Announcement: Jim Scheinberg was a special guest on Enterprise Radio hosted by Rick Unser, on Fiduciary Process Mindset, & Foresight

Click here to listen to the podcast.

Rick & Jim kick things off by addressing what role a 401(k) expert witness actually plays during a lawsuit.  Then they quickly begin to stress test some fiduciary messages you might have heard such as “Your process is your protection”, then we delve into whether having the right fiduciary mindset is relevant and while retirement plan fiduciaries are not expected to predict the future, could having some foresight be important to your fiduciary process.


401(k) Fridays_Linkedin Search Updates_posted 12-12-2018

Fiduciary Commentary | Summer 2017

By: Brant Griffin – August 23, 2017

14Focus on Vesting and Forfeitures

IRS regulations provide a great deal of flexibility on the use of forfeited plan assets in defined contribution plans. Forfeitures are created when a participant terminates their employment before obtaining full vesting in their employer contributions. The administration of plan forfeitures is a challenge and often a potential compliance risk. Effective internal procedures to ensure compliance and understanding of current regulations can alleviate these plan hazards.

Forfeiture Basics

Forfeitures are assets from participants that terminated their employment and had not yet earned the right to the full allocation of employer contributions according to the terms of the plan. A plan’s vesting schedule defines the rate that
a plan participant will become vested based on the length of service with their employer. Individual participant’s salary deferrals, rollovers into the plan and qualified nonelective and matching contributions (QNECs and QMACs) are always 100% vested and non-forfeitable.

Vesting of Employer Contributions

There are two types of vesting schedules:

  • Graded – Graded vesting schedules are the most commonly used in defined15
    contribution plans. With this arrangement, vesting increases with each year of service reaching 100% after no more than six years of service with the employer. Participants must become at least 20% vested after the completion of two years of service and the rate of vesting must increase by at least 20% after each additional year of services.
  • Cliff – Cliff vesting provides for immediate 100% vesting of employer contributions when the participant completes the required years of services with their employer. Prior to the time when full vesting occurs, the employee has no vested interest in the employer benefits. Cliff vesting cannot require more than three years of service before 100% vesting is earned.

When a plan participant terminates service with their employer, the non-vested portion of their account becomes subject to forfeiture, as defined by the plan document. The forfeiture occurs upon termination or after the participant incurs five consecutive one-year breaks in service. If the employee is rehired after the five-year period from his last date of employment, his prior service would no longer count towards vesting. Due to the burdensome administration of this five-year rule, most plan provisions allow for accelerated forfeitures consistent with IRS rules.

Forfeiture Uses

Forfeitures must be used in ways identified by the plan document and in alignment with IRS regulations. Current guidance provides that forfeitures may be used to:

  • Pay plan expenses – Forfeiture balances may be used to pay reasonable plan expenses including the plan administration and consulting fees. An example of an expense not permitted to be paid from forfeitures is the
    payment of a fee resulting from a fiduciary breach.
  • Off-set future employer contributions – The most common use of forfeitures is to fund future employer matching or profit-sharing contributions, thereby relieving the employer’s funding obligations of new money to the plan.
  • Allocate an additional plan contribution – Forfeitures may be utilized as additional employer discretionary or nondiscretionary profit sharing or match contributions. These allocations would be aggregated with all other employer contributions in the plan’s annual additions test.

One of the largest compliance concerns with forfeitures has been disposing of them within the time frame specified by the regulations and their plan provisions. Frequently, when plan sponsors forfeit accounts the money is placed in a plan-level suspense account and not immediately used in one of the permissible methods identified above. Often, these accounts are not routinely monitored and the forfeiture balances lay idle within the plan without being allocated in a timely manner.

The regulations state that forfeitures are to be exhausted during the plan year in which they are incurred, or no later than the following plan year in certain circumstances. If these forfeiture accounts are not disposed of properly, corrections can be made under the IRS’s Employee Plans Compliance Resolution System (EPCRS). The correction would require that a participant’s account be made whole as if the error had not occurred. Depending on several factors, such as the number of affected employees, how far back the error occurred, locating any terminated participants the calculating a participant’s forfeiture amounts and earnings, the correction could be especially complicated.


In recent years, forfeitures have been more heavily scrutinized in internal and IRS audits. Operational failures resulting from their untimely use and insufficient internal controls over their administration have drawn increased attention by regulators.

A review of plan documents to identify the plan’s language governing forfeitures is the natural starting point to ensure a proper procedure is in place to ensure conformance to the regulations. Plan sponsors should also discuss whether the plan’s use of forfeitures aids them in achieving their business objectives and if there are clear policies and procedures in place for using forfeitures that is in alignment with these objectives.

The Fiduciary Rule Is Now Law

As of June 9, 2017, the Fiduciary Rule is law. As discussed in previous commentaries, the rule defines investment advice more broadly than the original definition in the DOL’s 1975 bill. This sweeping legislation will automatically hold all financial representatives who work with retirement plans and IRAs to a fiduciary standard. A fiduciary standard requires a financial representative to put their client’s interest first. The DOL will continue to review the potential implications of the new law. A transitionary period is in effect until January 1, 2018.

Market & Economic Commentary| Summer 2017

By: Jim Scheinberg – August 10, 2017

Goldilocks and the ZERO bears

The first half of the year is behind us. Whether it proves to be a fairy tale where everyone lives happily ever-after or a fable with a moral at the end, the story of 2017 keeps unfolding. Despite the constant barrage of dramatics from the White House and an ineffectual 115th Congress, the economy, corporate earnings, and stock prices continue to surge.  U.S. markets, both stock and bond, were unfazed following three consecutive increases of the discount lending rate from the Fed – an event that even if hinted at prior to a year ago, would have sent markets reeling. Instead, broader U.S. indices saw an unrivaled lack of downside volatility. During Q2 (as well as the first seven months of the year as a whole) the S&P 500 never declined more than about two percent from its continually newly set highs. First, Dow 20,000 fell, then 21,000, and now 22,000. An advance of this nature would be remarkable under normal settings, but set within the Trump-area theater, it is downright amazing.

How the Markets Fared12

Domestic debt markets were as quiet as the U.S. stock markets during the quarter. Even with the Fed raising rates a third time, the intermediate and long-end of the yield curve saw little movement. The yield on the 10-Year Treasury fell a paltry eighth of a point during the quarter, trading in a tight range of about 25 basis points. With no real negative news regarding the economy surfacing, credit spreads continued to tighten a tad more, adding to the recent impressive run of gains in the high yield space. The U.S. Dollar Index declined five percent during the quarter which helped lift the prices of most international debt, developed and emerging markets alike.

13On the equity front, theses declines in the dollar led to strong appreciation in developed market international securities, better than doubling the returns of U.S. stocks for the quarter. Both here at home and abroad, technology stocks continued to drive performance gains in the growth indexes, which again beat more cyclical value stocks by a few percentage points for the quarter… and by a whopping ten points for the year. This marks a complete reversal of 2016’s ten-percentage point outperformance by value stocks in a whipsaw of dramatic portions. For markets that used to be so highly correlated, those of the last few quarters have been anything but. Continued easing of commodity prices once again served as a headwind for nature resource names, especially in the small cap space. Though small cap growth stocks have advanced handsomely, the Russell 2000 Value Index continues to be stalled in neutral. This retreat in commodities spilled over into more resource dependent equity names in the emerging markets, like Latin America, whose markets actually saw modest declines during the quarter, even despite the weak dollar. The same could not be said of Asian EM stocks, which topped the leaderboard in performance for the quarter. With firming global economies, the manufacturing focused economies of developing Asian nations are reaping the benefit of restored global optimism.

PIERing Ahead

Though we may be beginning to sound like a broken record, North Pier’s optimistic view of the near-term global economy fortifies our belief that the recent advance of equities is founded on reasonable assumptions… at least in the near-term. Strong labor markets, and increased earnings for workers and corporations alike are likely to sustain for the foreseeable future. Housing prices continue to advance at reasonable levels (~6% year-over-year) with supply and demand still not in equilibrium. Add in a soaring stock market and one has all the ingredients needed to give consumers (who are the foundation of the U.S. economy) all the reasons they need to be as optimistic as the sentiment indexes indicate.

Though many talk about this period of economic recovery as being long in the tooth, we believe that there is compelling reason to believe that the real boom has actually just begun. With their zero interest rate policy (ZIRP) lasting as long as it did, the Fed never projected confidence in the recovery prior to late 2016. Regardless of one’s political tilt, it can’t be ignored that the current administration and Congress, which are both perceived as pro-business, have given breathing room for corporate America to stretch its legs and run a little. Now the Fed is on board and the rest of the world is joining the party. The only real question is how long will the party last? Sooner or later, swelling equity valuations will meet resistance from a maturing growth spurt in the economy. When that happens, the bears will join this Goldilocks story. When they do, we are likely to encounter a Papa Bear like correction that is “too hard” instead of a Baby Bear consolidation that is “just right.” Either way, this story has lots of chapters left to play out. It’s bound to be a real page-turner.