Compliance May 2, 2019

IRS Expands Determination Letter Program for Individually Designed Plans

The agency will accept determination letter applications for hybrid plans for a certain period and for merged plans on an ongoing basis.

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The IRS has issued Revenue Procedure 2019-20 which provides for a limited expansion of the determination letter program with respect to individually designed plans. 

Under this limited expansion, the IRS says it will accept determination letter applications for:

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  • individually designed statutory hybrid plans during a 12-month period beginning September 1, 2019, and
  • individually designed merged plans (as defined in section 5.01(2) of the revenue procedure) on an ongoing basis. 

In Revenue Procedure 2016-37, the agency closed the determination letter program except for initial plan qualification and for qualification upon plan termination.  The IRS later issued Revenue Procedure 2019-4 to provide an “other circumstances” category for which determination letters can be requested. Though the category was added, the agency did not specify what “other circumstances” for which it applies.

In April last year, the IRS asked for input about determination letter program exceptions. Among the input it received were comment letters from Groom Law Group, one of which suggested an exception for certain hybrid plans.

Revenue Procedure 2019-20 also provides for a limited extension of the remedial amendment period under Section 401(b) of the Internal Revenue Code (Code) and Revenue Procedure 2016-37 under specified circumstances, and for special sanction structures that apply to certain plan document failures discovered by the IRS during the review of a plan submitted for a determination letter pursuant to the new revenue procedure.
Investing May 2, 2019

U.S. Funds Are Seeing a Decline in Costs

A Morningstar study says investors are paying almost half as much to own funds in 2018, compared to 2000. 

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Morningstar, Inc. has published its annual fee study, gauging trends surrounding U.S. open-end mutual funds and exchange-traded funds (ETFs) costs.

Among study findings, the report says the asset-weighted ratio fell across U.S. funds, from 0.51% in 2017 to 0.48% in 2018—resulting in an estimated $5.5 billion in savings for fund fees.  The 6% year-over-year decline is the second largest recorded since asset-weighted fees were first tracked by Morningstar in 2000, according to the company.

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The Morningstar report credits this decline to the migration towards lower-cost funds. In 2018, they note, active funds’ fees dropped to 0.67% and passive funds’ fell to 0.15%. Additionally, active funds saw a 3.7% decline in equal-weighted average fees, and equal-weighted average fees across all share classes of active funds declined from 1.15% in 2017 to 1.11%.

This decline in fees could also be attributed to strategic-beta funds, which the report notes some asset managers have started to launch. The asset-weighted average fee for U.S. equity strategic-beta funds was 0.17% in 2018, and while the report says this number is slightly higher than traditional index funds’ fees, it is still significantly lower than fees associated with active funds.  

The study also reports that investors are paying almost half as much to own funds now, compared to 2000. Investors are contributing 40% less than what they paid a decade ago, and about 26% less than from five years ago.

“As awareness grows around the importance of minimizing investment costs, we have seen a mass migration to low-cost funds and share classes,” says Ben Johnson, Morningstar’s director of ETF and passive strategies research. “A shift in the economics of advice has further accelerated this trend. As advisers move from being paid on commission to collecting a fee for their service, a clear preference for semibundled and unbundled funds and share classes has emerged, as embedded advice and distribution costs are being stripped away from funds’ fees and charged separately.”

The study excludes money market funds and funds of funds. More findings on the study is available here.

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