Return to www.Rollover.net Home                                                         Third Quarter 2011

IRA DISTRIBUTIONS FOR QUALIFIED CHARITABLE DONATIONS

The Pension Protection Act of 2006 allowed certain IRA holders the opportunity to donate assets in their

IRA to qualified charitable organizations. If it’s done correctly, the distributions are tax-free and not

included as ordinary income. Distributions also count toward an individual’s Required Minimum Distri-

bution (RMD) for the year.

Originally, this benefit was available only through December 31, 2009. However, on December 17, 2010,

President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job

Creation Act of 2010, which included a provision that extends the charitable donation benefit through

December 31, 2011.

Eligibility and donation limit

IRA holders must be at least 70½ years of age on or before the actual day of making the donation.

For those who do qualify by age, their maximum IRA charitable donation is limited to $100,000 per tax

year. Any distributions in excess of this limit will not qualify for the tax exclusion benefit and will be

treated as ordinary income. The provision applies for Traditional and Roth IRAs and does not typically

apply to distributions from active SEP or SIMPLE IRAs unless an employer contribution was not made to

the SEP or SIMPLE IRA during or for the year the charitable distributions are made. Note that distributions

of base contributions and tax-paid conversions to Roth IRA holders are generally not considered taxable

income.

Direct payment requirement

In order to make a qualified charitable distribution, the IRA holder must instruct the IRA trustee/custodian

to issue the distribution check payable to the charity and include the charity’s address, if available. The

check can be mailed by the custodian either to the IRA holder or directly to the charity. If the check is

mailed to the IRA holder, he or she is ultimately responsible for delivery of the check to the charity. The

IRA holder is also responsible for receiving a receipt from the charity for proof of a direct donation.

Rather, if an individual elects to receive an IRA distribution directly (payable to the individual) with the

intention of making a future charitable donation, the IRA holder must report the distribution as ordinary

income. To offset this income, the IRA holder would deduct the charitable contribution on their income tax

return through itemized deductions, if eligible. (Contact a professional tax advisor for eligibility information.)

Benefit of excluding income

By not including a charitable donation from an IRA as ordinary income, an individual’s adjusted gross

income is not increased, which could affect the ability to qualify for Roth contributions or have other pos-

sible tax ramifications.

Qualified charities

For information pertaining to qualified charities, go to the IRS web site, www.irs.gov/individuals, select

the “Charities and Non-Profits" tab, and review the “Search for Charities" section.

SIMPLE IRAS - OCTOBER 1 DEADLINE

The SIMPLE IRA is an employer-sponsored plan that allows eligible employees to make pre-tax salary

deferrals into an IRA account and requires the employer to make annual contributions into the IRA ac-

count of each eligible employee. SIMPLE IRA plans must be maintained on a calendar year basis (IRC

Sec. 408(p)(6)(C)).

New plans

October 1 is an important date for new SIMPLE plans, as there is a requirement that all new plans be

established by October 1 of the year for which deferrals will be made. In addition, within a 60-day period

preceding a plan year, the employer must allow eligible employees to make deferral elections (IRC Sec.

408(p)(5)(C)). The 60-day election period for new plans must begin by October 1 to include 2011 defer-

rals.

There is one exception to the October 1 establishment deadline. Newly established companies may open

SIMPLE IRA plans as soon as administratively feasible to accept contributions immediately.

Retirement

Plans Quarterly

3rd Quarter 2011

Existing plans

For existing plans, employers should furnish a 60-day

election notice and salary deferral notice by November 1

each year. This notice allows newly eligible employees to

make elections or existing employees to modify elections for

the upcoming year.

October 1 is quickly approaching, and employers wishing to

establish a SIMPLE plan for 2011 should do so immediately, as

plans established after this date are effective for 2012.

EXTENSION DEADLINE FOR EMPLOYER

CONTRIBUTIONS

Employers may wait until the company’s tax filing due date plus

extensions to make company contributions to SEP or SIMPLE

IRAs and to Qualified Retirement Plans.

For fiscal year business owners, the normal filing date is the 15th

day of the 3rd month after the end of the corporation’s tax year.

Extensions stretch the employer funding and filing deadline an

additional six months following the normal filing date.

For calendar year filers, March 15, 2011 was the 2010 filing date

for corporations and for S-Corps. The normal 2010 filing date

for the self-employed business owner was April 18, 2011 (Eman-

cipation Day extension).

Extension deadlines

Business owners may request automatic extensions for tax filing

and for mailing contributions to plans by submitting appropriate

forms by their normal filing date. If an extension was granted,

September 15, 2011 is the final day a corporation may make

company contributions and to submit their tax returns. For the

self-employed individual, October 17, 2011 is the final day em-

ployer contributions may be accepted and tax returns filed.

BANKRUPTCY PROTECTION AND IRAS

Because of the Bankruptcy Abuse Prevention and Consumer Pro-

tection Act (2005), it’s now more difficult for consumers to dis-

charge certain debt obligations by filing for bankruptcy. While

some provisions of the Act restrict debtor options in bankruptcy,

the legislation provides limited protection for assets in certain

savings arrangements, including Traditional and Roth IRAs,

Simplified Employee Pension (SEP) plans, and Savings Incen-

tive Match Plan for Employees (SIMPLE) IRAs. In addition, as-

sets rolled from employer-sponsored retirement plans into IRAs

or IRA-based plans are given total protection from inclusion

in a bankruptcy estate. Coverdell Education Savings Accounts

(ESAs) and IRC Sec. 529 plans are also given protection, with

special limitations based on the timing of the contributions.

IRA protection

Under the Act, Rollover, Simplified Employee Pension (SEP),

and Savings Incentive Match Plan for Employees (SIMPLE)

IRAs are totally protected. The following are highlights of the

various protections:

• Traditional and Roth IRA assets may be exempted from

a debtor’s bankruptcy estate up to a limit of $1 million

(under new 11 U.S.C. Sec. 522(n)).

• The $1 million amount may be increased, based on a re-

view of the Consumer Price Index (CPI) every three years

(by changes to 11 U.S.C. Sec. 104(b)(1) and (b)(2)).

• SEP and SIMPLE IRA plan assets are not subject to the $1

million limitation (unlimited asset protection).

• Assets rolled into IRAs from employer-sponsored retire-

ment plans, including SEP and SIMPLE IRAs, are totally

exempt.

Simplification of the law

Prior to the enactment, under federal law most of a debtor’s

property was included in the bankruptcy estate with the exception

of the individual’s assets held in retirement plans that qualified

under bankruptcy code Sec. 522(d)(10)(E). The federal exemp-

tion did not include IRA or IRA-based plans. However, many

states provided specific exemptions for IRAs without meeting the

qualifications under the federal bankruptcy code, thus resulting in

inconsistencies between state and federal bankruptcy laws. The

Act clarifies that retirement accounts that are tax exempt under

the Internal Revenue Code are exempt from the debtor’s estate.

Even though the bankruptcy reform brings some clarity to the

treatment of IRAs in bankruptcy cases nationwide, it is an over-

statement to say it protects IRAs from all claims and attachments

by creditors. Remember, the IRS still has the right to levy IRAs.

And, some states allow creditors to attach IRAs in domestic

relations court cases regarding unpaid child support or in cases

of civic judgment. If an individual owns traditional and/or Roth

IRA assets, and is planning on filing for bankruptcy, it’s impera-

tive that he or she check with their tax advisor for details and

ask about segregating contributory amounts from qualified plan

rollover amounts.

This information is not intended to give tax or legal advice and is

for educational purposes only. It is recommended that you seek

the aid of a competent tax advisor or your tax attorney to assist

you with tax advice and bankruptcy guidance.

THE COSTS INVOLVED WITH 401(K) PLANS

As part of an ongoing research program, the Investment Com-

pany Institute (ICI) hired Deloitte Consulting, LLP to conduct

a study (the Defined Contribution/401(k) Fee Study) of defined

contribution (DC) plan sponsors to better understand what the

common fee and fee structures are relative to operating these

plans. Defined contribution plans, such as 401(k), profit shar-

ing, 403(b), and money purchase plans, are the dominant type

of retirement plans sponsored by private-sector employers in the

United States, covering nearly half of all private sector workers.

With older style “pension plans" (i.e., defined benefit plans) be-

ing made available less frequently to workers, an analysis of data

in the defined contribution market can give a very good indica-

tion as to how a key portion (outside of Social Security and per-

sonal savings) of the U.S. retirement savings system is operating.

Background

The ICI/Deloitte Defined Contribution/401(k) Fee Study was

conducted through a confidential, low-cost, web-based survey

by Deloitte Consulting, LLP. In total, 117 employers/130 plans

were involved in the study and 1,000 pieces of data were col-

lected covering plan design, investment options, and investment

fee information at the plan and participant level. Six retirement

service providers were also interviewed to gain an institutional

perspective. Multiple geographic regions, plan asset sizes, and

participant sizes were included. A total of 16 industries are rep-

resented in the study, where manufacturing firms were surveyed

most, encompassing a total of 37 plans. Plans ranging from under

$1 million to over $500 million were surveyed; mid-sized plans

(defined as having assets of $10 million to $100 million in assets)

were most common, totaling 41 plans. Finally, plans ranging in

size from under 100 participants to over 10,000 participants were

surveyed, with plans of participant bases of 1,000 to 4,999 most

represented, also totaling 41 plans.

Many fee arrangements exist

There are many aspects to maintaining a 401(k) plan, including:

Plan recordkeeping (which maintains participant accounts and

transactions), educational services (web sites, materials, advi-

sory services, etc.), and plan administration services (IRS Form

5500 preparation, plan discrimination testing, etc.). While the

services that 401(k) plans require are relatively consistent across

the market, there is a variation in the way fees are assessed to

these plans. Recordkeeping and administrative services can

be billed directly to the plan, or participant, or can be applied

to plan assets through an asset-based fee. All in all, the study

found that about three-quarters (74%) of 401(k) plan expenses

are assessed through asset-based fees. There are three basic

components of asset-based fees: 1) investment management fees,

2) distribution and/or service fees (e.g., 12b-1 fees when mutual

funds are involved), and 3) other fees to cover custodial, legal,

transfer agent, recordkeeping, and other operating expenses. Por-

tions of the distribution and/or service fees are many times used

to compensate a financial advisor, or to offset recordkeeping and

administrative costs.

Analyzing plan fees on an “apples to apples" basis

As mentioned above, while about three-quarters of plan expenses

are asset-based, the remaining one-quarter of plan expenses still

must be taken into account. The study utilized an analytical

tool that arrived at an “all-in" fee for each plan surveyed. The

“all-in" fee incorporates all administration, recordkeeping, and

investment fees, whether they are at the plan level, participant

level or as an asset-based fee. The “all-in" fee excludes par-

ticipant activity fees (e.g., plan loan fees). The median “all-in"

fee in the study was 0.72% of assets, or approximately $350 per

participant, while the median participant account balance was

$48,522 among all plans in the study. As for the range of fees

for all plans, “all-in" fees were 0.35% of assets or less for 10%

of plans in the study, while another 10% of plans had “all-in"

fees of 1.72% of assets or more.

Drivers of plan fees

As indicated above, “all-in" fees for plans in the study vary

widely. This is due to a number of plan variables, though the

key driver of plan fees is total plan assets. That being said, plan

assets in isolation do not tell the whole story. Drilling down

further, two further factors play a large role in plan fees: number

of plan participants and average account balance. Specifically,

the number of plan participants and average account balance are

inversely related to the “all-in" fee. For example, higher average

account balances and more participants tend to result in lower

fees as a percentage of assets. Other plan variables come into

play when dealing with two plans of a similar asset and average

account balance size, where the two plans may still have differ-

ent overall fees. Those variables are:

• Lower participant assets in equity-based asset classes

• Higher participant and employer contribution rates

• Use of auto-enrollment or auto-escalation

• Less plan sponsor business locations

• Other plan sponsor relationships (e.g., defined benefit

plan, health and welfare plan)

Conclusion

DC plans, such as 401(k) plans, are now the main retirement

plans utilized by plan sponsors, covering over 55 million plan

participants and $4 trillion in assets. The balances accumulated

in these plans are or will be a key driver of retirement income

for those millions of plan participants. The ICI/Deloitte survey

brings out the cost of these plans in a comprehensive manner

relative to the complex service and fee structures involved with

maintaining these plans. The survey ultimately supports the

need for plan sponsors to actively assess the fees being charged

to their plans. The impact of employer and employee contribu-

tions, as well as any positive market experience related to plan

investments, can lead toward a lowering of plan fees, sometimes

dramatically. Plan sponsors should not be surprised to hear that

they need to be the ones to reach out to their plan vendors to

reassess plan fees. In many instances, plan vendors will not be

responsive to lowering plan fees unless pressed.

TARGET DATE FUNDS: WHAT TO LOOK FOR

Target date retirement funds are becoming increasingly popular

investment vehicles within 401(k) plans. Target date funds are

mutual funds that periodically rebalance or modify the asset

mix (stocks, bonds, and cash equivalents) of the fund’s portfolio

and change the underlying fund investments with an increased

emphasis on income and conservation of capital as they ap-

proach the target date. Different funds will have varying degrees

of exposure to equities as they approach and pass the target date.

As such, the fund’s objectives and investment strategies may

change over time. The target date is the approximate date when

investors plan to retire. The principal value of the funds is not

guaranteed at any time, including at the target date. More com-

plete information can be found in the prospectus for the fund.

This “glide path" approach of gradually reducing exposure to

riskier investments is a key feature of target date funds, and the

concept of having most of a your money invested at retirement

in safer assets, such as bonds or cash, has intuitive appeal in the

event of a severe market downturn near the targeted retirement

date.

Rise and fall

Target date funds got a boost back in 2006, because they were

determined to be an eligible qualified default investment alterna-

tive (QDIA) for defined contribution plans. According to data

compiled by the Employee Benefit Research Institute (EBRI)

and the Investment Company Institute, by the end of 2008, 15.4

million people held about $161 billion in target date funds in

their 401(k) accounts. In 2010, assets reached $334 billion and

33% of 401(k) participants own a target date fund, according to

Financial Research Corp.

However, with the heavy losses in the

stock market in 2008, retirement plan sponsors discovered that

many target date funds with similar target dates delivered big

differences in investment returns. The reason for the differences

is due to varying allocations in equities. What investors didn’t

realize was that the target date meant different things to different

fund companies. These differences point to the challenges of

educating plan sponsors about the glide path and asset alloca-

tion of target date funds. The growing popularity of target date

funds emphasized the importance of encouraging fiduciaries to

be prudent in selecting and monitoring these funds and helping

participants better understand their features.

The information contained in this newsletter has been carefully compiled from sources believed to be reliable, but the accuracy of the information is not guaranteed.

This newsletter is distributed with the understanding that the publisher is not engaging in any legal or accounting type of work such as practicing law or CPA services.

Member SIPC and New York Stock Exchange, Inc.

National Headquarters: One Financial Plaza • 501 North Broadway • St. Louis, Missouri 63102

(314) 342-2000 • www.stifel.com

Investment Services Since 1890

Corrections

As a response to the market downturn and lack of education, regu-

latory agencies began to examine the education and disclosures

surrounding plan investments, including target date funds. In

October 2010, the Department of Labor (DoL) proposed amend-

ments to its participant-level disclosure regulations for QDIAs

and, specifically, target date funds. The proposals would require

notices that disclose more specific investment-related information,

including:

• The age group for which the investment is designed

• The relevance of the date in the fund’s name

• Any assumptions about contribution and withdrawal

intentions on or after such date

• The investment fund’s asset allocation

• How the asset allocation changes over time

• The point when the fund will reach its most conservative

allocation

Challenging conventional wisdom

Are target date funds worthy of their immense popularity.

Target date fund marketing literature often suggests that they

are a “safer" alternative to traditional asset allocation portfo-

lios because of their “glide path" approach to incorporating a

participant’s age and expected retirement date. To test this glide

path approach, Buck Consultants conducted a study using some

market data to test the safety claim. The Buck study involved us-

ing Monte Carlo simulations to estimate the accumulated wealth

at retirement for a person investing $1,000 a year for 40 years

via three approaches: 1) 100% in the S&P 500 Index, 2) a 60/40

annually rebalanced portfolio between the S&P 500 Index and

U.S. Treasury Bills, and 3) a target date fund with a linear glide

path from 100% in the S&P 500 Index to 100% in U.S. Treasury

Bills at the end of the 40-year period. The results are interesting

in that the target date fund approach resulted in the lowest vola-

tility (one measure of risk) though at the expense of the lowest

expected median return among the three. Therefore, the lower

volatility comes at the expense of a higher chance of a fund-

ing shortfall at retirement, or the need for larger contributions.

Another interesting outcome is that the 95% confidence Value at

Risk (VAR), an important measure of the risk of portfolio losses,

is very similar among the three strategies. This contradicts the

loss-minimizing approach that target date funds imply with their

glide path strategy.

No magic formula

Where did the glide path concept come from. According to

some marketing literature, it is based on avoiding a situation

where participants start investing during a bull market and

approach retirement around the time of a big market crash. If

this were the case, then target date funds would be protecting a

lifetime of market gains by being in safe assets near retirement.

While this situation has occurred recently, it is possible, or prob-

able, that future investment scenarios will be quite different.

With the ongoing debt struggles in the United States and other

countries, the markets have become more volatile and sideways

in nature, and may remain that way for some time. Participants

investing in target date funds now may experience some very

disappointing results, because they would be locking in losses,

or minimal gains, early on while missing out on some or all of a

potential stock market rally down the road.

Conclusion

By 2015, target date funds are expected to capture $1.7 tril-

lion of assets and account for 60% of all defined contribution

assets. Target date funds have soared in popularity since 2006,

and while issues have emerged and further education is critical,

the goal will be to enhance the industry as it evolves and grows.

The Buck study sheds light on the risk/return characteristics of

target date funds. It suggests a more “intelligently" designed

target date fund would focus on the approach to asset allocation,

tailored to the desired levels of downside risk protection and the

certainty of retirement wealth being sought.

Although there may be flaws, target date funds may help protect

the participant by professionally managing the assets and the

exposure to risk as the participant nears retirement. These funds

won’t make the mistakes some investors do by panic selling and

buying when a stock is at its peak. Target date funds serve as an

investment for participants that want a simple way to invest for

the future.

SAFE HARBOR 401(K) NOTICE REQUIREMENTS

A plan sponsor must notify its employees that the safe harbor

provision is being used before the beginning of the plan year

involved. This notice must be sent at least 30, but no more than

90 days in advance of each plan year. For calendar year plans,

those dates are from October 1 through December 1, 2011.

The plan sponsor must also make sure that the plan document

contains the appropriate safe harbor provisions before the begin-

ning of the plan year involved. So, for plans that want to add a

safe harbor feature in 2012, the amendments to the plan document

must be in place before December 31, 2011.