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  2. DEFINED CONTRIBUTION
December 23, 2019 12:00 AM

Deemed IRA roadblocks move it to no-fly list

Strategy, allowed for decades, has few fans due to restrictions

Robert Steyer
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    Keith Overly
    Photo: Ciara Cusseaux
    Keith Overly sees the limits inherent in Deemed IRAs as being too stringent to overcome.

    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.


    Discourage leakage

    NAGDCA and other supporters of Deemed IRAs also view this option as a way to discourage leakage, by allowing participants to aggregate retirement assets and capitalize on lower institutional fees.

    "Sponsors see money leaving their plans," said Dean S. Weltman, executive counsel/agency chief contracting officer, employee benefits program, New York City Office of Labor Relations, which governs the New York City Deferred Compensation Plan.

    "It's a great tool for people getting close to retirement and people who want to consolidate their retirement investments," he said.

    The New York City Deferred Compensation Plan is the largest provider of a Deemed IRA, and executives have deemed it a success.

    When asked by peers about New York City's experience, "we say our fees are less than retail IRAs," Mr. Weltman said.

    The Deemed IRA is administered separately within a 457 plan or other DC plan, but its assets are deemed to be part of the whole plan, thus providing greater clout for negotiating fees.

    In New York, the Deemed IRA, called the NYCE IRA, has the same investment menu as the three other DC plans — 457, 401(k) and 401(a) — under the umbrella of the New York City Deferred Compensation Plan. Started in 2006, the NYCE IRA had 4,883 participants at year-end 2018, out of a total of 208,859 participants in the various DC plans, according to the latest available data. About 70% of all participants are in the 457 plan.

    The NYCE IRA accounted for $339 million, or 1.7%, of the $19.8 billion in the system's aggregate DC assets by year-end 2018. The 457 plan's $16.4 billion in assets accounted for 83% of total assets.

    It took about nine months for the New York plan to go from idea to implementation, and Mr. Weltman said the response was favorable. "People were familiar with IRAs," he said. "They were happily surprised that we had an IRA."

    Participant interest in a Deemed IRA "continues to chug along," said William C. Biddle, executive director of the Kentucky Public Employees' Deferred Compensation Authority, Frankfort, whose Deemed IRA was launched in 2007. "It has a dedicated, small fan base. It is a very pro-participant retirement tool."

    For Kentucky participants, the biggest drawback is the absence of an option like collective investment trusts, he said. For plan executives, the biggest challenge is administrative complexity.

    By year-end 2018, the Deemed IRA had assets of $61 million and 5,786 participants. The authority administers the Deemed IRA, a 401(k) plan and a 457(b) plan covering 75,000 participants with assets of more than $3 billion, he said.

    A newcomer to the Deemed IRA is the Municipal Employees' Retirement System of Michigan, Lansing, which began offering it in late 2018.

    "The Deemed IRA adds additional flexibility to MERS offerings, which can help eliminate some barriers participants may have for saving," Jennifer Mausolf, communications and retirement strategies director, wrote in an email. "For example, some participants might consider access to the account while working important, and the Roth IRA offers this, where in-service distributions are not available under our other retirement plans."

    She added that the Deemed Roth IRA "also has more favorable distribution rules around using one's account toward such things as purchasing a house or funding a child's college."

    It took MERS officials about a year from studying the Deemed IRA to implementing it. During its first 11 months, the Deemed IRA has "over 100 participants with over $1 million in assets," she said. As of Sept. 30, MERS administered $2.3 billion in DC assets via a 457 plan, 401(a) plan and the DC component of a hybrid DB-DC plan.

    One task was educating staff and participants about the differences between the Deemed IRA and the other MERS retirement plans, she said. "It is an ongoing challenge to provide this complex information in a succinct and relevant way," she said. "However, we use feedback from our participants to continuously look for improvements.

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