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Rethinking Retirement Plan Design


Recently, the Internal Revenue Service announced the demise of its determination letter program for individually-designed retirement plans. This change, along with recent judicial developments, is prompting employers to review the design of their retirement plans. Here are two key questions to keep in mind when reviewing your plan. First, does the design of the plan minimize compliance costs, while still offering the features that make your retirement benefits attractive to your workforce? Second, does your plan design minimize the potential liability associated with operating your plan?

Demise of the Determination Letter Program

In Announcement 2015-09, the Internal Revenue Service announced that effective January 1, 2017, it will eliminate the staggered 5-year determination letter amendment cycle procedure for all individually-designed (i.e., "custom-written") retirement plans. Going forward, the Service will limit the scope of determination letters for individually-designed plans to initial plan qualification and qualification upon termination of the plan. Employers who use prototype plans, however, will be able to rely on determination letters for interim amendments obtained by their prototype plan sponsor.

In a prototype plan, the "plan" consists of two documents – a master plan document that contains most of the technical language required for tax-qualified status under the Internal Revenue Code, and a much shorter adoption agreement, which the employer uses to customize various operational features, such as eligibility, vesting, and plan loans. Prototype plans are cost-effective to operate and maintain. As amendments are needed, they are simply added to the master plan document by the sponsor of the prototype plan, and then adopted by employers who use the master plan document.

The demise of the determination letter program is significant for employers who use individually-designed plan documents because a current determination letter provides assurance (or "cheap insurance") that the written plan document meets all of the technical requirements for a tax-qualified plan. Without this assurance, employers who sponsor individually-designed plans are at greater risk of plan disqualification as various amendments are added over the life of the plan.

Plan disqualification issues, and the "solution" provided by a current determination letter, can arise in a variety of contexts. For example, if there has been an operational error in plan administration, a current determination letter allows the employer to self-correct the problem under certain circumstances. In addition, a current determination letter provides access to the Employee Plans Compliance Resolution System, where more serious errors can be corrected for a relatively nominal fee. In the context of a merger or an acquisition, a current determination letter reduces due diligence costs by buttressing representations and warranties that the retirement plan is tax-qualified. Finally, a current determination letter helps to minimize the risk of a plan audit.

In order to preserve the advantages associated with a current determination letter, employers who sponsor individually-designed profit sharing, 401(k), and money purchase pension plans may want to consider transitioning to a prototype plan document to reduce future compliance costs. Koley Jessen offers a variety of prototype plan and adoption agreement options, with fixed fee pricing for starting a new plan or transitioning an existing plan. Adopters of our prototype plans also may elect to receive a package of compliance-oriented legal services for a fixed annual maintenance fee. Under this annual maintenance fee arrangement, there is not a "surprise" bill when the plan later must be amended to comply with a change in the law.

For governmental plans, church plans, defined benefit plans, collectively bargained plans and ESOPs, as a practical matter the prototype plan option is not available. These individually-designed plans must continue to be amended to remain in compliance, but will not enjoy the assurance provided by a determination letter. Thus, for these types of plans, the experience and expertise of the attorney who prepares the plan amendment becomes of paramount importance. The benefits attorneys of Koley Jessen – Dan Wintz, Adam Cockerill, and Colleen Medill, have over 60 years of combined experience with qualified retirement plans.

Plan Structure and Fiduciary Liability

When reviewing your current plan document, it is also critical to focus on who is designated to serve as the "named fiduciary" for the plan. The named fiduciary is the person who is ultimately liable for mistakes or mismanagement in the operation of the plan. If a person or a committee is not specifically designated as the plan’s named fiduciary in the formal plan document, the default rule is that the employer who sponsors the plan becomes its named fiduciary, thereby placing corporate assets at risk.

Sophisticated employers take maximum advantage of plan design to minimize corporate liability. Common risk management techniques include designating an employee or a committee to serve as the plan’s named fiduciary, and to delegate certain fiduciary functions, such as plan administration or the oversight and management of plan investments. Plan administration and investment management can be done internally by employees, or these fiduciary functions (and related liabilities) can be outsourced to professional fiduciaries.

When serving as a plan fiduciary, an individual owes fiduciary duties to the plan and its participants. A breach of those duties can result in personal liability if the breach causes a loss to the plan or a participant. The legal duties of plan fiduciaries are the highest form of legal duties imposed on individuals under the law. This point was recently emphasized by the Supreme Court in Tibble v. Edison International. In Tibble, the Court held that the individuals who served on a 401(k) plan investment committee had an ongoing duty to prudently monitor the plan’s investment options, which charged excessively high fees. This duty to monitor, along with other key fiduciary responsibilities, such as documenting a prudent decision-making process, were addressed in our July webinar presentation. If you were unable to listen, please contact us for a copy of the slides used in the presentation.

One common mistake made by employers is to delegate fiduciary responsibilities for the operation of the plan informally to a committee, but fail to do so formally in the written plan document. The result can be that the committee members believe that they can take effective action, such as amending the terms of the plan, when in fact they lack the legal authority to do so.

Another common mistake is to outsource fiduciary functions under the written terms of the plan document to a professional fiduciary, but then inadvertently "take back" the fiduciary liability for the outside fiduciary’s actions. For example, if in operating the plan the employer "has the final say," or is asked by the outside fiduciary to "review and approve" a decision or action, then the employer becomes liable as a co-fiduciary for that decision or action.

These operational situations highlight the importance of fiduciary training so that employees who serve as plan fiduciaries understand their roles, responsibilities, and limitations under the terms of the plan document and the law. Koley Jessen offers a customized and cost-effective fiduciary training program to educate employees who serve as plan fiduciaries. Additional information about the content and cost of this fiduciary training program can be found in the attached brochure.


An employer wants to operate a business, not worry about a retirement plan. The employee benefits attorneys of Koley Jessen are here to help with amending individually-designed plans, providing affordable prototype plan options, and conducting fiduciary training for employees. If your retirement plan is starting to feel like a burden rather than a benefit, please contact us to discuss options and solutions.

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