Benefits April 5, 2005

Deloitte: Rise in Plan Sponsor Advisor Use, Fee Transparency Knowledge

April 5, 2005 (PLANSPONSOR.com) - A new Deloitte survey indicates that there was a dramatic rise in the use of investment advisors by plan sponsors, as well as a corresponding shift in mutual fund investments in 2004.
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The use of outside investment consultants rose to include 45% of respondents to the 2004 survey, according to Deloitte, up 10% from 2003. This, combined with recent publicity surrounding mutual fund scandals, has resulted in a large number – 37% – of respondents replacing at least some of their mutual fund holdings in the past year; an additional 5% are considering making changes. Twelve percent of plan sponsors cited the mutual fund scandal as the reason for the shift.

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Transparency

There has also been a increase in fee transparency, a likely result of the scandal. Ninety percent say they have a good understanding of their plan’s fees, and 84% say they understand the normal fund operating expenses. However, less than 60% claim to understand the revenue sharing agreements in place at their mutual fund companies.

“The past few years have challenged most plan sponsors to take a closerlook at their retirement programs, as well as their fiduciaryresponsibilities,” said Leslie Smith, director of the annual survey and adirector in the Human Capital Total Rewards practice of DeloitteConsulting. “Fee transparency is another area thatwill require more attention from plan sponsors as they demand greaterdetail from the providers and venders that serve them.” She adds thatthere is much more to 401(k) plan fees than what is being directlycharged to the plan, and the well-informed plan sponsor will understandall of the revenue streams involved.

Participation Rates Still Stagnant

Still, with all these changes, plan participation has not increased above its 73% level, Deloitte asserted. Around 13% of plan sponsors said they will add automated enrollment features in hopes of upping their participation numbers and 15% already have such a program. Automated rebalancing is also on the rise with 35% of plans now offering such a feature, up from 24% in 2003.

“Easy Enrollment” options have also taken hold, with around 10% of respondents using such a system currently and 9% considering adding it in the future. According to Deloitte, this feature, along with “step-up contribution” features, can aid in increasing participation rates. Fifty-seven percent of respondents to the survey cited increasing participation as the main reason for introducing such programs.

The study – the 2004 Annual 401(k) Benchmarking Survey – was conducted last summer of human resources and employee benefits executives across the country. In total, 426 plan sponsors responded to the survey. For a detailed copy of survey results, go here .

Compliance April 4, 2005

US Supreme Court Extends Bankruptcy Protection to IRAs

April 4, 2005 (PLANSPONSOR.com) - Ruling in a case involving an Arkansas couple who had rolled over pension distributions into an individual retirement account (IRA), a unanimous US Supreme Court ruled Monday that IRA assets can be protected under bankruptcy laws.
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By ruling for Richard and Betty Jo Rousey of Berryville, Arkansas who have been battling to shield more than $55,000 in retirement savings from their bankruptcy estate, the high court extended protections already afforded to pensions, 401(k)s, and Social Security and other benefits tied to age, illness or disability.

Monday’s ruling in  Rousey versus Jacoway is also a significant development in retirement circles because of new rules mandating IRA rollovers. Plans with mandatory distribution provisions now   have to have something in place to deal with distributions of more than $1,000 for which distribution instructions aren’t provided (See  IRS, Treasury Issue Automatic Rollover Guidance ).  Fighting the Rouseys in the current case was bankruptcy trustee Jill Jacoway.

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Even though Jacoway contended that the couple’s IRA assets should be included in the money distributed to their creditors, the justices ruled that IRAs should be eligible for special treatment because of the 10% early withdrawal penalty the accounts carry. Jacoway argued that the couple had the right to withdraw IRA funds at any time if they were willing to pay the penalty

“Contrary to Jacoway’s contention, this tax penalty is substantial,” wrote Justice Clarence Thomas, for the court. “The deterrent to early withdrawal suggests that Congress designed it to preclude early access to IRAs. The low rates of early withdrawals are consistent with the notion that this penalty substantially deters early withdrawals from such accounts.”

Lump Sum Distributions

According to the opinion, both Rouseys took lump sum distributions from the Northrup Grumman Corp. pension plan before he took early retirement in 1998 and Mrs. Rousey was laid off a month later. They ultimately rolled the funds over to two separate IRAs. Several years later, the couple filed for Chapter 7 bankruptcy protection in the US Bankruptcy Court for the Western District of Arkansas, asking that the IRA accounts be kept out of their bankruptcy estates from which their creditors would be repaid. The IRA owned by Richard Rousey totaled $42,915.32 at the time of bankruptcy filing while Mrs. Rousey’s IRA totaled $12,118.16 at the time of filing.

Jacoway objected to the request and an Arkansas bankruptcy judge agreed.   The couple appealed the issue to the US 8 th Circuit Court of Appeals, which likewise agreed in September 2002 that the IRAs should be included in the Rouseys’ pool of assets.

“The fact that the debtors have unfettered discretion to withdrawal causes their IRAs to look less like exempt retirement plans and more like non-exempt bank savings accounts with favorable tax treatment,” 8 th Circuit judges ruled. The 8 th Circuit decision is  here . (See High Court to Ponder IRA Bankruptcy Exclusion ).

In Monday’s decision the Supreme Court reversed the lower appeals court and sent the case back for further hearings.

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