Return to www.Rollover.net Home                                                         Third Quarter 2012
The New 404a-5 Fee Disclosure…
…and How It Coordinates With 408(b)(2)
As you likely know, July 1 was the deadline for retirement plan “covered service providers" to comply
with the Department of Labor’s 408(b)(2) regulation. The regulation requires “covered service providers"
to make a comprehensive disclosure of their fees and services to a “responsible plan fiduciary" of an
ERISA-governed tax-qualified plan, such as defined contribution, defined benefit, and ERISA 403(b)
plans. The regulation does not include IRAs, SEP, or SIMPLE Plans. The “responsible plan fiduciary"
will usually be the individual who has the power to make decisions and sign documents. Only fees that
are paid out of a plan’s assets need to be disclosed. So, for example, if the company writes a check for
administration services, that fee will not need to be disclosed under 408(b)(2).
ERISA requires plan sponsors to compile and analyze the vari
ous fee disclosures and make
“reasoned and informed" decisions regarding the reasonableness of the plan fees. In addition,
under Regulation 404a-5, plan sponsors must disclose certain fees and other information to the plan
participants (of participant-directed accounts) by August 30, 2012.
Plan sponsors must disclose basic plan information, such as how to give investment instructions, plan
level administration fees, individually charged fees, and how to access the participant web site for
additional information. The plan sponsor must provide comparative investment information, including
a description of the investments and their performance data for 1, 5, and 10 years versus applicable
benchmarks or indices.
Some retirement plan recordkeepers will provide participants with all pertinent information on behalf of
the plan sponsor as a service to the plan on each quarterly participant statement.
Some recordkeepers are providing a template with instructions to help plan sponsors fill in the required
fees and investment information and therefore construct a 404a-5 compliant disclosure.
In other cases, plan sponsors can use the sample provided by the DOL to understand how to create a
compliant 404a-5 disclosure.
Fiduciary Responsibility: 404(c) will include 404a-5
As noted above, taking effect on August 30, 2012, 404a-5 will mandate plan sponsors to disclose certain
information regarding plan fees and services to plan participants.
After August 30, compliance with 404a-5 will be a necessary component of compliance with 404(c)
Part of a plan sponsor’s fiduciary responsibility includes the prudent selection and monitoring of plan
investments. In fact, in a participant-directed plan, e.g., 401(k) / profit sharing plans, the plan sponsor can,
nevertheless, still be responsible for poor investment results. However, a plan sponsor can reduce their
fiduciary responsibility by choosing to comply with ERISA 404(c).
The DOL suggests compliance with 404(c) to reduce fiduciary liability because it gives participants the
investment selection, control, and information necessary for them to make informed investment decisions.
The Selection
Participants must be able to select from a broad range of investment alternatives, also called “core"
investments. The Plan must make available at least three diversified investment options, which have
varying degrees of risk and return and may enable plan participants to achieve a balanced portfolio.
The Control
Participants must have the opportunity to change any of their investments as frequently as the volatility
of the investment requires under ERISA’s “general volatility rule." However, participants must be able
Retirement
Plans Quarterly
3rd Quarter 2012
pg_0002
to alter “core" investment alternatives at least once a quarter.
If any plan investment allows changes more often than once a
quarter, then at least one core investment must allow the same
more frequent rate of change, and the investment into which
participants can transfer must be income-producing, low risk,
and liquid. Note: Most 401(k) plans allow daily exchanges of
assets, well exceeding the 404(c) requirements.
The Information
Just as plan sponsors use 408(b)(2) fee and service
disclosures to make prudent investment selections for the
plan, 404a-5 fee, plan, and investment information can help
participants make sound investment decisions toward their
retirement savings.
404(c) also requires that certain financial concepts be described
in layman’s terms to participants so they can educate themselves
about the basics of retirement planning and investing. This may
also include investment risk and return characteristics, how
to achieve diversification through asset allocation, the effects
of compound interest, tax deferral and inflation, and sources
of retirement income. 404(c) requires that certain information
regarding a plan’s investment options be readily available to
plan participants, including descriptions of each investment’s
objectives, historical risk and return statistics, definitions,
comparative indices, access to prospectuses, and other
regulatory filings.
Complying With 404(c)
One way a plan sponsor can comply with the 404(c)
provisions noted above is to work with a retirement plan
record keeper platform that offers the necessary services
and products, including assistance with required
404a-5 disclosures.
Additionally, for a small fee, a suitable vendor can
provide a
fiduciary warranty or 3(21) or 3(38) fiduciary service through a
third party. This helps protect a plan sponsor by applying ERISA
standards of fiduciary prudence to plan investment selection and
monitoring, diversification, and Qualified Default Investment
Alternatives (QDIA). Your Stifel Financial Advisor can help
guide you through the process of selecting a suitable plan vendor
that may provide the required investment education materials to
plan participants.
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 account 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 2012 deferrals.
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.
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 2012 should do so immediately, as
plans established after this date are effective for 2013.
THE SIGNIFICANCE OF IRA BENEFICIARY
DESIGNATIONS
Many IRA holders are unaware of how the selection of a
beneficiary can affect distributions of their IRA assets after
their death. Frequently, at the time of the IRA holder’s death,
it is discovered that the beneficiary designation does not follow
the intentions of the IRA holder and an accelerated payout and
taxation is the result.
After an IRA holder dies, the designated beneficiary(s) receives
the remaining balance in the account in the form of Required
Minimum Distributions (RMDs). Note that a beneficiary may
take more than the minimum required at any time. In addition, a
beneficiary may choose to “disclaim" their share of the inherited
funds. Details follow in another article that’s titled, Beneficiary
Disclaimers.
Calculating the RMD
RMDs are determined by dividing a decedent’s previous year-
end IRA balance by a life expectancy (LE) factor found in IRS
LE tables. The amount and timing of RMDs will depend upon
whether the IRA holder died before their required beginning
date (RBD), or on or after the RBD. In addition, RMDs will
be dependent upon whether the beneficiary is a spouse, a
non-spouse, an entity, or a combination thereof. If multiple
beneficiaries are named, special rules apply. Note that the terms
“recalculated" and “non-recalculated" are used throughout the
text. A recalculated LE means that an IRS Life Expectancy
Table will be referenced each year for a new LE factor and non-
recalculated means that the LE factor established in the first year
will be reduced by one for each subsequent year’s RMD.
Required Beginning Date
For most IRAs, the RBD is April 1 of the year following the year
in which the IRA holder turns age 70 ½. However, with Roth
IRAs, there are no RMD requirements for the Roth IRA holder.
However, after the death of the Roth IRA holder, beneficiaries
must generally take RMDs according to the IRA rules that apply
when an IRA holder dies before his or her RBD, as explained in
the following text.
pg_0003
Death Before the RBD
If an IRA holder dies before the RBD, distribution options are as
follows:
Spouse as sole beneficiary
•
Five-year rule – The IRA balance must be withdrawn by
December 31 of the year containing the fifth anniversary of
the IRA holder’s death. Any amount may be taken at any time
during that period. Note that RMDs were suspended for 2009,
which extended the five-year anniversary period to six for
deaths that occurred prior to 2009.
•
LE payments – Distributions are to be taken at least annually,
over the beneficiary’s single LE (recalculated). Payments
must begin by the later of December 31 of the year following
the year of the IRA holder’s death or December 31 of the year
the deceased spouse would have reached 70 ½.
•
IRA rollover – A spouse beneficiary may roll over or
transfer the IRA into his or her own IRA and his or her own
beneficiaries. RMDs will not be due until the new IRA holder
attains age 70 ½.
Spouse not sole beneficiary
•
If separate inherited beneficiary accounts are established,
a spouse may choose any of the above-listed options. If
not separated, instead of receiving RMDs (see “Multiple
Beneficiaries" later) a spouse may take a distribution of his or
her share and roll that share to his or her own IRA if desired.
Non-spouse beneficiary
•
Five-year rule (same as above)
•
LE payments – Distributions are based on the beneficiary’s
single LE (non-recalculated) and must begin by December 31
of the year following the year of the IRA holder’s death.
Multiple beneficiaries
•
If separate beneficiary accounts are established, each
beneficiary choosing LE payments may calculate RMDs
using his or her own single LE (non-recalculated). If the IRA
account is not separated, RMDs will be based on the single LE
(non-recalculated) of the oldest beneficiary established in the
year following the year of the IRA holder’s death.
Note: There are no rollover options for a non-spouse
beneficiary.
No beneficiary, entity beneficiary, estate beneficiary, or non-
qualified trust (defined later)
• Five-year rule (same as above)
Qualified trust (defined later)
•
Five-year rule (same as above)
•
LE payments (non recalculated) – Based on the LE of the
oldest beneficiary identified in the trust (non-recalculated)
Death On or After the RBD
•
If an IRA holder dies on or after the RBD, distribution options
are as follows:
Spouse as sole beneficiary
•
Continue LE payments – In the year of the IRA owner’s
death, the RMD is based on the decedent’s LE from the IRS
Uniform Lifetime Table. For subsequent years, RMDs are
based on the longer of the recalculated LE of the spouse
beneficiary or the non-recalculated LE of the deceased
IRA holder.
•
IRA rollover – After the deceased’s RMD for the year of
death is satisfied, a spouse beneficiary may transfer or roll
the balance of the deceased spouse’s IRA into his or her own
IRA. Once complete, distributions will be based on the new
IRA holder‘s LE from the IRS Uniform Lifetime Table. If the
surviving spouse has not yet reached their RBD, RMDs may
be discontinued until that time.
Spouse not sole beneficiary
•
Instead of continuing LE payments (see “Non-spouse and
multiple beneficiaries" next), a spouse may take a distribution
of his or her share and roll that share to his or her own IRA
if desired.
Non-spouse beneficiary and multiple beneficiaries
•
Continue LE payments – After the deceased’s RMD for
the year of death is satisfied, remaining RMDs must begin
by December 31 of the year following the year of the IRA
holder’s death and be based on:
1.
The single LE (non-recalculated) of the oldest primary
beneficiary if separate inherited beneficiary accounts are
not established.
2.
The single LE (non recalculated) of each beneficiary if
separate inherited beneficiary accounts are established by
December 31 of the second year of death.
An entity beneficiary may continue RMDs based upon the
decedent’s single LE (non-recalculated) established in the
year of death.
Estate, non-qualified trust (defined later), or entities
•
LE payments – The remaining payments will be calculated
using the remaining single LE factor of the IRA holder,
established in the year of death (non-recalculated).
Qualified trust (defined later)
•
LE payments – After the RMD is payed in the year of the
IRA holder’s death, subsequent RMDs will be based on the LE
of the oldest beneficiary (non recalculated) identified in
the trust.
Qualified Trust
In order for a trust to be considered qualified for the purpose of
determining life expectancy, it must:
1. Be valid under state law
2. Be irrevocable upon the death of the IRA owner
pg_0004
3. Have identifiable beneficiaries named
4.
Provide qualifying documentation or a copy of the trust
instrument to the custodian by October 31 of the year after
the year of the account holder’s death.
Non-Qualified Trust
If the trust does not meet these qualifications, the IRA will be
treated as if no beneficiary is named.
Conclusion
Post-mortem distributions and estate planning for IRAs can
be extremely complicated, and it’s highly recommended that
IRA holders consult with a qualified attorney, tax advisor,
and investment professional prior to making these important
beneficiary designation decisions.
BENEFICIARY DISCLAIMERS
When an individual establishes an IRA or an employee becomes
a participant in a qualified retirement plan (QRP), that
individual generally names a beneficiary (s) who will receive
the assets upon his or her death. In addition, contingent or
secondary beneficiaries, that become effective if the primary
beneficiary dies, can also be named. There are several
distribution options available to the beneficiary(s) upon death,
and one of these options is the right to disclaim the rights to the
IRA or QRP assets.
Primary and Contingent Beneficiary
Upon the death of the IRA owner or QRP participant, the
primary beneficiary is the immediate owner of the IRA assets. A
contingent beneficiary becomes part of the distribution sequence
when one of two events occur:
1.
The primary beneficiary(s) dies before the IRA owner or
QRP participant and the individual does not name another
primary beneficiary.
2.
The primary beneficiary disclaims (forfeits) all or a
portion of the inherited assets and there are no other
primary beneficiaries.
Disclaimers
A beneficiary may choose to disclaim their entire share of the
inherited funds, or they can disclaim a portion (Rev. Rul. 2005-
36) of the funds and receive the other portion as distributions.
Under IRC Sec. 2518(b), the term “qualified disclaimer" means
an irrevocable and unqualified refusal by a person to accept an
interest in property, but only if:
1.
The disclaiming beneficiary states in writing that he or she
is irrevocably refusing to accept all or a portion of the IRA
or QRP assets,
2.
Such writing is received by the IRA trustee, custodian, or
issuer or plan administrator within nine months of the death
of the IRA holder,
3.
Such person has not already accepted the interest or any of
the benefits (Treas. Reg. 25.2518-2(a)), and
4.
As a result of the refusal, the individual executing the
disclaimer passes without direction the assets to another
beneficiary other than the disclaimant.
Note: Disclaimers are governed by federal and state law,
and to insure that a disclaimer meets all legal requirements,
disclaiming beneficiaries should always seek the aid of
legal counsel.
Conclusion
It’s very important to name contingent beneficiaries. In the
event a beneficiary does not need or want the assets of an
inherited IRA for their own use, they may disclaim and transfer
wealth to contingent beneficiaries. This provides flexibility and
possibly more favorable estate planning opportunities.
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