FINAL FORM – IRS Issues Final Regs on Alternate Payment Forms

September 1, 2000 (PLANSPONSOR.com) - The Internal Revenue Service has issued final regulations that permit defined contribution plans to eliminate some alternate forms of payment, as long as a lump sum option is available.

The regulations also allow some previously prohibited transfers between defined contribution plans (TD 8900).

The final regulations say that a defined contribution plan will not violate Internal Revenue Code Section 411(d)(6) merely because the plan is amended to eliminate or restrict payment of accrued benefits for a particular form of payment, as long as a single-sum distribution otherwise identical to the type of payment being eliminated is included as an alternative form of payment.

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Proposed regulations had imposed additional restrictions on the single-sum distribution.

A number of items in March’s proposed regulations were eliminated based on comments received from the IRS, including:

  • A requirement that a defined contribution plan also include an identical alternative extended payment form, such as an annuity distribution,
  • A requirement that a modifying plan amendment cannot apply to any distribution that has an annuity starting date earlier than the 90th day after the participant receiving the distribution has been furnished a summary that reflects the amendment

In response to comments received, the IRS noted that permitting plan amendments eliminating an alternative form of payment would not result in the elimination of subsidized early retirement benefits.

The final regulations clarify that in mergers, acquisitions or changes in employment status, Section 411(d)(6) relief is provided for a voluntary transfer in which a participant is not eligible to receive immediate single-sum distribution of the entire accrued benefit that can be rolled over.

The final regulations become effective Sept. 6, and apply to plan amendments that are adopted and effective on or after that date, except as otherwise provided.

– Nevin Adams                       editors@plansponsor.com

THE URGE TO MERGE – Fund Acquirees Grow Slower

August 1, 2000 (PLANSPONSOR.com) - When money managers are acquired, plan sponsors may be voting with their feet, according to data from a survey conducted by Cerulli Associates. The study found that 2/3 of US managers involved in merger activity grew slower than the industry average, with a like number falling short of their pre-merger growth rates.

Sixty percent of the 33 transactions involving acquisitions or mergers of US fund managers between 1988 and 1998, failed both tests.

Ben Phillips, managing director of Cerulli, told Bloomberg that a possible reason for the decline is the lack of incentive on the part of key executives to continue to grow the business.

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According to Bloomberg, the Cerulli study examined the increase in assets at the companies that were purchased, rather than the asset growth of the combined firms. The study then compared annualized growth for the five years prior to the merger with the annualized growth rate between the time the merger was completed and the end of 1998.

Perhaps the most compelling evidence against mergers was that over various time periods ranging from a quarter-century to six years, companies not involved in acquisitions saw their assets grow more rapidly than the industry as a whole. 

The study found that over the past 25 years firms that depended solely on “organic” growth saw assets expand by 20%/year on average, compared with 16% for the industry overall.

In the past several months South Africa’s Old Mutual has agreed to acquire United Asset Management for $2.2 billion, France’s Caisse des Depots is buying Nvest LP for $2.2 billion and Italy’s Unicredito Italiano has said it will pay $1.2 billion for Pioneer Group Inc. for $1.2 billion.  Alliance Capital Management has agreed to buy fellow US manager Sanford C. Bernstein Inc. for $3.5 billion.