Compliance May 18, 2010

IRS Issues Final Regs on Diversification Requirements for Company Stock

May 18, 2010 (PLANSPONSOR.com) – The Internal Revenue Service is issuing final regulations under section 401(a)(35) of the Internal Revenue Code (Code) relating to diversification requirements for certain defined contribution plans holding publicly traded employer securities.
Reported by

Section 401(a)(35) of the Code was added by section 901 of the Pension Protection Act of 2006 and generally provides that an applicable defined contribution plan allow each individual who is a participant who has completed at least three years of service, a beneficiary of a participant who has completed at least three years of service, or a beneficiary of a deceased participant to elect to direct the plan to divest employer securities allocated to the individual’s account and to reinvest an equivalent amount in other investment options. The regulations say the plan must offer individuals not less than three investment options, other than employer securities, to which the individuals may direct the proceeds from the divestment of employer securities, each of which is diversified and has materially different risk and return characteristics.   

The IRS said a plan does not fail to meet the requirements if it allows individuals to divest employer securities and reinvest the proceeds at periodic, reasonable opportunities occurring no less frequently than quarterly. A plan is not permitted to impose restrictions or conditions with respect to the investment of employer securities that are not imposed on the investment of other assets of the plan, other than restrictions or conditions imposed to comply with securities laws.  

Get more!  Sign up for PLANSPONSOR newsletters.

The agency made changes to the proposed regulations in response to comments and also clarified provisions of the regulations. For example, the final regulations provide that, in the case of a multiemployer plan, an investment option will not be treated as holding employer securities to the extent the employer securities are held indirectly through an investment fund managed by an investment manager if the investment is independent of the employer and the percentage limitation rule is satisfied.  

The proposed regulations provided that certain investment funds that include employer securities held indirectly through an investment company registered under the Investment Company Act were treated as not holding employer securities. The final regulations replace the reference to a fund that is an investment company registered under the Investment Company Act of 1940 with a regulated investment company as described in Code section 851(a).   

The IRS said this change extends the types of investment companies to include exchange traded funds, which are unit investment trusts if they satisfy section 851(a). The final regulations also retain the rule from the proposed regulations that allows the Commissioner to designate additional types of funds as eligible for this exception.  

The final regulations also provide that the determination of whether the value of employer securities exceeds 10% of the total value of the fund’s investments – for exception from the diversification rule – is made for the plan year as of the end of the preceding plan year, and can be based on the information in the latest disclosure of the fund’s portfolio holdings (for example, Form N-CSR, “Certified Shareholder Report of Registered Management Investment Companies”) that was filed with the Securities and Exchange Commission in that preceding plan year.  

The final regulations provide that the prohibition on restrictions or conditions with respect to the investment of employer securities applies to any direct or indirect restriction on an individual’s right to divest an investment in employer securities that is not imposed on an investment that is not employer securities, as well as a direct or indirect benefit that is conditioned on investment in employer securities. It also provides clarification with respect to the exception for frozen funds.  

Finally, the final regulations provide that a plan is generally permitted to allow transfers to be made into or out of a stable value fund more frequently than a fund invested in employer securities and expand the list of permitted indirect restrictions to provide that a plan may provide for transfers out of a QDIA more frequently than a fund invested in employer securities.  

The IRS said the regulations will affect administrators of, employers maintaining, participants in, and beneficiaries of defined contribution plans that are invested in employer securities, and will be effective May 19, 2010, when the regulations are published in the Federal Register. The regulations apply for plan years beginning on or after January 1, 2011.  

Administration May 18, 2010

More Boards Demanding Quicker CEO Results

May 18, 2010 (PLANSPONSOR.com) – Booz & Company’s latest study of CEO succession found that corporate boards continue to hire insiders, are more often splitting the CEO/Chairman role, and are demanding the executive deliver results more quickly.
Reported by

A Booz & Company news release said CEO turnover rates for 2009 dropped to 3.3%, the lowest since 2003 and off a decade high in 2008 of 5.1%. In 2009, overall succession rates, which include planned and merger-driven departures, fell 2.4% in North America and half a percentage point in Japan, but held stable in Europe and increased 2.3% in the rest of Asia, the report said.

According to the news announcement, the Booz study found three primary CEO succession patterns:

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

  • The percentages of CEOs replaced each year in Europe and Asia (excluding Japan) are now at levels closer to those in North America and Japan. Similarly, turnover rates have harmonized across industries, with 10-year averages settling between 12 and 14% for all except telecommunications (16.9%).
  • Boards have picked insiders over outsiders to lead their companies 80% of the time since 2000, not surprising in light of an average 2.5% in market-adjusted shareholder returns, compared with 1.8% for outsider CEOs over the past seven years.  
  • In 2000, roughly half of North American and European CEOs held the dual roles of CEO and Chairman. At decade’s end, that number fell to 16.5% and 7.1% for these regions, respectively.

Booz said the study also found several overall trends refocusing the CEO job itself:

  • In just the past decade, boards have shaved nearly two years off the average CEO’s tenure, from 8.1 years to 6.3 years. While they are leaving office at about the same age as they have historically, today’s departing CEOs were older when they entered office: 53.2 years for those who exited in 2009 versus 50.2 for those who exited in 2000.
  • Having split the roles of Chairman and CEO, North American and European companies are increasingly appointing the outgoing CEO as Chairman to apprentice the incoming leader. However, the “apprenticeship” model does not produce consistently superior returns. In fact, on average, apprenticed CEOs underperformed non-apprenticed CEOs by 1.3% per year.
  • CEOs forced from office significantly underperformed those leaving on their own terms. Never was this more dramatic in the past decade than 2009, when chiefs departing on a planned basis delivered median market-adjusted shareholder returns of 6% compared with -3.5% for terminated CEOs.

“New CEOs have fewer years to execute a game-changing strategy than their predecessors,” said Booz & Company Senior Partner Ken Favaro, in the news release. “They need to balance clarity and boldness with a realistic understanding of what is possible in their organizations.”

Financial Services sees CEO Turnover Volatility

The study also found that of the 357 succession events in 2009, 228 were planned (retirement, illness, long-expected changes), constituting the bulk of departures, particularly in Japan (84%) and North America (71%). There were 83 forced departures (where a board removes a CEO for poor financial performance, ethical lapses, or irreconcilable differences), and 46 were driven by mergers.

Financial services is now the most volatile industry for CEO turnover. In 2009, the rate of financial services CEOs leaving office was 17.2%— well above the 14.3% global average and significantly higher than the industry’s average turnover rate over the past decade. By contrast, CEOs in health care enjoyed the greatest stability in 2009, with an overall 10.3% turnover rate and only 0.6% of CEOs forced from office.

Telecommunications, however, stands apart from other industries in terms of its 10-year turnover rate (16.9% vs. 13.6% average), and its share of forced turnover (54%) — by far the highest of the 10 industries assessed, and the only industry in which forced turnover is greater than that of planned succession.

The Booz study is available athttp://www.booz.com/media/file/CEO_Succession_2010.pdf.

«