By allowing "direct rollovers" from eligible retirement plans to Roth IRAs, the individual will bypass both inconveniences, as:

1. Retirement plan assets distributed after December 31, 2007, will be allowed to flow directly into Roth IRAs, depending upon an individual�s Roth IRA conversion eligibility1; and

2. Only the assets from the plan executing the "direct rollover" to the Roth IRA are considered when determining the ordinary income tax due on the conversion. IRAs or other retirement plan assets owned by the individual are not considered2.

Note: Only after-tax dollars can be deposited into Roth IRAs, and ordinary income tax will be due on any pre-tax dollars converted.

In addition to other eligible retirement plan contributions converting directly to Roth IRAs in 2008, designated Roth accounts (Roth 401K / Roth 403(b)) will also have this ability. In PPA 2006, it was not clear if the $100,000 maximum adjusted gross income (AGI) eligibility restriction for individuals converting other types of eligible retirement plans also applies to those who do direct rollovers of designated Roth accounts to Roth IRAs. In the final regulations pertaining to distributions from designated Roth accounts (Treas. Reg. 1.408A-10, dated January 2006) it states: "An individual may establish a Roth IRA and roll over an eligible rollover distribution from a designated Roth account to that Roth IRA even if such individual is not eligible to make regular contributions or conversion contributions (as described in section 408A9(c) and (d)(3), respectively) because of the modified adjusted gross income limits in section 408A(b)(3)." Even though the final regulations explicitly indicate the $100,000 AGI restriction does not apply, a technical correction may be forthcoming.

Eligibility and donation limit

IRA holders must be at least 70� years of age before making the donation, and a distribution must be made on or after the actual day the account holder reaches age 70�.

For those who qualify, their maximum IRA charitable donation is limited to $100,000 for 2007. Any distributions in excess of the limit will not qualify for the tax exclusion benefit and will be treated as ordinary income.

The IRA holder must instruct the IRA trustee/custodian to issue the distribution check payable to the charity. If an individual elects to receive an IRA distribution directly with the intention of then making the charitable donation, that individual must report the distribution as ordinary income. To offset the ordinary income, the IRA holder would need to deduct the charitable contribution on their income tax return through itemized deductions, if eligible.

Any amount ($100,000 or less) payable to a qualified charity from an eligible Traditional IRA holder will count toward satisfying that individual�s RMD for the year. Note, that if an individual turns 70� in 2007 and elects to delay their first RMD until April 1, 2008, the delayed distribution will be reported in 2008 and will not qualify for this special provision. In order to utilize the benefit for 2007, the check must be issued by December 31, 2007.

By not including a charitable donation from an IRA as ordinary income, an individual�s adjusted gross income is not increased, which could affect Social Security benefits and the ability to qualify for Roth contributions or conversions.

For information pertaining to qualified charities, go to the IRS web site, www.irs.gov/individuals and review the "Charities and Non-Profits" section.

The IRA charitable donation provision sunsets on December 31, and legislation has been introduced to either extend the provision or make it permanent.

On October 18, 2007, the IRS announced (Release No: IR-2007-171) the retirement plan limits that are effective on January 1, 2008.

� Participants defaulted into the QDIA must be given the opportunity to transfer to other investments as often as participants who elect to invest in the QDIA, but no less often than once during any three-month period.

� The QDIA cannot impose a penalty or restrict a participant�s ability to transfer out of the investment during the first 90-day period of participation. This includes the imposition of surrender charges or redemption fees.

� Participants must receive a copy of the QDIA�s prospectus and any other material provided to the plan.

� The plan must complement the QDIA with a "broad range" of investment alternatives as defined under ERISA Section 404(c) regulations, into which participants can exchange QDIA assets.

Prior to the final regulations, most plans used stable value funds as their default investment. While the final regulations do not allow stable value funds to be a QDIA, contributions made to stable value funds prior to December 24, 2007, will be grandfathered.

With the growth of automatic enrollment, coupled with the fact that many participants do not want to manage their retirement account, it is expected that most fiduciaries would add a QDIA to their plan�s investment lineup.

A recent study commissioned by John Hancock found that 401K participants investing in John Hancock lifestyle funds had better returns than those who picked their own mix of mutual funds.

The study reviewed the 10-year performance, from 1997 to 2006, of 14,487 401K participants and the 5-year performance, from 2002 to 2006, of 200,467 participants. The study found that after five years, 80.9% of non-lifestyle fund participants would have accumulated, on average, a 6.1% higher balance if they had invested in one lifestyle fund. The average annual return for lifestyle participants was 9.5% versus 7.6% for non-lifestyle participants.

And after 10 years, 84.2% of non-lifestyle fund participants would have accumulated, on average, an 11.1% higher balance if they had invested in one lifestyle fund. The average annual return for lifestyle participants over the 10-year period was 7.2% versus 5.3% for non-lifestyle fund participants.

In addition to the performance measures, the survey also analyzed participant behavior. They found that non-lifestyle participants invested in an average of 3.9 funds and that non-lifestyle participants were more likely than lifestyle participants to adopt investment strategies at the extremes of the risk spectrum, either very conservative or very aggressive.

It appears that the Department of Labor (DOL) and Congress are jockeying as to who will be the first to impose rules regarding 401K fee disclosure. Rep. George Miller (D-California) and Rep. Richard Neal (D-Massachusetts) have each sponsored bills that would require greater disclosure of 401K fees charged to participants and plan sponsors.

Rep. Miller�s bill would require itemization of at least 12 expenses, including disclosure of start-up fees and expenses for investment management as well as separate disclosures for investment advice, sales commissions, administrative fees, trustee fees, and more. The bill would also force plan sponsors to offer participants at least one low-priced index fund.

There is concern among industry experts that Miller�s approach would overwhelm participants with too much information and that the extensive fee breakdown could unnecessarily increase plan costs.

Rep. Neal�s disclosure bill is less stringent, and many believe that the House Ways & Means Committee will use his bill as the foundation for an alternate bill.

As the bills move through the House, the DOL is in the process of developing regulations that would expand fee disclosure. The DOL is indicating that they will finalize their regulations before the end of the Bush administration.

Industry advocates prefer the regulatory approach over the legislative approach, because it is more flexible and easier to amend as the 401K market changes. At a recent congressional hearing, the Assistant Secretary of Labor for the DOL�s Employee Benefits Security Administration, Bradford Campbell, urged Congress to let the agency complete work on its regulations before moving ahead with legislation.

With the House set to adjourn for the year by mid-December, it�s unlikely that 401K fee legislation will be passed before the end of the year. This could leave the door open for the DOL to act first on the issue.

And while much of the focus is on fee disclosure, industry advocates want to stress that fees are not necessarily a bad thing, if they finance

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.

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