A defined contribution plan strategy promoted as providing participants with greater flexibility and lower costs has collided with sponsors' reluctance even though the option has been on the books for nearly 20 years.
Called a Deemed IRA, this approach, embraced by a handful of government DC plans, has been rejected by most sponsors due to complex administrative requirements and restrictions on allowable investments. A federal law was enacted in 2001, and IRS regulations were issued in 2004.
"We couldn't justify the extra cost and complexity," said Keith Overly, executive director of the Ohio Public Employees Deferred Compensation Program, Columbus, referring to administrative and record-keeping expenses.
The Ohio plan's board decided in September 2018 against offering the Deemed IRA.
Mr. Overly pointed out that federal law and IRS rules prevent Deemed IRAs from offering collective investment trusts and separate accounts, thus reducing participants' choices.
A Deemed IRA investment menu would be limited compared with that of the $15.2 billion deferred compensation plan. For example, the two most popular investments in the Ohio plan are a stable value fund, which isn't allowed for IRAs, and a target-date series based on collective investment trusts. They account for 47% of the plan's assets.
"So, the investment menu that could be offered for Deemed IRAs would not allow participants to access the most popular investment options," Mr. Overly explained. "The participants that might want to contribute to Deemed IRAs might become frustrated by the inability to choose from the entire existing lineup."
The investment restrictions are cited by the National Association of Government Defined Contribution Administrators as one of its top legislative and policy priorities for the current congressional session.
"Sponsors have a wide array of investment vehicles, and collective investment trusts have been successful," said Paul Beddoe, NAGDCA's Washington-based director of government affairs. "They say 'why can't we use it in a Deemed IRA?'"
Collective investment trusts, a NAGDCA legislative priorities document stated, would allow Deemed IRAs "to build more robust investment lineups, at lower costs, often with improved speed to market and other efficiencies."
Mr. Beddoe said getting Congress to change the law is a "harder path" than getting regulatory relief. Next year, he will ask the Securities and Exchange Commission to allow Deemed IRAs to offer the same investment options available to most other DC plans, including the 457 plans. The Deemed IRA has been most closely associated with deferred compensation programs, some of which offer several DC plans in addition to the 457 plans.
It was designed as a way for participants to consolidate multiple retirement accounts and to allow them to benefit from lower fees vs. the fees charged for retail individual retirement accounts. Deemed IRAs can be structured in a traditional IRA format or a Roth IRA format. Annual contribution limits and rules for Deemed IRAs are the same as for retail IRAs.
Any sponsor wishing to establish a Deemed IRA must make sure its record keeper and custodian are capable and willing to operate it. The plan must create a group trust, revise its contract with a custodian and secure approval from the IRS.