Friday, July 19, 2013

Fee Disclosure: Enforcement Coming, no surprise

Fee Disclosure has been discussed ad nauseum on this blog in past entries.  Here we are on the approximate one-year anniversary of 408(b)-2 and an article comes out discussing how the DOL intends to make a concerted effort to enforce excessive fee cases, using the disclosures as the primary supporting documentation.  See below for the full article.

And they were kind enough to supply a link to the list of items required in the event of a DOL audit.

My thoughts are that the full impact of the fee disclosure rules from last year have yet to be felt, perhaps this is a sign of that impact en route.

Thursday, July 11, 2013

Just who's Revenue Sharing is this Anyway? Good question Fred.....

This is a straight re-post from Napa-Net.  Original author, Fred Reish, link to follow.

Is revenue sharing a plan asset? This issue and others were addressed in a July 3 DOL opinion letter (Advisory Opinion 2013-03A) addressed to the Groom Law Group concerning a plan administered by Principal.

In the situation addressed in the letter, Principal receives payments in the form of 12b-1 fees and other revenue sharing to offset expenses and deposit excess monies in a general account. Unless there is a specific agreement to the contrary, Principal is not required to hold each plan’s excess revenue sharing in a separate account. The DOL said that the revenue sharing received by Principal is a plan asset, but not before it is received.

Since Principal is using the revenue sharing to pay for the cost of the plan, some of which is paid to itself and from funds it manages, it is incumbent upon the plan fiduciary to ensure that the services and costs are necessary and reasonable. In particular, the letter stated:

It is the view of the Department that the responsible plan fiduciaries must obtain sufficient information regarding all fees and other compensation that Principal receives with respect to the plan’s investments to make an informed decision as to whether Principal’s compensation for services is no more than reasonable. … Prudence requires that a plan fiduciary, prior to entering into such an arrangement, will understand the formula, methodology and assumptions used by Principal in arriving at the amounts to be returned to the plan or used to pay plan service providers following disclosure by Principal of all relevant information pertaining to the proposed arrangement.

While this question is not addressed, if revenue sharing is considered a plan asset just like the investments themselves, doesn’t the revenue sharing really belong to the participants? If so, it raises the question of why one participant should have to pay more than another with the same account balance to offset the cost of administration of the plan just because the funds they invest in have higher revenue sharing. Would that pass the “reasonable” test?

Good questions.....ultimately the bigger question that I have is whether any of these standard industry practices would meet a true interpretation of the Exclusive Purpose rule......perhaps that's a matter of opinion, but my sense is that the participants are the last things on the mind of the big insurance companies and big mutual fund houses......

Wednesday, July 10, 2013

Tax Reform, Hatch and Starter 401(k)'s

On a morning where I read one of the scariest ideas I've seen come from Congress in my adult life, the so-called "Blank Slate" idea on Tax Reform from Senator's Baucus and Hatch which more/less calls for a complete "Do Over" on U.S. taxes, I also saw the separate ideas put forth by Senator Hatch in his introduction of the SAFE Retirement Act of 2013.  

Some thoughts on each of these.

The Blank Slate -  linked here

The general idea is that the U.S. Tax code is broken, it is riddled with exclusions, deductions and credits and caters to special interests.  It needs to be fixed, and needs to be simplified and clear out all of the unproductive provisions.  They say that their goal is to: (1) help grow the economy (applause!), (2) make the tax code fairer (whatever that means.....), or (why not AND?!) (3) effectively promote other important policy objectives.

They put out a bunch of noise about percentages, blah blah blah.   Here's what frightens me.

Blank Slate means the elimination of ALL special provisions, exclusions, deductions and credits and then add back in only the one that meets one of the above 3 goals.  This do over approach will almost certainly hurt lots of individual tax payers and because of #3, will almost certainly allow for all of the Special Interests to get back what they want in the name of "promoting other important policy objectives", Who's policy are they talking about?  I'm guessing that it is isn't mine.......Oh yeah, since this is a 401(k) blog, 401(k) Elective Deferrals are 'exclusions, deductions and credits', thus would be eliminated and may or may not be added back......

As I started to consider taking all of my money out of the bank and stuffing it in my mattress, I saw this other idea come across my desk, and it is a peach.  Truly, a lot of good ideas in this one and it came from, wait for it......Senator Hatch, one of the co-authors of the aforementioned Blank Slate!!! 

SAFE RETIREMENT ACT OF 2013- His introduction linked here.

The provisions of this submitted legislation would have mainly positive benefits to the Retirement Plan industry, would allow for greater coverage and greater savings levels.  In general, I'm in favor of these provisions listed below:

The bill would:
• create a new safe harbor deferral-only “Starter 401(k)” plan with automatic enrollment and an $8,000 deferral limit (plus a catch-up for those age 50 and over) for employers that do not have another retirement plan

• allow employers to adopt a qualified retirement plan on or before the due date, with extensions, of the employer’s tax return

• allow employers to replace SIMPLE retirement accounts with a safe harbor 401(k) plan during the year

• remove the arbitrary 10% auto-escalation limit on elective deferrals under the existing automatic enrollment safe harbor

• permit required interim amendments to qualified retirement plans to be made in conjunction with the plans’ restatement cycle

• allow plan sponsors to make electronic delivery of retirement plan documents the default option

• direct the DOL to modify its new participant disclosure regulation so that an investment that uses a mix of asset classes can be benchmarked against a blend of broad-based securities market indices

• allow individuals to roll over insurance contracts into individual retirement accounts

• allow required minimum required distributions to be rolled over into Roth IRAs

The legislation would also restore jurisdiction over the fiduciary rules in the tax code to the Treasury Department, and would require Treasury officials to consult with the SEC in prescribing rules relating to the professional standard of care owed by brokers and investment advisors to IRA investors — thus adding yet another element to the debate over a new, broader fiduciary standard.