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How Simple Are SIMPLEs?

Practice Management

A savings incentive match plan for employees of small employers (SIMPLE) IRA is intended to be a simplified way for employers and employees to contribute to retirement savings. But are they really simple? A recent analysis questions whether they really are as uncomplicated as they are purported to be.

In “When SIMPLE Is Not Simple, and Is Expensive,” H.C. Foster & Company suggests that SIMPLE IRAs may not be as simple as one may think. “Employers too often adopt IRA-type savings plans expecting to avoid the detailed administrative and IRS compliance requirements of tax-qualified Profit Sharing and Defined Benefit Pension Plans,” they write. But they point out factors that suggest SIMPLE may not necessarily mean simple.

An employer must pay the same administrative attention and face the same fiduciary exposure when it offers IRA plans as it does when it offers a profit-sharing plan or a pension plan. And there are risks for employees, the paper suggests. For instance, it points out that with investment such as SIMPLE IRAs, employees believe they can effectively manage them, even though employers often enlist the assistance of professional investment advisors. “IRA-type savings plans are heavily promoted by investment sources to market retail consumer investment products directly to financially naive individual buyers,” they write. 

And while an employer may avoid incurring the expense of engaging the services of an independent advisor, correcting errors may prove to be more expensive than advice would have been, H.C. Foster & Company points out. “Administrative costs skyrocket when an IRS Plan Audit finds a plan failure or a beneficiary claims his or her death benefit is insufficient,” they write, or when a participant claims investment disclosures and investments violate ERISA investment fiduciary standards.

There is a risk of plan failure when the employer or TPA makes a mistake that invalidates the plan’s favorable tax status, H.C. Foster says. SIMPLE IRA plan failures can include:

  • a plan document is not up to date with IRS requirements;
  • contributions are not deposited in a timely manner;
  • incorrect contributions are deposited for an employee;
  • employer contributions are not deposited for eligible terminated employees;
  • an eligible employee is excluded from participation;
  • compensation applied in calculations does not fit the plan’s definition;
  • benefits are incorrectly calculated;
  • benefits are not distributed correctly;
  • required disclosures to employees are not properly prepared and distributed in a timely manner;
  • more than 100 employees earn $5,000 or more; and
  • the employer sponsors another tax qualified plan.

Reasons that mismanagement of IRA-type savings arrangements occurs, the paper says, include:

Lack of centralized administration. The paper argues that there “are usually no independent advisors for investment management, accounting, legal and actuarial support services to oversee all aspects of a plan’s administration to prevent plan failures” and that administrative functions usually are usually are divided, “with no centralized oversight or responsibility for the plan’s proper administration.”

Poor employer oversight. The paper suggests that results from circumstances related to common administrative practice and even the consequence of some aspects of regulation. For instance, it says, employers often are not involved in day-to-day administration of such arrangements, may not be as readily able to comply with ERISA prudent man investment standards because there are fewer investment options and they may not be inclined to pay close attention to tax deferrals because they do not vary with employment longevity nor position.

Misrepresentations. Poor planning and plan failures can result from practices and use of forms that circumvents employer scrutiny.

Cost of SIMPLE IRA plans. Employers are required to match employee contributions up to 3% of compensation, the paper says. There also are costs imposed through lost opportunity, including losses of annual investment returns net of expenses available through large unallocated funds whose investments are managed by professionals and unavailability of:

  • plan design options that fit the overall compensation policy are not available;
  • business objectives that can allocate much more of the contributions to higher-paid business owners and higher-paid employees with annual nondiscrimination testing; and
  • non-vested forfeitures remaining with plan assets.

“Self-administered, tax-qualified retirement plans permit the full range of plan design options under IRS regulations that enable direct employer control and monitoring of plan administration and investments.,” the paper argues.