News
Category: Regulations
In response to the credit market instability, the Treasury Department will make available certain funds from its Exchange Stabilization Fund, on a temporary basis, to enable money market funds to insure the amount of assets held in publicly offered money market mutual funds to maintain a stable $1.00 per share net asset value. This program will be voluntary and is a temporary program to last no more than one year (after one year, it will be evaluated to determine if an extension is warranted).
"This Notice provides administrative relief in furtherance of public policy to promote stability in the market for money market funds," the IRS wrote. "Except with respect to the administrative relief expressly provided in this Notice, no inference should be drawn from this Notice regarding any other federal tax issues affecting tax-exempt bonds, money market funds, or any other security."
Premiums for participating money market mutual funds will be assessed against the mutual fund and we understand that most, if not all, investment companies maintaining these funds are planning to participate. The amount insured will not be capped like FDIC insurance. Once a participating fund board determines the fund has "broken a buck" and decides to liquidate, any shortfall would be covered by the Treasury. The SEC has been given the responsibility of developing this program.
It is important to note that new money that comes into these funds after close of business on September 19, 2008, will NOT be covered by this program. Though details are still being worked on, it appears intermediaries and recordkeepers will find it necessary to keep data on money market mutual fund account values as of the close of business on September 19, 2008, in order to be in a position to properly allocate recoupment of Treasury insured amounts, if subsequently necessary.
For further information, please contact Jim Bartoszewicz, Executive Vice President, Cowden Advisers, Inc. Defined Contribution & Investment Advisory Services. Jim can be reached at 412-208-0481 or toll-free at 888-889-9432.
The IRS Notice is available here.
On August 22, 2008 The U. S. Department of Labor (DOL) released proposed regulations in the Federal Register, that if adopted make investment advice more accessible for millions of Americans in 401(k) type plans and individual retirement accounts (IRAs).
“These proposals would give workers greater access to investment advice so that they are better equipped to manage and monitor their 401(k) plans and Individual Retirement Accounts,” said U.S. Secretary of Labor Elaine L. Chao.
The Pension Protection Act of 2006 amended the Employee Retirement Income Security Act (ERISA) by adding a new prohibited transaction exemption that allows greater flexibility for participants of 401(k) plans and IRAs to obtain investment advice. One of the ways in which investment advice may be given under the exemption is through the use of a computer model certified as unbiased, the other is through an adviser compensated on a “level-fee” basis.
Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive.
In December 2006, the department solicited public comments to determine what expertise and procedures may be needed to certify a computer model under the exemption, and to assist in developing a model form for the exemption’s disclosure of adviser fees.
The proposed regulation provides general guidance on the exemption’s requirements, including computer model certification, and includes a non-mandatory model form that advisers may use to satisfy the exemption’s fee disclosure requirement. In addition, to further the availability of quality and professional investment advice, the department is proposing a class exemption that permits advisors to provide individualized advice to a worker after giving advice generated by use of a computer model.
Separately, the department also released its determination relating to the feasibility of using computer models for providing investment advice to participants of IRAs.
For further information, please contact Jere Cowden, President and CEO, or Jim Bartoszewicz, Executive Vice President, Cowden Advisers, Inc., Defined Contribution & Investment Advisory Services. They can be reached at 412-394-9330 or toll-free at 888-889-9432. Full Proposed Regulations can also be found at the DOL website.
The Department of Labor (DOL) released proposed regulations that if adopted impose new requirements for the disclosure of fee and expense information to participants in self-directed individual account plans (such as 401(k) plans). The proposed rule is expected to be effective for plan years beginning on or after January 1, 2009 and is part of an ongoing effort to ensure that participants receive sufficient information about plan fees and expenses so that they can make informed investment decisions. In the same notice, DOL proposed changes to the regulations under Section 404(c) of the Employee Retirement Income Security Act (ERISA) to integrate the disclosure requirements and to restate DOL’s position with respect to the scope of ERISA Section 404(c)’s protection.
In June, President Bush signed into law H.R. 6081: Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), providing tax benefits and incentives to employees in qualified military service as defined by the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). The provisions have varied impact on many benefits, including 403(b) plans, governmental 457(b) plans, IRAs, and health flexible spending accounts. A full summary can be found at GovTrack.us.
The U.S. Department of Labor (DOL) has released additional clarification of the "QDIA regulation," the final regulations governing Qualified Default Investment Alternatives (QDIA). These regulations provide plan sponsors relief from certain fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) for investments made on behalf of participants or beneficiaries who fail to direct the investment of assets in their individual accounts. The guidance has been published in the form of a Q & A that can be found at the DOL website.
An update to a retiree health care case we featured last year: on March 24, 2008 the U.S. Supreme Court declined to review a 2007 federal appeals court ruling, upholding a final rule from the Equal Employment Opportunity Commission (EEOC) that allows an employer to coordinate retiree health benefits with Medicare or a similar state health benefits program without being subject to the Age Discrimination in Employment Act (ADEA). The effect of the ruling is that employers are allowed to provide a two-tier system of retiree heath care coverage, with younger retirees receiving richer benefits than Medicare-eligible retirees. The final ruling ends an eight year court battle, often referred to as the "Erie County" case.
Jim Bartoszewicz was featured in a Pittsburgh Business Times article from the March 21 -27, 2008 issue:
A recent ruling by the U.S. Supreme Court is being called a victory for millions of workers and a reminder for employers to exercise the utmost fiscal responsibility regarding their 401(k) plans.
The court ruled on Feb. 20 that individual participants in 401(k) retirement plans can sue to recover losses caused by the mismanagement of funds, reversing a decision made earlier by the 4th U.S. Circuit Court of Appeals in Richmond, Va., in the case of LaRue v. DeWolff, Boberg & Associates.
Jim Bartoszewicz, president and CEO of Cowden Advisers Inc., a Downtown investment advisory firm, said companies can take action to guard against lawsuits.
"By creating Sound practices for governing their retirement plans, sponsors will reduce the number of legitimate claims, while putting themselves in a better position to defend the frivolous suits," he said.
The full article requires a subscription.
On February 20, 2008 the Supreme Court ruled that a participant in a 401(k) plan can sue the plan sponsor for mismanaging his account. That seems pretty logical, but until that decision, any suit brought against a 401(k) plan sponsor had to be on behalf of the plan (i.e. ALL the participants).
In this instance, (LaRue v. DeWolff), only one participant was harmed when the plan sponsor did not follow his investment instructions. Under the old law, the “plan” was not materially harmed so there would not have been an event to cause a lawsuit. The Supreme Court said what most of us would have said, “This man lost $150,000 and should be allowed to sue for restitution.”
Plan Sponsors Beware: the door is now open for many lawsuits against the plan and the plan fiduciaries. The LaRue case was one example of negligence, but this ruling could allow any of the following scenarios:
On Wednesday, February 20, 2008, the U.S. Supreme Court issued a ruling that overturned the Fourth Circuit Court of Appeals' decision that a participant in a 401(k) plan is prohibited from using provisions of ERISA to recover losses allegedly caused by their employer's failure to carry out investment instructions (LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856, U.S. Supreme Court [February 20, 2008]). Effectively, the ruling allows James LaRue to try to recover $150,000 the he believes was lost when the plan manager failed to respond to his investment directions, but has the potential to open a floodgate of litigation on defined contribution plan sponsors.
This fall the IRS published proposed rules on Qualified Automatic Contribution Arrangements (QACAs) for 401(k) plans, 403(b) tax-sheltered annuities, or 457(b) governmental plans. The guidance concerns design-based safe harbor created by the Pension Protection Act of 2007. By adopting a QACA, a plan may escape some nondiscrimination testing.