Employers and plan participants alike will not soon forget 2008. Accounts that have seen losses in excess of forty percent coupled with increased regulatory scrutiny and additional audit requirements have left the world of retirement plans crying UNCLE!

Up until two months ago, the retirement plan landscape had been dominated by the focus on fee disclosure and the associated proposed Department of Labor (DOL) rules. After significant back and forth activity, the DOL issued proposed fee disclosure rules to be effective January 1, 2009. In summary, the new rules would require greater detailing of fees reported on the form 5500, greater fee transparency for plan sponsors, and more extensive disclosure to plan participants. The ultimate goal is to provide sponsors with a better understanding of the true costs associated with operating their plan, while providing meaningful accurate information to employees. Contrary to the position maintained by many in the investment industry, it is very difficult to determine the fees associated with a plan. Final regulations were supposed to be published by the end of 2008; however, as of this writing, they had not been released.

Just as employers were coming to grips with the new fee disclosure requirements, the bottom fell out of the financial markets with the economy now in a recession. After several years of market bliss, plan accounts have been hammered, with no one particularly confident on where they are headed.  We have never before witnessed such a rapid deterioration in the financial markets, so we are struggling to comprehend what has happened. Some are in a state of panic, most are confused and, to a certain extent, all of us are afraid. At one point, I was receiving calls everyday from friends, family, clients and colleagues that just wanted to talk about the state of the market and economy. This is the time when plan advisors earn their keep and employers must avail themselves of all of their resources to assist employees through this very difficult time. If you have not had significant contact with your plan’s investment advisor, then you should be concerned. One could argue that all employers with participant-directed accounts should have a strategic plan in place related to how to work with participants through this tough time. Between the downturn in the market and the review of plan fees, a strong plan investment advisor will be key to protecting plan fiduciaries.

As we brought to a close the busiest part of our audit season, we noted two major issue areas. Coping with yet another new set of standards and capturing the correct definition of compensation repeatedly caused problems for employers. 2008 marked the second consecutive year that we, and our audit clients, had to work through new standards. The new standards focused on employers’ internal controls related to the processing of plan tasks and the assessment of risk associated with how those tasks were being performed. Ultimately, this resulted in additional time at client sites, additional work for the client and our auditors and, of course, additional costs. Many employers struggled with the extra documentation required under these new standards.

Using the correct definition of compensation was yet again the biggest plan problem that we found. Employers across all industries, regardless of size, continue to be baffled by what the proper definition of compensation is in their plan. We try to bring attention to this potential pitfall every year, but seem to only have minimal success. This is a problem specifically related to 401(k) plans that affects what compensation is subject to the employee’s deferral election and how the matching contribution is calculated. The Internal Revenue Code provides a lot of flexibility on the treatment of various types of compensation, regular wages, commission, bonuses etc. and what types are included when calculating the resulting match. However, the plan document must spell out these provisions and they must be followed. Failure to do so can cause a lot of grief. We encourage all employers to review their definition of compensation to ensure that what they are doing in practice is accurately reflected in the written instrument.

There was also some positive news. The IRS recently released the 2009 cost-of-living adjustments that included the following limit increases:

Despite the bad press that plans have received during the recent economic events, plan participants are encouraged to avail themselves of the new limits as best they can. With a new administration and significant tax policy change expected, it remains to be seen how much longer contribution limits will remain high.

If you would like additional information regarding any of the topics discussed above, or would like information regarding Aronson’s Benefit Plan Services Group, please contact Mark Flanagan at 301.231.6257.