GAO Calls for Simplified IRA Rules

September 16, 2008 (PLANSPONSOR.com) - A Congressional watchdog agency has recommended the Internal Revenue Service (IRS) simplify its IRA rules so more people can take advantage of the tax-sheltered savings vehicle.

Specifically, the Government Accountability Office (GAO) suggested the IRS clarify the rules under which taxpayers can make a combined contribution to a regular and a Roth IRA and that the IRS work with other federal agencies to pursue ways to help taxpayers comply with the required minimum distribution rule (taxpayers over age 70½ are required to take minimum distributions from traditional IRAs or face a 50% penalty on the required distribution amount). GAO also suggested the tax agency pursue ways to give taxpayers more general guidance

GAO researchers say many taxpayers are hamstrung in their ability to take maximum advantage of their IRA because of the rule confusion. “As partly shown by taxpayer misreporting to IRS, taxpayers face challenges in figuring how much they can contribute, navigating the various distribution rules, and rolling over their IRAs between custodians,” the GAO said.

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Complexity of IRA rules was cited by IRS officials, IRA custodians, and financial planners as the overarching contributor to challenges facing taxpayers in complying with IRA rules, the GAO said.

On the basis of the most recent research results available, the IRS estimated that in 2001, nearly 15% of those who made traditional IRA contribution deductions misreported their deductions on their tax returns, and nearly 15% of taxpayers who took taxable distributions from traditional IRAs misreported this information.

The GAO said older taxpayers make mistakes in determining when they must start distributions and calculating the correct amount and said the IRS could develop a Web-based calculator to figure out the required minimum distribution. Other options to reduce the complexity of IRA rules, such as eliminating income limits on eligibility, pose tradeoffs and could be considered in the context of broader tax reform, the GAO said.

The report is available  here .

Transferring Participants Come "Home", Dump International

September 15, 2008 (PLANSPONSOR.com) - Participants continued to flee equities for the relative security of GIC/stable value during August.

In fact, more than two-thirds (70.21%) of monies transferred during the month wound up in that category, according to the Hewitt 401(k) Index, some $309 million.   Most of that money came from company stock (37.81%), but nearly as much came from last year’s hot category, international stocks, which made up nearly 37% of the total transfers out, some $162 million.   Emerging markets were 10% of the transfers out.  

In July, more than $692 million was shifted out of equities into fixed-income asset classes, and though $228 million of that came from large U.S. equity funds, $208 million came from international funds, making up 26% of the outflows for the month (see  Transfers Favor Stable Value, But Contributions Cling to Lifestyle ).

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International Flavors

Hewitt comments that international funds have experienced the largest year-to-date outflows among all asset classes, with nearly $1.2 billion shifting out of these funds.   International funds represented approximately 10% of total assets in this asset class at the beginning of the year in the Hewitt 401(k) Index.

As for company stock, that category shed $166 million in August, and thus far in 2008 $630 million has moved out of this asset class.

In addition to GIC/stable value, small U.S. equity and bond also received a portion of the inflows of $81 million (18.45% of the total transfers in) and $41 million (9.35%), respectively.

With regards to the level of transfers, 0.05% of the balances were transferred on a net daily basis.   Transfers were above normal level just four of the trading days in August, thought that was slightly higher than the average number of above-normal days so far in 2008.   A "normal" level of relative transfer activity is when the net daily movement of participants' balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

Considering recent transfer volumes, it is perhaps not surprising that GIC/stable value was the largest category represented, making up nearly a full quarter of the total assets tracked by the Index.   Large US equity, at 18.59%, was second-most represented, while company stock slipped further back, and, at month's end, constituted just 15.92% of the total.   Lifestyle/pre-mixed funds continued to expand, and at the end of August, were nearly 10% of the total assets.

Trends would seem to favor a continued growth in the lifestyle category, as it drew nearly one-in-five contributions tracked by the Hewitt index in August, and the category drew 20.51% of participant contributions.   

Large US equity and GIC/stable value offerings each drew nearly 18% of the current month's contributions (and 19% of participant contributions), and international - though it suffered losses in the transfer category - still captured nearly 11% of the participant contributions for the month.

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