The battle lines have been drawn.  The opinions of industry insiders expressed.  And now we wait to see whether or not the U.S. Department of Labor and the Employee Benefits Security Administration (DOL in particular) will change the definition of who is a fiduciary to an employee benefit plan.  In regards at least to retirement plans, the fact is that, if unaltered, the largest players in the retirement plan marketplace will be the greatest beneficiaries.  In essence, the rich will get richer.

The most significant impact of the definition change is that individuals who are simply providing investment products to the retirement plan and collecting upfront finder’s fees and/or ongoing commissions will become fiduciaries just like the Register Investment Advisors that always held themselves out as fiduciaries.  Theoretically, now all individuals selling assets to retirement plan sponsors will be on the same playing field, a field that involves potential prohibited transactions.  The goal seems to be to have all plans billed on a fixed percentage or flat fee basis so that assets offered in the plan will not change the compensation of the advisor.  Seems like a noble cause.  However, since the mutual fund companies, insurance companies or other product providers are not fiduciaries, they have greater opportunity to capture more revenue and assets without fear of engaging in a prohibited transaction – essentially they now have the IRA playing field, the largest pool of assets in the market, tilted to their advantage.

It is currently problematic for a fiduciary advisor to offer an IRA to participants of a plan, but a broker can offer an IRA with no trepidation.  That always seemed unfair because the role of an advisor is to offer investment products that are in the best interest of clients, even in the IRA world, while commissioned-based advisors (formerly referred to as brokers) could openly prospect plan participants and offer high-commission products with impunity (not that they all do that).  Under the new regulations, both have to deal with the potential prohibited transaction issues regarding soliciting IRAs from plan sponsors.  However, the asset providers such as Charles Schwab, Fidelity, Vanguard and others who often also record keep many of these plans, have no such restrictions.

For years, the industry has touted the need for plans to pick investment options from multiple providers knowing that some asset providers have funds that under- and over-perform the market.   If the new regulations are enacted, those big providers who likely will offer rollover products only comprised of their investments will gain a greater share of the market.  This is probably an unintended consequence.  But if I were a mega-player in this industry, I would be rooting for the DOL to issue the new definition of fiduciary as originally proposed.

Retirement plans administrators can eliminate major headaches by automatically rolling over low balance accounts of terminated employees to Individual Retirement Accounts (IRAs).  Those headaches primarily surround lost participants, un-cashed checks, the per-head recordkeeping costs and the fiduciary liabilities associated with terminated employees.  Even if you aren’t concerned about the recordkeeping costs and ongoing fiduciary liability, I argue, based on issues brought up by our clients, that every plan should implement an Automatic Rollover provision and include accounts below $1,000 in that process.

Before continuing with my observations, let’s review the rules on Automatic IRA Rollovers.  Department of Labor regulations state that you can distribute account balances to terminated employees that have a vested balance of less than $5,000.  This $5,000 level does not include any rollovers into the plan and the earnings associated with those assets.  So, in some cases, even accounts with more than $5,000 qualify for automatic rollover.

Furthermore, the regulation states that if the qualifying balance is between $1,000 and $5,000, any non-voluntary distribution (no distribution election within 30 days after termination of employment) must be made to an IRA established by the plan for the benefit of the participant.  Individuals with account balances less than $1,000 may also be rolled into an Automatic Rollover IRA or those individuals can simply be sent a check, minus 20% mandatory withholding, making the distribution subject to taxes and potential penalties.

It is difficult enough to run a qualified retirement plan, but dealing with terminated participants simply complicates the matter.  Why?  Aside from the cost that can now be deducted from their accounts, these individuals tend to get lost.  Statements get returned.  Correspondence goes unanswered. As for distributions under $1,000, the participant getting lost is even more significant because in many cases the distribution check goes un-cashed. Plus, after the 1099R is filed and the withholding is sent to the government, you can’t change your mind and roll them into an IRA.  Some larger company plans have thousands of stale, un-cashed checks.  The employers or recordkeeper try their best to find them by getting a good address, but this is time consuming and expensive.

These un-cashed checks really become a problem when a company is terminating a plan or the plan becomes abandoned.  In these instances, you can’t rollover the taxable distributions into an IRA because a 1099R has been issued, taxes have been withheld and presumably tax returns file on that amount.  

The solution is easy: Automatically Rollover to an IRA all qualifying account balances of less than $5,000.  If they get lost, it is the responsibility of the IRA provider to find them.  The risk of not doing so, in my opinion, outweighs any benefits gained from keeping the assets in the plan.

By Lowell M. Smith
President, Inspira

Recently one of our advisor clients came to me with an interesting question: Could one of his accountholders roll funds from a Traditional IRA back into a 401(k) plan, even though contributions had been made to that IRA? As with most questions in the retirement plan world, the answer was, “It depends.”

Funds from a Traditional IRA can be rolled back into a 401(k) plan only if the plan document permits such a rollover. Assuming the plan does permit this type of reverse rollover, only pre-tax retirement plan contributions made to the IRA that were tax-deducted and earnings in the account can be rolled back into the new 401(k) plan.

Also, if there were after-tax contributions in the IRA, those earnings can move back into the 401(k) plan but an amount equal to the after-tax contributions must remain in the Traditional IRA.

For example, assume that “Amy” had directly rolled over $50,000 from a 401(k) plan into a Traditional IRA in 2005. In 2006, Amy made an additional IRA contribution of $4,000 that was deductible at the time because she did not have access to a retirement plan through her employer.  In 2007, Amy made another $4,000 contribution to the IRA, but this time she could not deduct that contribution.  In 2010, Amy started working at a company whose 401(k) plan permitted Traditional IRAs to be rolled into the plan.  At that time, the value of the account had grown to $70,000. Amy would need to leave $4,000 in the IRA after transferring $66,000 to the 401(k) plan because the $4,000 was the amount of the non-deductible contribution made to the Traditional IRA.

As an additional strategy, assuming Amy has no other IRAs, she has the option of converting that $4,000 Traditional IRA into a Roth IRA for little, if any, tax consequence.

It is also important to note that it is the responsibility of the accountholder to keep track of the after-tax basis in an IRA account, not the financial institution holding the assets.

Join Nathan Rupp as he discusses Inspira on the Ron Morris show today on Pittsburgh Business Radio – 1360AM – today at 4pm!

Following are the four different ways you can tune in.

• Listen live on 1360 AM
• Stream online at TAEradio.com
• Don’t have access to the radio or internet?  Listen to TAE from your phone by dialing (724) 898-9669 (WMNY)
• Interact Live on TalkShoe

We often get questions about the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 regarding reverting contribution limits on IRAs back to only $2,000.  Here is a good Q&A from the Wall Street Journal on this issue.

http://online.wsj.com/article/SB127570646606101543.html?mod=googlenews_wsj

Just a real quick post here today, very busy here. We’ve locked up another strategic partnership, this time with RiversEdge. It’s our sixth such agreement that we’ve signed in the last month, so obviously things are going well for Inspira.

RiversEdge is a daily valuation and recordkeeping firm that was founded by my former colleague, Paul Palguta. Paul and I worked together at Invesmart, and he’s a really bright, energetic guy. We’re all excited to be working with him, and I think he feels the same way. Anyway, here’s a link to the release on our site: http://www.inspirafs.com/about_news_pr_RiversEdge.html

Enjoy!

I am often asked by Inspira prospects and others in the industry this question, “What is the most difficult aspect of assisting participants and their beneficiaries with IRA accounts that you service for your partners?”  That answer is simple – dealing with divorced spouses. 

In many cases, the dividing of assets in a divorce proceeds smoothly and amicably.  In just as many cases there is either an aggrieved party who is venomous toward the former spouse, or one party tries the best they can to place road blocks in the process.  Even among the amicable former couples who want to divide assets fairly, issues often arise.

Here are some common tricky points that we deal with every day:

1. A party’s attorney not being familiar financial matters leading to ambiguities and terminology issues in divorce decrees and Qualified Domestic Relations Orders (QDROs).
2. A party attempting to hide or move assets before divorce settlement paperwork is presented to the IRA provider.
3. A spouse or soon to be former spouse attempting to access their spouse’s or former spouse’s account.

 The key to the whole process, as far as IRA distributions are concerned, is to have an attorney that is not only familiar with the Employee Retirement Income Security Act (ERISA) as it relates to QDROs, but to financial matters as well to draft the documents.  Individuals often don’t understand which marital assets QDROs are designed to control.  A QDRO applies to a qualified retirement program offered by an employer like a 401(k) plan or pension plan.  The dividing of IRA assets is handled in a divorce decree issued by a court.  They are similar but not the same.

In either case, we find that the description of the IRA assets to be divided often creates interpretation problems when Inspira’s legal counsel reviews the order, and we then attempt to execute the order.  Often, the intent of the settlement is confused by the order.  For example, if we get an order that says to divide all marketable securities in the IRA account evenly as of a specific date and the account holds money market funds, stable value investments and/or mutual funds, obviously the intent is to divide the entire account evenly.  However, an aggrieved or contentious party may argue that only the mutual funds are marketable securities.  To avoid this type of ambiguity, it would significantly help us in the industry if the orders are very specific to intent and carefully reviewed prior to finalization.  In addition, the decree should describe the timing of the distribution and any limitations in accessing funds in the account prior to distributions.

As far as a spouse trying to move or hide money, that is something we can stop only after we get a divorce decree to review.  My advice to both parties is to get the QDRO(s) and/or divorce decrees to all financial services providers by fax the day it is executed.  If written well, access to the assets by either party prior to division can be controlled by the service provider.  As far as gaining access to an account, we do have in place controls that help prevent a non-accountholder, spouse or former spouse from gaining access to account information on an IRA held by the other party.

Obviously there is no magic solution that will make the processing of divorce settlements easier.  However, if you are in the business, be very careful when reading and interpreting a divorce decree.  If there are ambiguities, I would go back to each party and ask for clarification.  If they differ significantly, it may be best to ask them to go back to court for clarification.  It may anger the client, but in the long run it may help you avoid being involved in lengthy post-distribution interpretation battles.

Of all the proposals regarding retirement plans being floated since the beginning of the Obama administration, the one with the most “legs” seems to be the Automatic IRA.  A concept piece that is included in the budget proposed by the administration, the Federal government would require employers that do not offer a retirement plan to its employees to offer a payroll deduction individual retirement account (Automatic IRA).  Currently, there are IRA plans for small businesses such as the Simplified Employee Pension (SEP) Plan or a Savings Incentive Match Plan for Employees (SIMPLE IRA).  However, these IRAs require employees to fund all or a portion of the account, and the SEP contributions specifically are voluntary by the employer.

The thought is that the Automatic IRA program will cost employers very little to establish, and the accounts will be self-funded by the employees participating in the program.  The result would be an increase in retirement savings among the estimated 75 million American workers currently without access to an employer sponsored plan.  While all American workers under 70½ can make contributions to an IRA account now, the payroll deduction and potentially the use of automatic enrollment (unless the employee elects out of the plan a default percentage of salary will be put into the plan) will increase retirement savings as it has with 401(k) plans.  In addition, it is assumed that the amount that can be contributed to these Automatic IRAs will be greater than the $5,000 ($6,000 if you are age 50 or over) that can now be contributed to a Roth or Traditional IRA.

While I believe this type of program would be extremely beneficial, there are concerns over some of the buzz about potential features.  One thought is that very small employers will be exempt.  This makes sense if you are self employed or employ only you and your spouse.  But for this to truly be beneficial all employers with employees should be required to participate.

Secondly, there is some thought that the plan will be run by the Federal government and contributions will be made into “safe” investments specified by the government.  This would be a grave mistake.  The government is not equipped to record keep this type of program, and I personally would have concerns about whether or not contributions would even be “funded” or would this just be another tax such as Social Security.  The program should be regulated but administered by the private sector through payroll companies and other financial institutions that are already involved to some degree in retirement plans and IRAs.

The biggest potential winners with this proposal, aside from the IRA accountholders, are the payroll companies.  However, most of them do not have IRA products.  If I were these companies, I would either create or look to partner with firms to offer this type of solution.

It will be interesting to follow this legislation to see where it leads us.

By:  Lowell M. Smith, Jr.

President, Inspira

Just a quick post this morning to keep everyone up to date on more changes at Inspira.

We’ve upgraded to an improved version of our platform with ease of use for clients and customers in mind.

The new version includes improvements to Inspira’s straightforward online IRA account opening procedure, which will offer clients further guidance during the online enrollment and eSignature processes.

Click here to read more about the improvements we’ve made.

A little over a month ago one of our senior sales directors was talking to a prospect that is a Registered Investment Adviser under the Investment Advisers Act. The adviser asked how Inspira could help his firm comply with a revision to what is termed the “Custody Rule”. The adviser had just been looking at an article that said his firm had to comply with this new rule by March 12, 2010. He and his firm, which primarily sells and services 401(k) plans, were unaware that the Custody Rule was changing. So, as with everyone I have talked to about the rule, panic set in.  And the questions are, “What does the rule mean to me? How can we comply?”

The rule is actually a revision of SEC Rule 206(4)-2, and was revised to help avoid Bernie Madoff-like situations where the advisers created and delivered statements to clients themselves instead of an outside custodian in an effort to disguise a grotesque Ponzi scheme. Many in the retirement industry, including the leading industry associations, didn’t pay much attention to the issue and are now scrambling to comply.

In essence, the revised rule says that if you are an adviser under the Investment Advisers Act (essentially a fiduciary adviser) to a client, you or a related party (an entity owned or controlled by the adviser) need to take certain reporting precautions when the adviser has the ability to take fees or expenses out of an account. It appeared on the surface that the regulation was attempting to stem fraud coming from advisers managing investments for an individual while also producing statements. The rule basically says that, if you have custody, you need to engage an auditing firm that will perform surprise audits of the organization and report any violations directly to the SEC. In addition, your outside custodian must produce individual account statements at least quarterly and send them directly to the accountholder.  The adviser can also send their own statements.

This seems simple enough, except it fails to consider all of the issues inherent in establishing omnibus account positions for trading efficiency purposes. Retirement plan recordkeepers, some IRA recordkeepers (like Inspira), and some firms roll up trades into one omnibus account and allocate within the recordkeeping system portions of those accounts to shareholders. The custodians, often trading partners, do perform custodial services for the asset. However, in the case of 401(k) plans they do not always send quarterly statements to trustees due to the additional servicing costs that would need to be charged to recordkeepers and plans. These same custodians in omnibus IRAs and non-qualified accounts don’t have enough information to send individual statements. Thus, there is panic in the industry. The regulations became final at the end of December 2009, and these entities didn’t really understand that it might affect them until recently. Meanwhile, the March 12 compliance date is Friday.

The bottom line is this: If you are an adviser for retirement plans and/or you have a recordkeeping shop that is related to an adviser who is also recordkeeping individual accounts within an omnibus position, you need to adjust your ADV and compliance procedures. You will have to figure out a way to avoid having custody and/or ensure that your custodian can issue individual statements without information supplied by a firm that is also a related entity. Custodians have the same issue in determining how they can produce such statements for either trust accounts or individual accountholders.

At Inspira, we have an independent recordkeeping solution for IRA accounts that can be utilized by advisers and their custodians to address this issue without the expense of hiring an auditing firm.