Pension Protection Act Blog

As a pension geek, I spend a lot of time reading reports produced by the federal government, or reading reports about guidance produced by the federal government. These reports tend to fall into two categories. One categories is the stack of papers which I read, highlight, and spend some time contemplating. The other category are reports that fail to deliver, and ultimately wind up in my circular file. At the very bottom of that category are the reports that, after I’ve read them, I wish it was possible to regain the time I spent reading the report.

Today, the Advisory Committee on Tax Exempt and Government Entities released a long-awaited report which included their recommendations on Improving Compliance for Adopters of Pre-Approved Plans. ACT is a group of 21 volunteers appointed by the Secretary of the Treasury to serve a two-year term. Normally, their reports are really good reading. This report is 189 pages with 69 pages devoted to recommendations for improving compliance for adopters of pre-approved plans.

The report starts with a good beginning, stating that the IRS believes that 94% of all qualified retirement plans are pre-approved plans. This is good news, since I write plan documents for a living. Simple math tells us that means 6% of plan documents are individually designed. Two weeks ago, the IRS let the industry know that they received 3,769 individually designed plans in the last month of Cycle A, and that was 73% of the Cycle A plans they received. Therefore, the IRS received 5,163 individually designed plans in Cycle A. Since the 5 cycles for individually designed plans were designed to equally distribute the number of individually designed plans across 5 cycles, my best guess is that the IRS believes there are 25,815 individually designed qualified plans. If this is 6% of all qualified retirement plans, that would mean that there are 430,250 pre-approved plans, since 6% of 430,250 is 25,815.

In footnote 1 of ACT’s report, they state that their belief is that there are approximately 1,000,000 qualified plans, and approximately 60,000 individually designed plans filed for a determination letter during the last mandatory restatement period, which was the GUST restatement period about 6 years ago. So the universe of pre-approved plans is somewhere between 430,250 and 940,000 plans.

ACT says that they started with the hypothesis that adopters of pre-approved plans generally maintain lower levels of compliance than individually designed plans (See page 144 of the report). Beginning with this hypothesis with the goal of recommending ways to improve compliance for pre-approved plans, ACT said it went in search of independent verification to sustain this premise. ACT said that it sought statistical information from the IRS and other groups on these 430,250 to 940,000 plans, and was unable to locate any.

ACT then decided to seek anecdotal evidence to support their hypothesis, so they ask 13 representatives of sponsoring organizations to meet with them in October of 2006. There are 6 major plan document providers who write most of the plan documents in this country - AccuDraft, ASCi, Corbel, Datair, Ft. William, and McKay-Hochman. None of the 13 representatives included representatives of these companies (See footnote 103 on page 145).

ACT then sought information from adopting employers of pre-approved plans. With somewhere between 430,250 and 940,000 plans, this is a large pool of adopting employers to obtain information from. ACT said it placed an article in an IRS publication, and received 3 responses.

ACT then posted a survey on BenefitsLink.com. They received 110 responses to this survey. ACT states that most of the responders were not adopting employers but some responders were professionals who work closely with adopting employers.

So out of between 430,250 and 940,000 plans, ACT gathered information from 126 individuals to support their hypothesis that adopters of pre-approved plans generally maintain lower levels of compliance than individually designed plans. Statistically speaking, their sample was obtained from less than 0.03% of the universe of pre-approved plans using the lower estimate of 430,250 plans.

At this point, you would think that ACT decided to start over with their hypothesis because they were unable to obtain sufficient information to support it. Or at least start over gathering information to support their hypothesis.

Instead, ACT turned to the IRS for more information. Since the IRS does not maintain empirical data comparing compliance levels between pre-approved plans and individually designed plans, ACT decided to survey EP audit agents. 33 agents provided responses to ACT’s survey.

Based on this information, ACT made a number of recommendations in their report. The most obvious recommendation, based on the information ACT was able to obtain, is missing from the report. That recommendation should have been that further information is needed before making recommendations because ACT was unable to obtain a statistically significant sample.

Even though ACT was unable to sustain their hypothesis, their report contains a number of recommendations. One recommendation is that the IRS continue with its plans for a “soft contacts” audit with sponsoring organizations to determine if they are complying with Rev. Proc. 2005-16.

Another recommendation is to require each sponsoring organization of a prototype plan to offer a simplified version of their prototype with little or no options. Sponsoring organizations operate in a highly competitive marketplace, and so far there has not been a demand for such a document. A few years ago, I saw a prototype where the adoption agreement was only 3 pages long because most of the options were pre-selected. At the time, I thought it was a great idea and there should be demand for such a document. The last two years have proven that there is very little demand for such a document. If adopting employers wanted a simplified prototype with little or no options available, every plan document provider would already be offering one.

Of the 794 specimen plans submitted to the IRS for approval as EGTRRA prototypes and volume submitters, the IRS can provide statistical information on how many are simplified prototypes with little or not options available. To require each sponsoring organization to devote time and resources to create and market such a document, and the IRS to devote time and resources to review and approve such documents, on the basis of such a small amount of information, simply does not make economic sense.

Also contained in the report is the announcement that ACT is undertaking a project to determine whether to recommend a prototype version of governmental 401(a) defined contribution plans. This project is expected to be completed by June of 2008.

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