1690 and as a trust underIRC section 401(a). As the largest defined contribution plan in existence, the TSPincludes approximately 3.7 million participants and $210 billion of assets.III.TrendsThis section references trends impacting governmental plans, which include the role ofindustry organizations, the impacts of recent pension legislation and developments thatare specific to individual categories of plans.Industry OrganizationsDue to the efforts of industry organizations and increasingly professional staff, largepublic sector defined contribution plan sponsors are more aware than ever of theirfiduciary duties and their responsibilities under the IRC. This is exemplified in part bythe work of NAGDCA an organization made up of 50 States and 100 local governmententities as well as private sector service providers. As evidenced by its website,NADGCA employs an array of media and onsite meetings to educate members aboutsuch policy issues as pending pension legislation, 403(b) regulations, investment adviceand Department of Labor (DOL) guidance on Qualified Default Investment Alternatives(QDIA). The IRS has partnered with NAGDCA effectively in recent years by participatingin NAGDCA’s annual conference and most recently by including NAGDCA members inthe Governmental Plans Roundtable. There are a number of similar governmentalemployer organizations who advocate effectively. They also provide an opportunity forforming partnerships between regulators and other governmental plan stakeholders.LegislationAlthough the Pension Protection Act (“PPA”) and 403(b) regulations have dominatedheadlines, EGTRRA most profoundly changed governmental defined contribution plansfor the better.Among other benefits, EGTRRA provided for:• Increased regular deferral limits and additional catch-up contribution limits• Distribution flexibility and elimination of the irrevocable election rule for 457(b)plansADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 10
PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCE• Asset portability to include purchase of permissive service credits from definedbenefit plansThis report does not provide analyses of legislation, but rather attempts to estimate itsimpact on governmental plan formation and employer needs that are relevant to theIRS.Trends Specific to 457(b) PlansWith the implementation of beneficial legislation, the number of governmental definedcontribution plans has grown, perhaps most significantly among 457(b) plans. Sincemost states and large localities operated 457(b) plans prior to 2002, it is likely thatgrowth has been most pronounced among small employers who typically rely onvendors rather than internal resources for compliance and operational expertise. Basedon that assumption, anecdotal evidence that 40% - 60% of public K-12 employers offer457(b) plans indicate a significant increase in plan formation beginning in 2002, the yearmost provisions under EGTRRA became effective.Trends Specific to 403(b) PlansAlthough growth is not projected to be as high among 403(b) plans in terms of employeradoptions, the new 403(b) regulations will test employers’ and their service providers’ability to adopt required changes for existing plans. The new regulations will also likelyresult in a profound change to service provider structure, investment structure designand governance. Increased employer involvement necessitated by the new regulationsmay result in ramped-up marketing and thus greater participation. Further, providers willbe relied upon to offer specialized compliance services, similar to those they have longdelivered in the 401(k) market.Trends Specific to 401(a) PlansThough data on 401(a) plans is scarce, Pensions & Investments (P&I) reported assetgrowth of 52% for these plans for the three years ended December 31, 2007 20 . P&Ifurther reported predictions of rapid future growth driven by growth in match plans andthe creation of defined contribution alternatives to existing governmental defined benefitplans. Although not a clear trend, state governments have increasingly made 401(a) orgrandfathered 401(k) defined contribution plans available to their employees as aprimary retirement vehicle. State and local employee access to an employer-fundeddefined contribution plans that served as a primary retirement vehicle increased from9% in the late 1990’s to 14% in 2004. 2120 Pension Investments,401(a)s get an “A” for rapid asset growth, August 6, 200721 Trends in Public Sector Retirement Plans, Nationwide Retirement Education Institute, Volume II, March 2006ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 11
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