|
|
Newsletter
September
2008 Volume
25 - Number 2
|
|||||||
|
|
This newsletter is addressed to our clients, their attorneys,
accountants and other professional advisors. Citations may be included for those
who want to refer directly to the source material. IN THIS ISSUE:
QUALIFIED DEFAULT INVESTMENT ALTERNATIVES (QDIA) - The DOL issued
requested regulations establishing the types of safe harbor investments that
can be used for contributions where the participants have an individually
directed investment account but have not made an investment election. PRE-TAX ROLLOVER TO A ROTH IRA – Prior to 2008,
rolling over a distribution from an eligible retirement plan to a Roth IRA
was an unwieldy, two step procedure, new regulations have simplified this
transaction. This newsletter can also be
viewed online at www.prplans.com. |
|||||||
|
|
QUALIFIED
DEFAULT INVESTMENT ALTERNATIVES IN PARTICIPANT-DIRECTED INDIVIDUAL ACCOUNT
PLANS History Studies show that approximately one third of eligible workers do
not participate in their employers’ 401(k) plans. These studies suggest that
automatic enrollment plans, in which employees opt out of plan participation
rather than opt in, could reduce this rate significantly and greatly increase
retirement savings. Prior to the
enactment of the Pension Protection Act of 2006 (PPA), employers were
reluctant to adopt automatic enrollment procedures due to fear of legal
liability for market fluctuations. If employers did select an automatic
enrollment program, it was generally a low risk, low return investment. The
PPA included provisions to address these concerns and to encourage plan
sponsors to adopt automatic enrollment in their plans. The PPA also directed
the Department of Labor (DOL) to issue a regulation to assist employers in
selecting default investments that best serve the needs of employees who do
not direct their own investments. DOL Final Regulation The final
regulation set forth conditions that must be satisfied in order to obtain
safe harbor relief from fiduciary liability for investment results. These
conditions include the following: ·
Assets must be invested in a “qualified default
investment alternative” (QDIA) as defined in the regulation (see below). ·
Participants and beneficiaries must have been
given an opportunity to provide investment direction, but have not done so. ·
A notice generally must be furnished to
participants and beneficiaries in advance of the first investment in the QDIA
and annually thereafter. The regulation describes the information that must
be included in the notice. ·
Material, such as investment prospectuses,
provided to the plan for the QDIA must be furnished to participants and
beneficiaries. ·
Participants and beneficiaries must have the
opportunity to direct investments out of a QDIA as frequently as from other
plan investments, but at least quarterly. ·
The new rules limit the fees that can be imposed
on participants who decide to direct their investments. ·
The plan must offer a “broad range of investment
alternatives” as defined in the DOL regulation under section 404c of ERISA ·
The final regulation does not absolve plan
fiduciaries of their duty to prudently select and monitor QDIAs. ·
Qualified Default Investment Alternatives ·
The final regulation does not name specific
investment products but provides for four types of QDIAs: ·
A product with a mix of investments that takes
into account the individual’s age or retirement date, such as a life cycle or
targeted retirement date fund; ·
An investment service that allocates
contributions among existing plan options providing an asset mix that takes
into account a participant’s age or retirement date, an example of which
could be a professionally managed account; ·
A product with a mix of investments that takes
into account the characteristics of the group of participants as a whole
rather than each individual (an example of which could be a balanced fund);
and ·
A capital preservation product for only the first
120 days of participation. ·
A QDIA must be managed by an investment manager,
plan trustee, plan sponsor, a committee comprised primarily of employees of
the plan sponsor that is a named fiduciary, or by a registered investment
company. ·
A QDIA may not invest participant contributions
in employer securities. Participant
Notices 1.
Employees who will be invested in the QDIA must
receive a notice at least 30 days in advance of their date of plan
eligibility, or at least 30 days in advance of the date of their first
investment in a QDIA. In addition, an annual notice must be provided at least
30 days in advance of each subsequent plan year. These notices must include: 2.
A description of when participant and beneficiary
accounts may be invested in a QDIA, and for automatic contribution
arrangements, an explanation of when elective contributions will be made, the
percentage of such contributions, and the right of the participant to elect
not to have such contributions made or to elect to have contributions of a
different percentage: 3.
An explanation of the right of participants and
beneficiaries to direct the investment of assets in their individual
accounts: 4.
A description of the QDIA, including a description
of the investment objectives, risk and return characteristics and fees and
expenses of the investment alternative: 5.
A description of the right of the participants
and beneficiaries to direct the QDIA assets to any other investment
alternative under the plan, including a description of any restrictions and
fees or expenses connected with such a
transfer: 6.
An explanation of where the participants and
beneficiaries can obtain investment information about the other alternatives
available under the plan. |
|||||||
|
|
PRE-TAX
ROLLOVERS TO ROTH IRAs The Pension
Protection Act of 2006 (PPA) includes a provision to permit a direct rollover
from an “eligible retirement plan” to a Roth IRA, subject to the existing
limitations on Roth IRA rollovers. An “eligible retirement plan” includes all
types of qualified plans, 403(b) plans and Section 457 plans. This provision
became effective January 1 2008. Pre 2008 Rules Prior to passage
of PPA, a participant receiving a distribution from an eligible retirement
plan (which may or may not include after tax employee contributions) and who
wished to transfer that distribution to a Roth IRA, had to first roll over
the distribution to a “traditional” IRA and then convert the traditional IRA
to a Roth IRA. The participant had to include in gross income the taxable
portion of the amount converted from the traditional IRA to the Roth IRA, but
the conversion was not subject to the Internal Revenue Code Section 72(t)
premature distribution penalty. In addition, a participant could only convert
from a traditional IRA to a Roth IRA if the individual’s adjusted gross
income (“AGI”) did not exceed $100,000 for the taxable year in which the
conversion occurred. In other words, pre 2008, the law required a two step
process to complete the conversion from a pre-tax plan account to a Roth IRA; pre-tax
distribution and rollover (or direct rollover) to traditional IRA, then
conversion from traditional IRA to a Roth IRA. New Post 2007
Rules Now that the PPA
law change is effective, a participant may elect to rollover a distribution
from an eligible retirement plan to a Roth IRA without the intervening step
of rollover to a traditional IRA. The tax consequences are the same as for
pre 2008 distributions. The participant must include in his or her gross
income the taxable portion of the conversion amount, and the conversion is
not subject to the premature distribution penalty. However, the AGI
limitation on who can convert a non Roth account to a Roth IRA is still
applicable for 2008 and 2009. Note, however, that Congress has eliminated the
AGI limitation on Roth IRA conversions for post 2009 distributions. Effect of Law
Change on 402(f) Notices A plan
administrator has the legal obligation to give written notice of the direct
rollover option to any participant receiving an eligible rollover
distribution; this is the “402(f) notice”. The one step rollover from a non
Roth account to a Roth IRA is now an additional option for participants who
satisfy the AGI limitation. Therefore, plan sponsors should be certain that
their 402(f) notices correctly reflect the new rules. |
|||||||
|
|
|
