IRS Raises Fees for Most Determination Letters

Fees.....where do we begin? Obviously, the burden of determining if fees are fair, reasonable and necessary is a daunting challenge even for professional fiduciaries. Very few practitioners enjoy going through a fee discussion with clients, the industry has been hiding fees and selling "free" plans for 35 years, necesitating the quite robust set of new rules forthcoming later this year. In many cases, it is hard to get clients to understand all of the moving parts and mechanics of Retirement Plan fees, even harder in some cases to get them to not pass them along to their participants. Of course, in difficult economic times like the present this task becomes even more unplesaant. With that stated, see the below list of IRS imposed fee increases, some of which are 250% increases.....gotta love the timing.

Effective Feb. 1, 2011, The Internal Revenue Service (IRS) has raised the fees for determination letters and advisory letters sought by qualified retirement plans.

These increases will be for almost every type of determination letter request, as follows:

(1) For a plan intending to satisfy a design-based or nondesign-based safe harbor, or a plan not seeking a determination letter with respect to any of the general tests, and the plan is not seeking a determination letter with respect to the average benefits test:

The single employer Form 5300 determination letter fee is increased from $1,000 to $2,500;
The single employer Form 5310 determination letter fee is increased from $1,000 to $2,000;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

• 2 to 10 employers from $1,500 to $3,000
• 11 to 99 employers from $1,500 to $3,000
• 100 to 499 employers from $10,000 to $15,000
• Over 499 employers from $10,000 to $15,000

Average Benefit Test Or General Tests

(2) For a plan seeking a determination letter with respect to the average benefit test and/or any of the general tests:

The single employer Form 5300 determination letter fee is increased from $1,800 to $4,500;
The single employer Form 5310 determination letter fee is increased from $1,800 to $4,000;
Adopters of a Master or Prototype Plan or a Volume Submitter Plan will pay a fee that is increased from $1,000 to $1,800;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

• 2 to 10 employers from $2,300 to $5,000
• 11 to 99 employers from $2,300 to $5,000
• 100 to 499 employers from $15,000 to $25,000
• Over 499 employers from $15,000 to $25,000

(3) For group trust submissions under Rev. Rul. 81-100, C.B. 1981-1, 326; Rev. Rul. 2004-67, C.B. 2004-2, 28, and Rev. Rul. 2011-1, I.R.B. 2011-2, the fee has been increased from $750 to $1,000. Form 5316 to be used for group trust submissions will be available soon, according to the IRS.

For the complete (260 pages) rule please view IRS Revenue Procedure 2011-8 ---> http://irs%20revenue%20procedure%202011-8%20---%3e%20http//www.irs.gov/pub/irs-irbs/irb11-01.pdf

A start on How to focus on Professional Practices

Earlier this year, Pete Swisher of Unified Trust was interviewed by the CFDD for its' internet broadcasting station. The topic discussed was New Directions For Professional Practices. The discussion centers around how recent Health Care legislation may impact the 'M & A' activity in this industry and the impact on Qualified Plans as a result. It also touches upon the unique plan design sales opportunities. It is worth the listen. Below is the link.

click here

In Plan Roth Conversions

The Small Business Jobs and Credit Act, which was signed by President Obama in September 2010, permits 401(k) and 403(b) plans that have a Roth deferral program in place to also provide for an in-plan Roth rollover provision. This will be extended to 457(b) plans for plan years beginning after December 31, 2010.

An in-plan Roth rollover feature allows a participant who is eligible for a distribution to roll any vested amount to an in-plan Roth rollover account. If amounts are converted in 2010, the taxpayer can choose to recognize the income in 2011 and 2012 instead of in the year of the roll over.

Previously, a participant who wanted to convert to a Roth had to do this outside the retirement plan by rolling the money to a Roth IRA.

For more general information on implementing this feature, please follow the link to more frequently asked questions. Click here.

Dynamic Asset Allocation Strategies

Dynamic Asset Allocation strategies are very useful policies for defined benefit plans. What does this type of policy entail? Well, it means that the investment manager is actively looking at a defined benefit plan’s actuarial valuation and using that information to then develop an independent measure of funding status in the interim, on a quarterly basis – an analysis uncommon in an industry focused on capturing alpha or liability driven investing alone.

Funded status is the primary driver of the plan’s allocation within the plan’s Risk Category (or fixed range of allowed equity exposure). This process allows the investment manager to swiftly take action whenever market conditions change through tactical adjustments to the plan’s allocation. This should be fully defined in the IPS and reported in the Fiduciary Monitoring Report; as such, it eliminates the need to obtain approval at the committee level for a change in the plan’s investment strategy every time market conditions drastically change versus the parameters prescribed in the plan’s IPS. The process is documented and anticipates a prudent course of action ahead of these changing market conditions. The focus stays on the funded status of the plan and not simply capturing investment performance.

This is an important approach when investing in a liability driven environment such as the retirement market. Our clients are widely diversified demographically speaking, and present us with a variety of goals that they hope to accomplish within a very real and finite period of time. It's usually less time than is necessary. By focusing on the anticipated liability of a pool of assets (such as defined benefit assets) or individual participant accounts, it is much easier to implement a strategy that either helps the client achieve their goals, or at least, helps them narrow the gap between where they currently are and where they wish to be in the future. Dynamic asset allocation strategies and managed participant accounts not only assist the client with determining where they currently are with regard to meeting their goals, but they vastly improves the probability of reaching their goals, as well. It's compelling evidence for a client, and a service provider, to know that an actual solution is being provided.

Ding, Dong the prospectus requirement is finally dead, dead, dead!!! - Participant Disclosure Regs

The DOL just published the final regulation on participant disclosures, completing a process started several years ago with a three part regulatory initiative to improve transparency:

1. New disclosures required on Schedules A and C of the Form 5500, effective in 2009

2. 408b-2 point of sale disclosures, published recently and effective July 16, 2011

3. Participant disclosure rule, effective sixty days from today, but with disclosure requirements that don’t kick in until plan years beginning after November 1, 2011 (2012 for most plans).

The rule is a “final” regulation, and appears to track the Bush administration’s version closely. One key element: the Bush administration decision to eliminate the 404(c) prospectus requirement survived the final regulation. No more “forced” prospectus requirement. Good riddance. Fiduciaries will still need to provide prospectuses on demand, but that’s easy.

What does this new rule mean to advisors? Not much. The real burden will be on plan providers like Unified Trust, who will need to retool systems to deliver information in the prescribed format. It’s worth noting, also, that the basic nature of this rule is that it puts the burden of compliance on plan fiduciaries, not providers: DOL interpreted ERISA Section 404(a), the Fiduciary Duties, especially the prudence and exclusive purpose rules, as requiring disclosure to participants. Realistically, however, the burden is on providers, and there are provisions allowing sponsors to rely on data providers give them.

Here’s a link to the DOL website, where you can download the full regulation and the Fact Sheet: http://www.dol.gov/ebsa/. Stay tuned for more info on what it means to you, your clients, and your business.

- Original Content credit to Pete Swisher, Unified Trust Company.

Automatic Savings: A Case Study

Recently, Dan Ariely (author of The Upside of Irrationality) published an article in the Harvard Business Review. In this article, linked at the bottom, he describes a public pension system in the country of Chile that looks very familiar to a mandated version of the provisions the Pension Protection Act of 2006. It seems that Chile subscribes to the notion that if they can remove emotional bias from the equation, the net effect would ultimately be an increase in retirement income adequacy for their citizens.

....In Chile, by law, 11% of every employee’s salary is automatically transferred into a retirement account. Employees select their preferred level of risk, with the following restrictions: They may not choose either 100% equities or 100% bonds, and the percentage of equity that they can select diminishes as they age. When employees reach retirement, their savings are converted into annuities.....

That sounds a lot like Automatic Enrollment and QDIA usage. Good ideas, no doubt. Behaviorally, it recognizes that inertia in decision making regarding money is a very real problem. Forcing the savings and forcing the reduction of risk over time probably seems like a diminishing of freedom in the absence of an opt-out clause. However, in the U.S. over the past 25-30 years, the data on retirement readiness never changes. Participants covered by plans are on a path to failure (inadequate income replacement rates) to the tune of 4-1, that's a rough composite stat, but you get my drift. The article points out that people are not good at two aspects of financial planning for retirement:

1.) deciding to save and
2.) eliminating risk in later years

We think that participants in retirement plans have more challenges thant that. After deciding to save, it is difficult for them to determine how much is truly affordable and how much is truly necessary. Additionally, participants are challenged in general when it comes to investing even with a little (or more) education. Common mistakes range from investing 100% in cash (overwhelmed behavior) to overly aggressive investing (gamblers behavior, aka performance chasing). The Chilean system, however does something very smart. It acknowledges that people who enroll in retirement plans are reasonably good at managing their own risk. So, while the investment choices are left to the individual, the choices are limited exclusively to asset allocation portfolios with a fair degree of diversification.

I think I once heard someone say that the safest plan is one that is 100% invested in QDIAs. Now that was in the context of fiduciary safety, so perhaps not directly applicable, however, the elimination of fear based and gambling based decision making by limiting the options only to models is a terrific idea.

This type of design structure is available in the U.S. today inside of 401(k) Plans. At my firm, we call it The Success Pathway. But unlike in the Chilean system, the participants still will have the freedom to opt out of the plan or any of its auto provisions.

We applaud Chile for taking a strong position on embracing a plan design that shows it leads to better outcomes for the folks it serves.

Please click here to see the full text.

Senate Passes Roth 401(k) Rollover Provision!

Today, the Senate passed a small-business jobs bill, H.R. 5297, which among other things would allow employers to amend their 401(k) plans immediately to allow participants to roll over pre-tax account balances into Roth 401(k) plan accounts.

The House has not yet acted on the proposal, and it remains to be seen if this will make into law. However, this step by the Senate is a very encouraging sign that this feature will at some point make it into law whether attached to this bill or some other.

According to the bill, it would also allow for some spreading of immediate tax over several years. For example, if a participant were to convert their pre-tax deferrals to a Roth 401(k) this year, taxation could be elected to be paid in 2011 and 2012.

We see this as a big step in increasing tax flexibility to be in line with what is currently available in IRAs. Additionally, another very real benefit is that in 401(k)s, often times the institutional pricing structure of the underlying investments makes this a better deal than for those in IRAs where mutual funds and the like are generally retail priced and thus more expensive. If passed, this could be a strong incentive for investors to finance their retirement from their 401(k) Plans rather than rolling to IRAs and financing that way. Every bit helps especially with the coming wave of retiring baby boomes.