Retirement Jargon Confusion
As many of you are aware, there is a lot of retirement plan industry and legal jargon that is confusing not only to plan participants, but also to plan sponsors and those who work with them. In fact, one of the goals for Top of Mind and our Twitter feed is to make retirement plans more accessible by eliminating jargon and addressing technical retirement plan topics in a way that is more easily understood.
In this Top of Mind, we address three of the most significant culprits of retirement plan terminology confusion that I have witnessed in the last 25+ years. In fact, I suspect that even some of the savviest plan sponsors would fail a quiz asking them to correctly distinguish the terms below:
- Fiduciary Liability Insurance vs. Fidelity Bond — In my experience, this is the number one set of terms that plan sponsors confuse. To clarify, fiduciary liability insurance protects plan fiduciaries, the sponsoring employer, and the plan itself from claims arising from alleged fiduciary breaches. The coverage is not required under ERISA but is strongly recommended as best practice. However, a fidelity bond, which protects against employee fraud and dishonesty in the handling of plan assets, is required under ERISA. Each employee or individual who handles plan assets (e.g., employees who remit funds to the recordkeeper) is required to be bonded.
- Roth Contributions vs. Roth Conversions — A Roth contribution is a special type of elective contribution where participants contribute after-tax money to their savings, on which they will owe no taxes on qualified distributions. These types of contributions have been permitted in retirement plans since 2002. A Roth conversion allows a participant to move EXISTING retirement plan assets from a traditional pre-tax account to a Roth account, with taxes paid at the time of conversion. Roth conversions have been allowed in retirement plans since 2010 but were restricted to individuals eligible for a distribution until 2012. Roth contributions and conversions are only allowed when a plan permits them, and, since many plan sponsors did not fully understand the difference between the two transactions, those who originally amended their retirement plans to allow for Roth contributions did not later amend their plans to allow Roth conversions when the law permitted.
- Multiemployer Plans vs. Multiple Employer Plans — These two terms are also often misunderstood, especially since they sound so much alike. A multiemployer plan (often referred to as a “Taft-Hartley plan”) is a collectively bargained plan maintained by more than one employer (usually within the same or related industries) and a labor union. Multiemployer plans have been in the news lately due to solvency issues. On the other hand, multiple employer plans (commonly known as MEPs) are plans sponsored by employers that are not part of the same controlled group/affiliated service group of employers. Unlike a multiemployer plan, a multiple employer plan (MEP) is not sponsored by a labor union. Often, MEPs involve employers with some relation to one another (such as a trade and/or membership association); however, recent legislation has attempted to expand the multiple employer concept to include “open-MEPs,” where completely unrelated employers band together and form their own multiple employer retirement plan.
If you were already aware of all the distinctions described above, then you should give yourself a pat on the back!
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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