Module 1 - An Overview of Retirement Planning.docx

We will discuss this list of prohibited transactions

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list of prohibited transaction types that the DOL monitors. We will discuss this list of prohibited transactions in detail in another lesson. They also check adherence to the exclusive benefit rule, which states that all plan assets must be invested for the exclusive benefit of the employees (participants). The purpose of the exclusive benefit rule is to prevent a company from buying shares of another company to attempt to influence their actions in the marketplace which would be a manipulation of the forces of competition and not a sole benefit for the plan participants. In addition, the DOL also monitors the actions of the plan’s fiduciaries . The fiduciary is the person or group with responsibility over the employer-sponsored plan. Every plan has a fiduciary. They are held to a standard known as prudence , which means that they must act as a prudent person would be expected to act. It should go without saying that the fiduciary would act in a prudent way for the exclusive benefit of the plan’s participants, but sadly reality has pointed to a different outcome unless the DOL looks over their shoulder. The DOL can sue a plan fiduciary if they breach their duties. We will discuss fiduciary responsibility later in this course as well. See this article for an example of an alleged breach of fiduciary duty on behalf of a corporate pension plan. (Links to an external site.)Links to an external site. One confusing element is that the DOL can potentially issue interpretations of the laws just as the IRS can. Pension Benefit Guarantee Corporation (PBGC) The PBGC exists to create a backstop for Defined Benefit plans only. They do not apply to Defined Contribution plans. They charge a set premium per participant at a given covered company, and all DB plans are required to buy this coverage. See the chart below for the history of the PBGC's per participant premiums. PBGC's Per Participant Premiums
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In the event of plan insolvency, the employer must notify the PBGC, who will then assume the assets of the plan sponsor and pay as much benefit as they can. The monthly cap is $4,500 per participant. Consider our executive from earlier who maxed out the 415(b) limit. Under normal plan operation, this executive could receive as much as $18,333.33 (220,000/12) per month. If her plan was in default and the PBGC stepped in, then she would be capped at receiving $4,500 per month. Most PBGC recipients receive an amount less than they would have if the plan had remained in full force. Sometimes the PBGC comes into play because a firm files for bankruptcy and notifies the PBGC that the backstop is needed. Sometimes, the PBGC can pro-actively shut down a plan because they smell smoke (meaning that the plan might be on fire and about to disappear). The video below is an advertisement for the PBGC that was created by them...but it does tell you a little bit about their structure.
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