1.
DOL WARNS BANK ABOUT FEES FOR STEERING IRAs:
By letter dated May
11, 2005 (released May 23, 2005), the U. S. Department of Labor
issued an advisory opinion that banks, brokerage firms and investment
firms
are prohibited from accepting payments from mutual fund companies
in exchange for steering retirement account customers to those
funds. The Pension Excise Tax Regulations provide that a fiduciary
may not
use the authority, control or responsibility that makes such person
a fiduciary to cause a plan to pay an additional fee to such fiduciary
(or to a person in which such fiduciary has an interest that may
affect the exercise of such fiduciary’s best judgment as a
fiduciary) to provide a service. A fiduciary may not use the authority,
control or responsibility that makes such person a fiduciary to cause
a plan to enter into a transaction involving plan assets whereby
such fiduciary (or a person in which such fiduciary has an interest
that may affect the exercise of such fiduciary’s best judgment
as a fiduciary) will receive compensation from a third party in connection
with such transaction. Here, the bank that requested the ruling does
receive otherwise-prohibited fees, but management fees received by
the bank are reduced by an amount equal to such other fees and receipt
of such other fees does not cause the bank’s compensation
to exceed the amount of management fees agreed to by the individuals
who established IRAs or by IRA beneficiaries. This opinion is very
significant: it may eliminate some of the conflicts of interest
that
exist in many IRAs. The bottom line is that a plan participant
should only pay the amount of fees designated and not have to worry
about
recommendations of products that just happen to be most lucrative
for the trustee/custodian/investment adviser. 2. BANKING REGULATORS PROPOSE ADVISORY ON AUDITORS’ ATTEMPTS
TO LIMIT LIABILITY:
The Federal Financial Institutions Examination
Council (FFIEC), on behalf of the Office of Thrift Supervision (OTS),
the Board of Governors of the Federal Reserve System (Board), the
Federal Deposit Insurance Corporation (FDIC), the National Credit Union
Administration
(NCUA) and the Office of the Comptroller of the Currency (OCC), is
seeking public comment on a proposed Interagency Advisory on the
Unsafe and Unsound Use of Limitation of Liability Provisions and Certain
Alternative
Dispute Resolution Provisions in External Audit Engagement Letters.
The proposal advises Financial Institutions’ Board of Directors,
Audit Committees and Management that they should ensure that they do
not enter into any agreement that contains external auditor limitation
liability provisions with respect to financial statement audits. The
agencies have observed an increase in the types and frequency of provisions
in certain Financial Institutions’ external audit engagement
letters that limit the auditors’ liability. While these provisions
do not appear in a majority of financial institution engagement letters,
they are becoming more prevalent. The agencies believe such provisions
may weaken an external auditors’ objectivity, impartiality and
performance; therefore, inclusion of these provisions in financial
institution engagement letters raises safety and soundness concerns.
White these provisions take many forms, they can be generally categorized
as an agreement by a financial institution that is a client of an external
auditor to:
a. Indemnify the external auditor against claims made by third parties;
b. Hold harmless or release the external auditor from liability for
claims or potential claims that might be asserted by the client financial
institution; or
c. Limit the remedies available to the client financial institution.
Financial Institutions’ boards of directors, audit committees
and management should also be aware that certain financial institution
insurance policies (such as error and omissions policies and director
and officer liability policies) may not cover the financial institutions’ losses
arising from claims that are precluded by the limitation of liability
provisions. This advisory, if it becomes final, may not relate directly
to pension boards – except to the extent that they might invest
in the securities of a financial institution subject to the advisory.
However, this advice is well taken in relation to external audits of
pension funds themselves, and should be followed regardless of the
outcome of the banking regulators’ advisory.
3. DOL HAS GRAVE CONCERNS ABOUT EXPENDING PLAN ASSETS ON SOCIAL SECURITY
DEBATE:
On May 3, 2005, the Deputy Assistant Secretary for Program
Operations, Employee Benefits Security Administration, Department
of Labor, wrote to General Counsel for the AFL-CIO. He made reference
to reports that union officials had suggested fiduciaries of ERISA-covered
plans could expend plan assets to inform participants about the current
public debate on Social Security, and that plan trustees could make
decisions on the hiring and firing of plans’ service providers
based upon their opinions on Social Security reform. DOL has grave
concerns about these statements, and disagrees with any suggestion
that plan assets could be used for any purpose other than to pay benefits
defray administrative expenses. In certain very narrow circumstances,
such as where a legislative proposal is near enactment and closely
tied to plan issues, a fiduciary could decide to spent plan assets
to educate participants about the need to take the legislation into
account in making particular decisions about their options under the
plan. Giving plan participants information directly relevant to particular
plan choices, however, is very different from expressing views or providing
information concerning issues of public policy like Social Security
reform. Under ERISA’s stringent standards of prudence and loyalty,
it would be unlawful for a plan fiduciary to review the plan’s
service providers based, not upon quality and expense of their services,
but rather upon their views on Social Security or any other broad area
of public policy. For this reason, DOL reiterates its view that plan
fiduciaries may not increase expenses, sacrifice investment returns
or reduce the security of any plan benefits in order to promote collateral
goals. A fiduciary’s reconsideration of its current service providers
based solely upon the service provider’s views on Social Security
would raise serious concerns about the prudence and loyalty of the
fiduciaries’ actions. Similarly, a fiduciary could not, consistent
with the duties of prudence and loyalty, simply exclude qualified service
providers from consideration and hiring based solely upon their views
on Social Security policy. Could the Administration be pulling out
all stops in its quest for substantial Social Security reform? 4. ICI ISSUES 2005 FACT BOOK:
The Investment Company Institute is
a national association of U.S. investment companies. ICI seeks to
encourage adherence to high ethical standards, promote public understanding
and
otherwise advance the interests of funds, their shareholders, directors
and advisers. As of April 1, 2005, ICI members included more than
8,000 open-end investment companies (mutual funds), more than 600 closed-end
investment companies, 144 exchange-traded funds and 5 sponsors of
unit
investment trusts. Mutual fund members of ICI have total assets of
approximately $8 Trillion (representing more than 95% of all assets
of U.S. mutual funds), serving approximately 88 million shareholders
in more than 51 million households. ICI has just issued the 45th
edition of its annual “Investment Company Fact Book.” ICI reports
that of the $13 Trillion U.S. retirement market, approximately $3.1
Trillion is invested in mutual funds ($1.6 Trillion in employer-sponsored
accounts and $1.5 Trillion in IRAs). The remaining $9.8 Trillion in
retirement assets were in pension funds, insurance companies, banks
and brokerage firms. Other data show that 92 million individuals (having
a median age of 48) in 54 million U.S. households own mutual funds.
Of these individuals, 71% are married, 56% are college graduates, 77%
are employed, 49% are Baby Boomers and 24% are members of Generation
X. (We know, we know....they’re not supposed to add up to 100%.) 5. HOW DO RETIREMENT PLANS AFFECT EMPLOYEE BEHAVIOR?:
Recent trends
in U.S. private pensions are undeniable, according to a Watson Wyatt
survey. Over the last twenty-five years, defined benefit plans, once
the centerpiece of retirement portfolios, have lost considerable
ground to defined contribution plans, which have become the primary
vehicle
for saving for retirement. Some claim that traditional defined benefit
plans are a dying breed (if not already dead). Detractors contend
that defined benefit plans are too complicated, too risky for plan
sponsors
and unappreciated by employees. The Watson Wyatt survey found that
most workers value both types of plans very highly. And workers who
value their retirement plan are more likely to want to continue working
for their current employer than those who do not. As such, design
and features of a retirement program can have a very meaningful effect
on workers’ behavior, which can deliver favorable economic returns
to the organization. The survey asked DB plan participants to indicate
their degree of satisfaction with the following eight plan design features
(the percentages being “highly satisfied”):
Value of benefits as future income 55.9%
Information about value today 49.9%
Information about projected value 47.4%
How benefits are paid out 54.0%
Age when benefits are available 58.4%
Years of service until vested 67.9%
Ability to access before retirement 35.2%
How plan compares with competitors 40.9%
Overall satisfaction with DB plan 56.4%
The survey also asked employees to indicate their satisfaction with
the following plan design features of DC plans:
Match rate 53.3%
Type of matching funds 55.4%
Amount can contribute 79.8%
Investment options 68.7%
Information about balances 74.2%
Education programs 40.7%
Quality of plan administrator services 57.2%
How plan compares with competitors 45.8%
Overall satisfaction with DC plan 68.2%
The conclusion is that most employees appreciate their retirement
plans and value them highly. In fact, it appears that a satisfactory
plan plays a very significant role in both attracting and retaining
employees. Although employee attraction and retention are always important,
they are likely to become increasingly so as the Baby Boom generation
starts retiring.
6. SOCIAL SECURITY DISABILITY BENEFITS RECEIVED BY CASH BASIS TAXPAYER
INCLUDABLE IN GROSS INCOME WHEN RECEIVED EVEN IF ATTRIBUTABLE TO PRIOR
YEARS:
In 1999, the taxpayer suffered an injury and applied for Social
Security disability benefits. The Social Security Administration
resisted the claim, but after many months, the taxpayer prevailed,
receiving
a lump-sum payment of benefits in 2001 (including $4,000.00 in attorney’s
fees). For 2001, the taxpayer received a Form SSA-1099, Social Security
Benefit Statement, from the Social Security Administration, showing “benefits
for 2001" of $21,656.00. Social Security benefits, including disability
benefits, are includable in gross income pursuant to the statutory
formula, but the taxpayer included no benefits. Here, application of
the formula results in inclusion of benefits of $18,408.00 (85% of
$21,656.00). The taxpayer challenged the deficiency for 2001, but the
United States Tax Court ruled against her. Even though a significant
portion of the Social Security benefits received by the taxpayer was
attributable to 1999 and 2000, under income tax accounting principles
an item of gross income must be included in income for the taxable
year that it is received by a cash basis taxpayer. However, the law
recognizes that a taxpayer who receives a lump-sum payment of Social
Security benefits attributable in part to prior taxable years may be
adversely affected by the “bunching” of income; the statutory
formula is designed to provide a measure of relief to such taxpayers.
In addition, that portion of the lump-sum payment of Social Security
benefits that was paid to the taxpayer’s attorney cannot be disregarded
for purposes of application of the statutory formula. Citing a very
recent United States Supreme Court decision, the Tax Court held that
under the so-called anticipatory assignment of income doctrine, the
taxpayer cannot exclude an economic gain from gross income by assigning
the gain in advance to another party. (The Court did note that a portion
of the attorney’s fees is potentially deductible as an itemized
deduction.) Davis v. Commissioner of Internal Revenue, T.C. Summ. Op.
2005-61 (May 19, 2005). 7. A LITTLE BIT OF DOW TRIVIA:
In a rather startling coincidence,
on May 19, 1989, the Dow Jones Industrial Average passed 2500 for
the first time. In 1993, on the same date, the Dow crossed 3500 for
the
first time.
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