A woman who claimed that a plan distribution form indicating her consent to her late husband’s distribution election was never properly notarized and therefore invalid has the agreement of a federal judge
The husband had elected a split distribution: one half in a lump sum and one half in an annuity without survivor benefits. The husband passed away after having received the lump sum distribution and two annuity payments. The wife then sued over the waiver's validity.
ERISA requires that the distribution waiver form be witnessed by a plan representative or a notary. In this case the notary had stamped the document without the wife present The US District Court threw out the waiver form signed by the woman, finding it had not been properly witnessed by a plan representative or a notary as required by ERISA.
The form did not include a standard declaration that the wife had executed the form in front of the notary. The plan argued that the requirement of a witness was a mere technicality that should not invalidate the wife's signature, but the court disagreed.
While acknowledging that outside of ERISA courts have found flaws in notarizations to be insufficient to defeat the validity of a document, the court noted that those cases "did not involve the ERISA strict requirements leading to the loss of benefits by a surviving spouse."
The case is Alfieri v. Guild Times Pension Plan, 2006 E.D.N.Y. 2006.
With more than two decades of operational and management experience We have developed a sharp eye for how businesses get clobbered with retirement plan fees and limited investment options. We empathetically help other business owners create the retirement programs that get results through checkbook control and self directed investments.
Monday, September 11, 2006
Tuesday, September 05, 2006
Do You Make This Mistake When You Reveal Your Age to the 401k Administrator?
For years, Maria Zdzienicki told her employer, Con Edison, that she was born in 1939. She provided Con Edison with sworn documents, such as immigration papers, confirming this to be true. Years later, when her pension benefits were about to begin, she reportedly told the company that she had actually been born five years earlier, in 1934. She claimed that she was therefore entitled to a larger pension benefit. In support of this claim, she submitted copies of her Polish birth certificate, Polish marriage license, and Polish passport.
The Con Edison pension plan administrator denied her request for additional benefits, citing the reason that there was sufficient evidence in the record to conclude that Maria was born in 1939, irrespective of what the Polish documents indicated.
Maria sued in federal court under ERISA, arguing that the plan administrator's decision was arbitrary and capricious. The parties stipulated that the administrator did not attempt to investigate the authenticity of the Polish documents. Zdzienicki conceded that the plan granted discretionary authority to the administrator to determine eligibility for benefits, decide factual questions, and resolve issues regarding plan administration.
In ruling for the defendants, the federal court found that "the plan administrator's decision to calculate Zdzienicki's pension benefits was not arbitrary and capricious and therefore did not violate ERISA."
The court explained that the administrator's decision was supported by voluminous documentary evidence, including Zdzienicki's sworn statement at the outset of her employment, her United States government issued Certificate of Naturalization, her New York State driver's abstract, her diploma from the Warsaw University of Technology, her 1990 COBRA forms, her employment authorization form and her 1993 medical laboratory reports. Also supporting the decision was the fact that Zdzienicki did not attempt to correct Con Edison's records of her date of birth until April 2003, when her pension payments were about to begin. This was 23 years after she first told the company that she was born on July 30, 1939.
It would not have been unthinkable for the Con Edison administrator to conclude that if Zdzienicki were truly born in 1934, she would have informed the company of that fact in 1990, when it twice sent her forms showing that her pension benefits would be calculated using 1939 as her year of birth, or at least in 1999, when, had Zdzienicki been born in 1934, she would have turned 65 and thus would have been entitled to pension payments at that time. Thus, "a reasonable mind" could view the evidence in the administrative record "as adequate to support the conclusion" that Zdzienicki was born on July 30, 1939.
The cite is Zdzienicki v. Consolidated Edison Co. of New York, 2006 WL 2482668 (S.D.N.Y. Aug. 29, 2006).
The Con Edison pension plan administrator denied her request for additional benefits, citing the reason that there was sufficient evidence in the record to conclude that Maria was born in 1939, irrespective of what the Polish documents indicated.
Maria sued in federal court under ERISA, arguing that the plan administrator's decision was arbitrary and capricious. The parties stipulated that the administrator did not attempt to investigate the authenticity of the Polish documents. Zdzienicki conceded that the plan granted discretionary authority to the administrator to determine eligibility for benefits, decide factual questions, and resolve issues regarding plan administration.
In ruling for the defendants, the federal court found that "the plan administrator's decision to calculate Zdzienicki's pension benefits was not arbitrary and capricious and therefore did not violate ERISA."
The court explained that the administrator's decision was supported by voluminous documentary evidence, including Zdzienicki's sworn statement at the outset of her employment, her United States government issued Certificate of Naturalization, her New York State driver's abstract, her diploma from the Warsaw University of Technology, her 1990 COBRA forms, her employment authorization form and her 1993 medical laboratory reports. Also supporting the decision was the fact that Zdzienicki did not attempt to correct Con Edison's records of her date of birth until April 2003, when her pension payments were about to begin. This was 23 years after she first told the company that she was born on July 30, 1939.
It would not have been unthinkable for the Con Edison administrator to conclude that if Zdzienicki were truly born in 1934, she would have informed the company of that fact in 1990, when it twice sent her forms showing that her pension benefits would be calculated using 1939 as her year of birth, or at least in 1999, when, had Zdzienicki been born in 1934, she would have turned 65 and thus would have been entitled to pension payments at that time. Thus, "a reasonable mind" could view the evidence in the administrative record "as adequate to support the conclusion" that Zdzienicki was born on July 30, 1939.
The cite is Zdzienicki v. Consolidated Edison Co. of New York, 2006 WL 2482668 (S.D.N.Y. Aug. 29, 2006).
Thursday, August 31, 2006
Why Do I Need my Spouse's Consent for 401(k) Loan
As a spouse has an interest in the accrued benefit of a participant, the plan does not satisfy the survivor annuity requirement unless the plan provides that, at the time the participant's accrued benefit is used as security for a loan, spousal consent to such use is obtained. Consent is required even if the accrued benefit is not the primary security for the loan.
No spousal consent is necessary if, at the time the loan is secured, no consent would be required for a distribution under $5,000. Spousal consent is not required if the total accrued benefit subject to the security is not in excess of the cash-out limit ($5,000) in effect under 1.411(a),11(c)(3)(ii).
The spousal consent must be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan and must be witnessed by a plan representative or a notary public.
Participant consent is deemed obtained at the time the participant agrees to use his accrued benefit as security for a loan for purposes of satisfying the requirements for participant consent under sections 401(a)(11), 411(a)(11) and 417.
Change in status.
If spousal consent is obtained or is not required at the time the benefits are used as security, spousal consent is not required at the time of any setoff of the loan against the accrued benefit resulting from a default, even if the participant is married to a different spouse at the time of the setoff. Similarly, in the case of a participant who secured a loan while unmarried, no consent is required at the time of a setoff of the loan against the accrued benefit even if the participant is married at the time of the setoff.
Renegotiation.
For purposes of obtaining any required spousal consent, any renegotiation, renewal, or refinancing that revises a loan shall be treated as a new loan made on the date of the renegotiation, refinancing, renewal, or other revision.
Internal Revenue Code 1.401(a) -20 Q & A 24
No spousal consent is necessary if, at the time the loan is secured, no consent would be required for a distribution under $5,000. Spousal consent is not required if the total accrued benefit subject to the security is not in excess of the cash-out limit ($5,000) in effect under 1.411(a),11(c)(3)(ii).
The spousal consent must be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan and must be witnessed by a plan representative or a notary public.
Participant consent is deemed obtained at the time the participant agrees to use his accrued benefit as security for a loan for purposes of satisfying the requirements for participant consent under sections 401(a)(11), 411(a)(11) and 417.
Change in status.
If spousal consent is obtained or is not required at the time the benefits are used as security, spousal consent is not required at the time of any setoff of the loan against the accrued benefit resulting from a default, even if the participant is married to a different spouse at the time of the setoff. Similarly, in the case of a participant who secured a loan while unmarried, no consent is required at the time of a setoff of the loan against the accrued benefit even if the participant is married at the time of the setoff.
Renegotiation.
For purposes of obtaining any required spousal consent, any renegotiation, renewal, or refinancing that revises a loan shall be treated as a new loan made on the date of the renegotiation, refinancing, renewal, or other revision.
Internal Revenue Code 1.401(a) -20 Q & A 24
Sunday, August 20, 2006
Fidelity Bonds under The Pension Protection Act of 2006
Fidelity Bonds under the
Pension Protection Act of 2006
Before PPA-2006, each person subject to the bonding
requirement had to be covered by a bond in an
amount equal to at least 10% of the plan assets
handled by such person, with a minimum bond
amount of $1,000, and a maximum of $500,000
PPA-2006 raises the maximum bond amount to
$1,000,000 for a plan that holds employer securities,
regardless of whether a bonded person actually
handles employer securities. Although a technical
explanation states that Congress did not consider a
plan to hold employer securities if it owns them
through a broadly diversified fund, the scope or
effect of this indication is unclear. The technical
explanation refers to mutual funds and index funds.
Since Mutual Funds are not considered to hold Plan Assets,
having employer securities in a Mutual Fund does not incur the
higher bonding. However, Hedge Funds holding Employer Securities
as an option under the plan would be subject to the higher bondng requirement.
Pension Protection Act of 2006
Before PPA-2006, each person subject to the bonding
requirement had to be covered by a bond in an
amount equal to at least 10% of the plan assets
handled by such person, with a minimum bond
amount of $1,000, and a maximum of $500,000
PPA-2006 raises the maximum bond amount to
$1,000,000 for a plan that holds employer securities,
regardless of whether a bonded person actually
handles employer securities. Although a technical
explanation states that Congress did not consider a
plan to hold employer securities if it owns them
through a broadly diversified fund, the scope or
effect of this indication is unclear. The technical
explanation refers to mutual funds and index funds.
Since Mutual Funds are not considered to hold Plan Assets,
having employer securities in a Mutual Fund does not incur the
higher bonding. However, Hedge Funds holding Employer Securities
as an option under the plan would be subject to the higher bondng requirement.
Saturday, July 22, 2006
Recovery Funds for 401k Plans
The Securities and Exchange Commission (SEC) has entered into settlement agreements with certain mutual funds relating to alleged late trading and market timing activities. Pursuant to the settlements, distribution funds have been created to make distributions to affected qualified retirement plans. For each distribution fund, an independent distribution consultant has been appointed to distribute the settlement fund
This page lists the SEC enforcement cases in which a Receiver, Disbursement Agent, or Claims Administrator has been appointed. Funds that are recovered and available for investors will be distributed according to an approved plan.
For example:
for each orgnaization listed, you may want to find out whether a private class action has been filed against the company you invested in.
For additional information, please visit the SEC website: http://www.sec.gov/divisions/enforce/claims/alphatelcom.html
Specific Examples of penalties and profit disgorgement include:
Admin. Proc. File No. 3-11818
$375,000,000 from Bank of America
(image placeholder)
In the Matter of
Banc of America Capital Management, LLC, BACAP Distributors, LLC, and Banc of America Securities, LLC,
Respondent.
(image placeholder)
On the basis of this Order and Respondents' Offers, the Commission finds that:
Summary
1. From as early as July 2000 and continuing through July 2003, Banc of America Capital Management, LLC ("BACAP") and its predecessor entity Banc of America Advisers, LLC, the investment adviser to all mutual funds, or series, in the Nations Funds mutual fund complex (the "Nations Funds") as well as BACAP Distributors, LLC ("BACAP Distributors"), the distributor and administrator for Nations Funds, allowed certain market timing clients to engage in short-term or excessive trading and never disclosed this fact to other investors.
Administrative Proceeding File No.3-11359
$250,000,000 from Alliance Capital
(image placeholder)
In the Matter of
ALLIANCE CAPITAL MANAGEMENT, L.P.,
Respondent.
(image placeholder)AMENDED ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTIONS 203(e) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER
I.Summary
1. This proceeding concerns Alliance Capital's negotiated, but undisclosed, arrangements with market timers -- arrangements that benefited Alliance Capital to the detriment of investors in mutual funds managed by Alliance Capital. In those arrangements, Alliance Capital provided "timing capacity" in mutual funds to known timers in return for or in connection with the timers' investments of "sticky assets" in Alliance Capital managed hedge funds, mutual funds and other investment vehicles, from which Alliance Capital earned management fees. Alliance Capital's single biggest timer received at its height $220 million in timing capacity in Alliance Capital mutual funds in return for investments at agreed ratios in hedge funds managed by some of the same portfolio managers. The prospectuses for these mutual funds gave the misleading impression that Alliance Capital sought to prevent timing in these mutual funds. Alliance Capital failed to disclose that, in fact, it negotiated agreements to permit timing in return for the sticky assets. At their height in 2003, Alliance Capital had over $600 million in approved timing in its mutual funds. Alliance Capital permitted these arrangements despite awareness of the harmful effects timing can have on mutual funds and the ability to detect and prevent inappropriate timing in mutual funds. By entering into these arrangements, Alliance Capital breached its fiduciary duty to the mutual funds in which it arranged the timing.
2. In addition to the arrangements, Alliance Capital accommodated timers through other means. In part in order to enable the portfolio manager of one mutual fund to deal with the effects of timers in his fund, rather than simply prohibit timing in the fund, Alliance Capital obtained approval of the mutual fund's board and shareholders to lift a restriction on futures trading in the fund. Alliance Capital failed to disclose to the fund's board or shareholders that one of the reasons for recommending the proposal was to accommodate better the Alliance Capital-approved timers.
3. Finally, Alliance Capital provided material nonpublic information about the portfolio holdings of certain mutual funds to at least one of the timers. This disclosure enabled that timer to profit from market timing in declining markets.
Administrative ProceedingFile No. 3-11450
$50,000,000 from MFS
(image placeholder)
In the Matter of
Massachusetts Financial Services Company,
Respondent.
(image placeholder) NOTICE OF PROPOSED PLAN FOR THE DISTRIBUTION OF A FAIR FUND AND OPPORTUNITY FOR COMMENT
THE PROPOSED PLAN OF DISGORGEMENT
The Distribution Plan generally provides for distribution "fairly and proportionately to the MFS Funds the total disgorgement and penalty ordered in [the Order] based upon the amounts of brokerage commissions coded for fund 'Sales' attributed to each fund." The MFS Funds are the registered investment companies for which MFS is the investment adviser, including the retail mutual funds, registered closed-end funds, MFS Variable Insurance Trust, MFS Institutional Trust, and variable annuity and variable insurance funds known as MFS/Sun Life Series Trust and Compass Accounts. The proposed plan provides that each MFS Fund shall receive a proportionate share of the funds paid by MFS comprised of $1 (one dollar) in disgorgement and a civil money penalty of $50 million (fifty million dollars).
For the Commission, by its Secretary, pursuant to delegated authority.
__________________________Margaret H. McFarlandDeputy Secretary
ADMINISTRATIVE PROCEEDING File No. 3-11530
$50,000,000 From Banc One
(image placeholder)
In the Matter of
BANC ONE INVESTMENT ADVISORS CORPORATION AND MARK A. BEESON,
Respondents.
(image placeholder) ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 203(e), 203(f), AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Investment Company Act”) against Banc One Investment Advisors Corporation (“BOIA”) and Mark A. Beeson (“Beeson”) (collectively, “Respondents”).
In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940, and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Order”), as set forth below.
On the basis of this Order and Respondents’ Offers, the Commission finds that:
1. From at least March 2002 through April 2003, BOIA, an investment adviser, and Beeson, President and Chief Executive Officer of One Group Mutual Funds (“One Group”) and a senior managing director of BOIA, violated and/or aided and abetted and caused violations of the antifraud provisions of the Advisers Act and the Investment Company Act by: (1) allowing excessive short-term trading in One Group funds by a hedge-fund manager that was inconsistent with the terms of the funds’ prospectuses and that was potentially harmful to the funds; (2) failing to disclose to the One Group Board of Trustees or to shareholders the conflict of interest created when Respondents entered into a market-timing arrangement with a hedge-fund manager that was potentially harmful to One Group, but that would increase BOIA’s advisory fees and potentially attract additional business; (3) failing to charge the hedge-fund manager redemption fees as required by the international funds’ prospectuses when other investors were charged the redemption fees; (4) having no written procedures in place to prevent the nonpublic disclosure of One Group portfolio holdings and improperly providing confidential portfolio holdings to the hedge-fund manager when shareholders were not provided with or otherwise privy to the same information; and (5) causing One Group funds, without the knowledge of the funds’ trustees, to participate in joint transactions raising a conflict of interest in violation of the Investment Company Act.
2. In addition, between June 1999 and May 2003, BOIA further violated the antifraud provisions of the Advisers Act and the Investment Company Act by: (1) allowing excessive short-term trading in One Group funds by a Michigan market-timer that was inconsistent with the terms of the funds’ prospectuses and that was potentially harmful to the funds; (2) failing to disclose to the One Group Board of Trustees or to shareholders the conflict of interest created when BOIA entered into a market-timing arrangement with a Michigan market-timer that was potentially harmful to One Group, but that would increase BOIA’s advisory fees; (3) failing to charge a Texas hedge fund redemption fees as required by the international funds’ prospectuses when other investors were charged the redemption fees; and (4) having no written procedures in place to prevent the nonpublic disclosure of One Group portfolio holdings and improperly providing confidential portfolio holdings to certain other entities.
3. The One Group funds’ prospectuses stated that One Group restricted excessive exchange activity in all One Group funds. BOIA enforced those provisions. But despite the prospectuses’ language, Beeson entered into an agreement with hedge-fund manager Edward J. Stern (“Stern”) pursuant to which Stern executed approximately 300 exchange transactions within certain One Group funds. This agreement was made in the hope that it would lead to additional business from Stern for various BOIA affiliates. The transactions, which occurred between June 2002 and May 2003, earned Stern a profit of approximately $5.2 million. In connection with some of those transactions, BOIA and Beeson also failed to charge Stern approximately $4 million in redemption fees, as required by those funds’ prospectuses.
4. Also despite language of the One Group funds’ prospectuses, from June 1999 to December 2001, BOIA allowed a Michigan market timer to execute approximately 100 exchange transactions in One Group international funds, resulting in a profit to the market timer of approximately $1.24 million. Further, in March 2003, certain BOIA employees allowed a Texas hedge fund to execute two exchange transactions in the international funds without collecting approximately $840,000 in redemption fees required by the prospectuses.
5. Finally, BOIA regularly provided listings of the confidential portfolio holdings of many One Group funds to favored clients (including Stern), prospective clients, and consultants when that information was not provided to the public, to the possible detriment of the funds and
$5,000,000 from Bridgeway Capital Management
____________________________________
In the Matter of : Order Approving Plan of Disgorgement
: Distribution and Appointing Administrator
Bridgeway Capital Management, Inc. and :
John Noland Ryan Montgomery, :
Respondents. :
____________________________________:
On February 10, 2005, the Commission published notice of the Plan of Disgorgement
Distribution (“Plan”) proposed by the Division of Enforcement (“Division”) in this proceeding.
The Plan proposed that $4,407,700 of disgorgement and $458,764 of prejudgment interest paid
by respondent Bridgeway Capital pursuant to the Commission’s Order issued on September 15,
2004, be distributed pro rata among the eligible current and former shareholders of Bridgeway
Capital’s Aggressive Investors 1, Aggressive Investors 2, and Micro-Cap Limited mutual funds,
who were overcharged as a result of the misconduct described in the Commission’s September
15 order.
The Commission received no comments in response to the publication of the Division’s
proposed Plan.
The Division proposes in its Plan, as amended on March 16, 2005, that Stephen Webster,
Assistant District Administrator, Ft. Worth District Office, be designated as Administrator of the
Plan.
Accordingly,
IT IS ORDERED that the Plan is approved; and
IT IS FURTHER ORDERED that Stephen Webster is appointed as Administrator of the
Plan in accordance with the terms of the Plan.
For the Commission, by its Secretary, pursuant to delegated authority.
_____________________________
Jonathan G. Katz
Secretary
This page lists the SEC enforcement cases in which a Receiver, Disbursement Agent, or Claims Administrator has been appointed. Funds that are recovered and available for investors will be distributed according to an approved plan.
For example:
- Funds from Banc of America totaled $350,000,000,
- from Banc One totaled $50,000,000,
- from Capital Alliance totaled $250,000,000,
- from MFS totaled $50,000,000 and
- from Bridgeway Capital Management totaled $5,000,000.
for each orgnaization listed, you may want to find out whether a private class action has been filed against the company you invested in.
For additional information, please visit the SEC website: http://www.sec.gov/divisions/enforce/claims/alphatelcom.html
Specific Examples of penalties and profit disgorgement include:
Admin. Proc. File No. 3-11818
$375,000,000 from Bank of America
(image placeholder)
In the Matter of
Banc of America Capital Management, LLC, BACAP Distributors, LLC, and Banc of America Securities, LLC,
Respondent.
(image placeholder)
On the basis of this Order and Respondents' Offers, the Commission finds that:
Summary
1. From as early as July 2000 and continuing through July 2003, Banc of America Capital Management, LLC ("BACAP") and its predecessor entity Banc of America Advisers, LLC, the investment adviser to all mutual funds, or series, in the Nations Funds mutual fund complex (the "Nations Funds") as well as BACAP Distributors, LLC ("BACAP Distributors"), the distributor and administrator for Nations Funds, allowed certain market timing clients to engage in short-term or excessive trading and never disclosed this fact to other investors.
Administrative Proceeding File No.3-11359
$250,000,000 from Alliance Capital
(image placeholder)
In the Matter of
ALLIANCE CAPITAL MANAGEMENT, L.P.,
Respondent.
(image placeholder)AMENDED ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTIONS 203(e) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER
I.Summary
1. This proceeding concerns Alliance Capital's negotiated, but undisclosed, arrangements with market timers -- arrangements that benefited Alliance Capital to the detriment of investors in mutual funds managed by Alliance Capital. In those arrangements, Alliance Capital provided "timing capacity" in mutual funds to known timers in return for or in connection with the timers' investments of "sticky assets" in Alliance Capital managed hedge funds, mutual funds and other investment vehicles, from which Alliance Capital earned management fees. Alliance Capital's single biggest timer received at its height $220 million in timing capacity in Alliance Capital mutual funds in return for investments at agreed ratios in hedge funds managed by some of the same portfolio managers. The prospectuses for these mutual funds gave the misleading impression that Alliance Capital sought to prevent timing in these mutual funds. Alliance Capital failed to disclose that, in fact, it negotiated agreements to permit timing in return for the sticky assets. At their height in 2003, Alliance Capital had over $600 million in approved timing in its mutual funds. Alliance Capital permitted these arrangements despite awareness of the harmful effects timing can have on mutual funds and the ability to detect and prevent inappropriate timing in mutual funds. By entering into these arrangements, Alliance Capital breached its fiduciary duty to the mutual funds in which it arranged the timing.
2. In addition to the arrangements, Alliance Capital accommodated timers through other means. In part in order to enable the portfolio manager of one mutual fund to deal with the effects of timers in his fund, rather than simply prohibit timing in the fund, Alliance Capital obtained approval of the mutual fund's board and shareholders to lift a restriction on futures trading in the fund. Alliance Capital failed to disclose to the fund's board or shareholders that one of the reasons for recommending the proposal was to accommodate better the Alliance Capital-approved timers.
3. Finally, Alliance Capital provided material nonpublic information about the portfolio holdings of certain mutual funds to at least one of the timers. This disclosure enabled that timer to profit from market timing in declining markets.
Administrative ProceedingFile No. 3-11450
$50,000,000 from MFS
(image placeholder)
In the Matter of
Massachusetts Financial Services Company,
Respondent.
(image placeholder) NOTICE OF PROPOSED PLAN FOR THE DISTRIBUTION OF A FAIR FUND AND OPPORTUNITY FOR COMMENT
THE PROPOSED PLAN OF DISGORGEMENT
The Distribution Plan generally provides for distribution "fairly and proportionately to the MFS Funds the total disgorgement and penalty ordered in [the Order] based upon the amounts of brokerage commissions coded for fund 'Sales' attributed to each fund." The MFS Funds are the registered investment companies for which MFS is the investment adviser, including the retail mutual funds, registered closed-end funds, MFS Variable Insurance Trust, MFS Institutional Trust, and variable annuity and variable insurance funds known as MFS/Sun Life Series Trust and Compass Accounts. The proposed plan provides that each MFS Fund shall receive a proportionate share of the funds paid by MFS comprised of $1 (one dollar) in disgorgement and a civil money penalty of $50 million (fifty million dollars).
For the Commission, by its Secretary, pursuant to delegated authority.
__________________________Margaret H. McFarlandDeputy Secretary
ADMINISTRATIVE PROCEEDING File No. 3-11530
$50,000,000 From Banc One
(image placeholder)
In the Matter of
BANC ONE INVESTMENT ADVISORS CORPORATION AND MARK A. BEESON,
Respondents.
(image placeholder) ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 203(e), 203(f), AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Investment Company Act”) against Banc One Investment Advisors Corporation (“BOIA”) and Mark A. Beeson (“Beeson”) (collectively, “Respondents”).
In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940, and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Order”), as set forth below.
On the basis of this Order and Respondents’ Offers, the Commission finds that:
1. From at least March 2002 through April 2003, BOIA, an investment adviser, and Beeson, President and Chief Executive Officer of One Group Mutual Funds (“One Group”) and a senior managing director of BOIA, violated and/or aided and abetted and caused violations of the antifraud provisions of the Advisers Act and the Investment Company Act by: (1) allowing excessive short-term trading in One Group funds by a hedge-fund manager that was inconsistent with the terms of the funds’ prospectuses and that was potentially harmful to the funds; (2) failing to disclose to the One Group Board of Trustees or to shareholders the conflict of interest created when Respondents entered into a market-timing arrangement with a hedge-fund manager that was potentially harmful to One Group, but that would increase BOIA’s advisory fees and potentially attract additional business; (3) failing to charge the hedge-fund manager redemption fees as required by the international funds’ prospectuses when other investors were charged the redemption fees; (4) having no written procedures in place to prevent the nonpublic disclosure of One Group portfolio holdings and improperly providing confidential portfolio holdings to the hedge-fund manager when shareholders were not provided with or otherwise privy to the same information; and (5) causing One Group funds, without the knowledge of the funds’ trustees, to participate in joint transactions raising a conflict of interest in violation of the Investment Company Act.
2. In addition, between June 1999 and May 2003, BOIA further violated the antifraud provisions of the Advisers Act and the Investment Company Act by: (1) allowing excessive short-term trading in One Group funds by a Michigan market-timer that was inconsistent with the terms of the funds’ prospectuses and that was potentially harmful to the funds; (2) failing to disclose to the One Group Board of Trustees or to shareholders the conflict of interest created when BOIA entered into a market-timing arrangement with a Michigan market-timer that was potentially harmful to One Group, but that would increase BOIA’s advisory fees; (3) failing to charge a Texas hedge fund redemption fees as required by the international funds’ prospectuses when other investors were charged the redemption fees; and (4) having no written procedures in place to prevent the nonpublic disclosure of One Group portfolio holdings and improperly providing confidential portfolio holdings to certain other entities.
3. The One Group funds’ prospectuses stated that One Group restricted excessive exchange activity in all One Group funds. BOIA enforced those provisions. But despite the prospectuses’ language, Beeson entered into an agreement with hedge-fund manager Edward J. Stern (“Stern”) pursuant to which Stern executed approximately 300 exchange transactions within certain One Group funds. This agreement was made in the hope that it would lead to additional business from Stern for various BOIA affiliates. The transactions, which occurred between June 2002 and May 2003, earned Stern a profit of approximately $5.2 million. In connection with some of those transactions, BOIA and Beeson also failed to charge Stern approximately $4 million in redemption fees, as required by those funds’ prospectuses.
4. Also despite language of the One Group funds’ prospectuses, from June 1999 to December 2001, BOIA allowed a Michigan market timer to execute approximately 100 exchange transactions in One Group international funds, resulting in a profit to the market timer of approximately $1.24 million. Further, in March 2003, certain BOIA employees allowed a Texas hedge fund to execute two exchange transactions in the international funds without collecting approximately $840,000 in redemption fees required by the prospectuses.
5. Finally, BOIA regularly provided listings of the confidential portfolio holdings of many One Group funds to favored clients (including Stern), prospective clients, and consultants when that information was not provided to the public, to the possible detriment of the funds and
$5,000,000 from Bridgeway Capital Management
____________________________________
In the Matter of : Order Approving Plan of Disgorgement
: Distribution and Appointing Administrator
Bridgeway Capital Management, Inc. and :
John Noland Ryan Montgomery, :
Respondents. :
____________________________________:
On February 10, 2005, the Commission published notice of the Plan of Disgorgement
Distribution (“Plan”) proposed by the Division of Enforcement (“Division”) in this proceeding.
The Plan proposed that $4,407,700 of disgorgement and $458,764 of prejudgment interest paid
by respondent Bridgeway Capital pursuant to the Commission’s Order issued on September 15,
2004, be distributed pro rata among the eligible current and former shareholders of Bridgeway
Capital’s Aggressive Investors 1, Aggressive Investors 2, and Micro-Cap Limited mutual funds,
who were overcharged as a result of the misconduct described in the Commission’s September
15 order.
The Commission received no comments in response to the publication of the Division’s
proposed Plan.
The Division proposes in its Plan, as amended on March 16, 2005, that Stephen Webster,
Assistant District Administrator, Ft. Worth District Office, be designated as Administrator of the
Plan.
Accordingly,
IT IS ORDERED that the Plan is approved; and
IT IS FURTHER ORDERED that Stephen Webster is appointed as Administrator of the
Plan in accordance with the terms of the Plan.
For the Commission, by its Secretary, pursuant to delegated authority.
_____________________________
Jonathan G. Katz
Secretary
Sunday, July 09, 2006
Wells Fargo 401k Plans Robbed-Thousands $ Missing
Wells Fargo 401(k) Operations Manager Accused of Robbing 401k Customers Accounts
According to the Web site for KSTP-TV Eyewitness News, a Wells Fargo 401(k) retirement operations manager, has been accused of robbing 401k customer accounts.
The Operations Manager, overseeing the 401k daily fund operations, allegedly disbursed money from dormant 401k accounts and deposited it into his own separate account.
HOW THE 401K ACCOUNTS WERE ROBBED
Point-by-point, this retirement manager eluded what should have been Well s Fargo s own financial controls
Where were the procedural controls? At each step in this alleged theft, there should have been procedural controls to prevent someone from taking these actions without either an independent review and / or supervisory authorization.
When a 401k plan s administration and assets are at the same organization, the risk of insiders bypassing their own procedural controls is always present.
FIVE ACTIONS TO PROTECT YOUR 401K NOW
You put your 401k funds into the hands of those who seem trust worthy. Whether it is greed or other financial need that results in their dereliction of duty, the abandonment of their obligations and responsibilities, you need to protect yourself and your plan s assets.
Here is what you should do now--
First:
Check with your plan administrator or record keeper to determine whether they are also holding your assets.
Second:
Request a SAS -70 or similar report of the procedural and financial controls on your 401k assets.
Third:
Require that all Plan information changes and plan distributions be authorized by a Plan Representative or Trustee.
Fourth:
Require an accounting of all disbursements from the plan and a report of all data changes of the plan on a quarterly basis.
Fifth- Last Resort:
Transfer your plan to an organization that can meet your financial and procedural control requirements.
By implementing the five actions now you can go back to sleeping peacefully again..
According to the Web site for KSTP-TV Eyewitness News, a Wells Fargo 401(k) retirement operations manager, has been accused of robbing 401k customer accounts.
The Operations Manager, overseeing the 401k daily fund operations, allegedly disbursed money from dormant 401k accounts and deposited it into his own separate account.
HOW THE 401K ACCOUNTS WERE ROBBED
Point-by-point, this retirement manager eluded what should have been Well s Fargo s own financial controls
- Requested false name changes on dormant accounts,
- Provided false Social Security numbers for the false names, then
- Requested the disbursements from the accounts and
- Reset the account information back to the original owners.
Where were the procedural controls? At each step in this alleged theft, there should have been procedural controls to prevent someone from taking these actions without either an independent review and / or supervisory authorization.
When a 401k plan s administration and assets are at the same organization, the risk of insiders bypassing their own procedural controls is always present.
FIVE ACTIONS TO PROTECT YOUR 401K NOW
You put your 401k funds into the hands of those who seem trust worthy. Whether it is greed or other financial need that results in their dereliction of duty, the abandonment of their obligations and responsibilities, you need to protect yourself and your plan s assets.
Here is what you should do now--
First:
Check with your plan administrator or record keeper to determine whether they are also holding your assets.
Second:
Request a SAS -70 or similar report of the procedural and financial controls on your 401k assets.
Third:
Require that all Plan information changes and plan distributions be authorized by a Plan Representative or Trustee.
Fourth:
Require an accounting of all disbursements from the plan and a report of all data changes of the plan on a quarterly basis.
Fifth- Last Resort:
Transfer your plan to an organization that can meet your financial and procedural control requirements.
By implementing the five actions now you can go back to sleeping peacefully again..
Thursday, April 27, 2006
One Less Furrowed Brow for 401k Plan Sponsors
We got a sneak preview of the Dept of Labor's preliminary guidance on setting up 401k default investment options.
Under the guidance--which is subject to change--401k fiduciaries are now given a safe harbor on 401k investment management decisions and any breach that is "the direct and necessary result of investing a participant or beneficiary's account" in a default investment."
Investment managers and advisers, on the other hand, are solely responsible for any decisions they make with regard to the 401k investments or any resulting losses and do not get the same kind of relief.
In order to qualify for that 401k safe harbor, however, 401k fiduciaries must allow participants
Moreover, that default investment, which can be a lifecycle fund or a managed account, or other fund, must limit the presence of employer stock in the portfolio, as well as allow funds to be transferred.
The 401k fiduciary responsibility associated with selecting funds for the investment options in a 401k plan has now been tempered with this new preliminary safe harbor.
One less furrowed brow for plan sponsors.
Under the guidance--which is subject to change--401k fiduciaries are now given a safe harbor on 401k investment management decisions and any breach that is "the direct and necessary result of investing a participant or beneficiary's account" in a default investment."
Investment managers and advisers, on the other hand, are solely responsible for any decisions they make with regard to the 401k investments or any resulting losses and do not get the same kind of relief.
In order to qualify for that 401k safe harbor, however, 401k fiduciaries must allow participants
- the opportunity to move their investments into an alternate account
- provide advance notice of the default investment and
- invest the assets in a certain kind of qualified default investment.
Moreover, that default investment, which can be a lifecycle fund or a managed account, or other fund, must limit the presence of employer stock in the portfolio, as well as allow funds to be transferred.
The 401k fiduciary responsibility associated with selecting funds for the investment options in a 401k plan has now been tempered with this new preliminary safe harbor.
One less furrowed brow for plan sponsors.
Sunday, April 16, 2006
10 Steps To Save Your Retirement
Many of the brightest and hardest-working marketing and advertising people in the country are obsessed with getting you to spend money and, if necessary, to go into debt to do so. Absolutely all the media that reach you every day are designed to get you to spend money. In order to save money in this environment, you will need determination to withstand the constant pressures to spend now.
What is it that separates those who are successful from those who are not?
Successful individuals have a strong personal vision of what they want and why they want it. That vision gives them the strength to stick to their strategies even when doing so is uncomfortable. It gives them the determination to persist when they are discouraged. This is the same characteristic of women entrepreneurs and is the reason their new, small businesses are successful.
The 401k Plan
Today, the 401(k) plan has become the main investment vehicle for working women to save for retirement. But many do not take full advantage of their plan, and this could leave them with a lot less at retirement.
Here are some steps we believe you can take to improve and eliminate any retirement worries about whether or not your retirement will be pleasurable or public charity; or whether you will have all the free time to spend with your family or friends.
Remember, to be successful, first, imagine your early retirement; the Caribbean condo, the yacht, the new Lexus. Luxury and pleasure as far as your eyes can see. Create a strong vision, and then do not let go. The power of a clear, strong vision applies to more than just your retirement savings. Let your vision shape your life, instead of the other way around, and all of the time in the world can be yours. You will not be spending your Golden Years working at the Golden Arches
What is it that separates those who are successful from those who are not?
Successful individuals have a strong personal vision of what they want and why they want it. That vision gives them the strength to stick to their strategies even when doing so is uncomfortable. It gives them the determination to persist when they are discouraged. This is the same characteristic of women entrepreneurs and is the reason their new, small businesses are successful.
The 401k Plan
Today, the 401(k) plan has become the main investment vehicle for working women to save for retirement. But many do not take full advantage of their plan, and this could leave them with a lot less at retirement.
Here are some steps we believe you can take to improve and eliminate any retirement worries about whether or not your retirement will be pleasurable or public charity; or whether you will have all the free time to spend with your family or friends.
Increase your contributions to the maximum that you can manage. Many women contribute just enough to take advantage of their employers matching contributions, and then they stop. By adding more to your account, beyond the matching contributions, youll end up with more in retirement.
Invest at the start of each year instead of taking a little bit out of each paycheck. Nothing in the law says you have to invest in a 401(k) plan a little at a time, from each paycheck. By investing early, you’ll put your money to work sooner for your benefit.
A few years ago it was reported that more than 30 percent of the money in 401(k) plans was invested in money-market funds or similar accounts. For investors nearing retirement, that may be appropriate. But most workers in their 40s and 50s need growth in their retirement investments. Put more of your investment fund in equities and less in money-market funds.
Research indicates that over long periods of time, small-company stocks outperform large-company stocks. Since 1926, In the equity part of your portfolio, shift some of your money into funds that invest in small companies. Do not put your entire equity portfolio in small-company stocks. But consider investing at least 25 percent of your U.S. equity investments in that fund.
Numerous studies have shown that value stocks outperform growth stocks. According to data going back to 1964, large U.S. value companies had a compound rate of return of 15.1 percent vs. only 11.4 percent for large U.S. growth companies. Among small U.S. companies, the difference was even more striking: a compound return of 17.4 percent for the value stocks vs. 12.1 percent for the growth stocks. Do not put your entire equity portfolio into value stocks. But if there is a value fund available to you, consider investing at least 25 percent of your U.S. equity investments in that fund.
Rebalance your portfolio once a year. Your asset allocation plan calls for a certain percentage to be invested in each of several kinds of assets. Rebalancing restores your asset balance and allows for the possibility that last years losers may be this years gainers. Diluting your diversification actually increases risk in your portfolio over time, which is a result that is just the opposite of what most investors want.
Without compromising proper asset allocation– use the funds in your plan that have the lowest operating expenses. Choose funds with low turnover in their portfolios.
Do not borrow or make early withdrawals from your 401(k) unless that is the only way to respond to a life-threatening emergency. Furthermore, if you take an early withdrawal before you are 59.5 years old, your withdrawals will be subject to a 10 percent tax penalty (in addition to regular taxes) unless you are disabled. Just dont do it.
If you leave your job, you will get a chance to roll over your 401(k) into an IRA. Take that chance. In an IRA, you have the same tax deferral as a 401(k), and you will have the flexibility to invest in virtually everything you can get in a 401(k), plus much more.
Here is the most important thing you can do to maximize your 401(k): Keep your contributions automatically payroll deducted, and make them no matter what. It is simple, but it is not easy. Half of the households in the United States have net worth of $25,000 or less. In a typical year, about two-thirds of U.S. households do not save money.
Remember, to be successful, first, imagine your early retirement; the Caribbean condo, the yacht, the new Lexus. Luxury and pleasure as far as your eyes can see. Create a strong vision, and then do not let go. The power of a clear, strong vision applies to more than just your retirement savings. Let your vision shape your life, instead of the other way around, and all of the time in the world can be yours. You will not be spending your Golden Years working at the Golden Arches
Saturday, April 08, 2006
Thousands Now Survive Financial Hardship Who Never Thought They Could...With a Solo 401k !
Financial Emergency! It is unpredictable yet it happens to all of us. Whether it's college tuition for your daughter, unexpected medical bills from an accident in the yard, covering the higher than expected closing costs on your new home or avoiding foreclosure or eviction because spending got out of hand; you're going to need money fast.
As one of the requirements for the tax exempt status of your Solo 401k, distributions of funds from your Solo 401k are limited to termination of employment, retirement, disability, death, plan termination or inservice distributions after age 59.5. Severe options for those needing a temporary cash infusion.
Your Solo 401k to the Rescue.
To cover those temporary situations, the IRS allows Solo 401k ’ s to provide disbursements of salary deferral contributions for financial hardships.
These financial hardships must satisfy one of the following IRS preapproved conditions:
These hardship disbursements are not considered Solo 401k distributions with the option to be rolled over to IRAs or other qualified plans. But what happens if the Solo 401k financial hardship does not meet one of these criteria? The request is denied and the consequences must be endured.
The IRS recognized that there were other significant events that could qualify as financial hardship and with IRS Regulation 2004-TD-9169, the IRS added two additional circumstances to the list of approved financial hardships.
1.Funeral Expenses and
2.Cost of Uninsured Repairs on your Primary Residence.
These two new additions bring the approved circumstances to a total of six.
The changes to the safe harbor hardship rules resulting from the IRS regulations is the second set of changes to the hardship rules since GUST. The first set of changes occurred when EGTRRA reduced the holdout period for elective deferrals from 12 to 6 months. Please note that all of the changes to the hardship rules since GUST apply only to plans that use the safe harbor criteria for hardship withdrawals.
To add these two additional situations to the financial hardship provisions of your Solo 401k requires an amendment. Such an amendment should adopt the safe harbor financial regulations by reference so that any future additions are incorporated without additional amendment.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. As an entrepreneur who quickly built his own successful consulting business he also empathetically helps other business owners set priorities and create the retirement programs that get results. Visit Solo 401k or
Womens Solo 401k
Contact Lawrence at Lawrence@solo-k.com or call 727-277-4137
As one of the requirements for the tax exempt status of your Solo 401k, distributions of funds from your Solo 401k are limited to termination of employment, retirement, disability, death, plan termination or inservice distributions after age 59.5. Severe options for those needing a temporary cash infusion.
Your Solo 401k to the Rescue.
To cover those temporary situations, the IRS allows Solo 401k ’ s to provide disbursements of salary deferral contributions for financial hardships.
These financial hardships must satisfy one of the following IRS preapproved conditions:
- Medical bills unreimbursed by insurance
- Secondary Education for yourself, spouse or dependents
- Purchase of your primary residence or
- Avoid foreclosure or eviction
These hardship disbursements are not considered Solo 401k distributions with the option to be rolled over to IRAs or other qualified plans. But what happens if the Solo 401k financial hardship does not meet one of these criteria? The request is denied and the consequences must be endured.
The IRS recognized that there were other significant events that could qualify as financial hardship and with IRS Regulation 2004-TD-9169, the IRS added two additional circumstances to the list of approved financial hardships.
1.Funeral Expenses and
2.Cost of Uninsured Repairs on your Primary Residence.
These two new additions bring the approved circumstances to a total of six.
The changes to the safe harbor hardship rules resulting from the IRS regulations is the second set of changes to the hardship rules since GUST. The first set of changes occurred when EGTRRA reduced the holdout period for elective deferrals from 12 to 6 months. Please note that all of the changes to the hardship rules since GUST apply only to plans that use the safe harbor criteria for hardship withdrawals.
To add these two additional situations to the financial hardship provisions of your Solo 401k requires an amendment. Such an amendment should adopt the safe harbor financial regulations by reference so that any future additions are incorporated without additional amendment.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. As an entrepreneur who quickly built his own successful consulting business he also empathetically helps other business owners set priorities and create the retirement programs that get results. Visit Solo 401k or
Womens Solo 401k
Contact Lawrence at Lawrence@solo-k.com or call 727-277-4137
ROTH 401(K)... A Wolf in Sheep's Clothing
Roth 401 (k) Overview:
After January 1, 2006, employees can choose to make their 401(k) contributions on either a pre-tax or an after-tax basis or a combination of the two. The contribution limits which apply to these 401(k) contributions made in 2006 (whether made pre-tax or after-tax or both) are:
1. $15,000 under the basic limit, plus,
2. $5,000 additionally for employees who are age 50 or older.
The employer remains responsible for withholding federal income tax (and state and local income tax, where applicable) and any applicable payroll taxes on the after-tax portion of each employee's 401(k) contribution.
While no federal income tax is withheld from pre-tax contributions, payroll taxes will apply to the amounts withheld as pre-tax contributions.
Absent additional IRS guidance, both the pre-tax and the after-tax contributions will be reported on each employee's W-2 just as is done now.
A separate recordkeeping account must be established for each participant who wishes to make Roth 401 (k) contributions.
Rules of the Roth 401(k)
To help with your decision, it is important to understand the rules of the Roth 401(k):
Roth 401(k) accounts are required to be separate accounts - the after-tax contributions cannot be combined with pre-tax contributions.
Distributions from the Roth 401(k) will be tax free for federal income tax purposes provided that both a 5-year holding period and a qualifying event requirement are met:
a) The 5-year holding period begins with the first contribution to any Roth 401(k) account in the employer's plan.
b) Qualifying events are limited strictly to attainment of 591/2, death, or disability.
Rollovers to a Roth 401k may be made from other employer sponsored Roth accounts. If rolled over to a Roth 401k, the 5-year holding period begins with the earlier of the date the rolled over account was established, or the date the receiving Roth account was established.
Our Reservations
A. The IRS should issue guidance clearing up that the determination of the five-taxable-year holding period is based on a calendar year rather than the plan year.
B. Requiring the plan administrator of the receiving plan to be responsible for tracking eligible rollovers of Roth contributions into a 401(k) plan and the time at which a Roth contribution was first made would be a deterrent to accepting rollovers of Roth contributions and would effectively restrict the transfer of these amounts. Participants should be responsible for tracking both the basis in the rollover account and the time at which a Roth contribution was first made.
C. Sponsors of plans that allow for Roth contributions should also have the ability to include plan provisions that set out ordering rules with respect to the account sources for all types of plan distributions.
D. The IRS should issue sample or good-faith amendments that plan sponsors may use without affecting reliance on prior determination letters, notification letters or opinion letters as to the qualification of the terms of their plans.
E. Sponsors of 401(k) plans that allow for Roth contributions and who want to implement an automatic enrollment feature should be able to choose whether pre-tax or Roth elective contributions will be the default election for participants.
F. Sponsors of 401(k) plans that allow for designated Roth contribution programs should be allowed to impose limitations on the ability and frequency of plan participants to choose between Roth and pre-tax elective contributions in a given calendar year without violating IRS rules.
G. A new model Distribution Notice to take into account distributions of both pre-tax and designated Roth elective contributions will be necessary. The current model is already 6 pages in length.
H. A plan sponsor should be able to maintain a plan that only allow for Roth contributions and no pre-tax salary deferrals.
Final Note
Again, we recommend that Employers and Sponsors of 401(k) Plans that are considering adopting the Roth provisions seriously consider the notes above. Perhaps it may be best to allow others to race ahead and see how they fare.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. As an entrepreneur who quickly built his own successful consulting business he also empathetically helps other business owners set priorities and create the retirement programs that get results.
After January 1, 2006, employees can choose to make their 401(k) contributions on either a pre-tax or an after-tax basis or a combination of the two. The contribution limits which apply to these 401(k) contributions made in 2006 (whether made pre-tax or after-tax or both) are:
1. $15,000 under the basic limit, plus,
2. $5,000 additionally for employees who are age 50 or older.
The employer remains responsible for withholding federal income tax (and state and local income tax, where applicable) and any applicable payroll taxes on the after-tax portion of each employee's 401(k) contribution.
While no federal income tax is withheld from pre-tax contributions, payroll taxes will apply to the amounts withheld as pre-tax contributions.
Absent additional IRS guidance, both the pre-tax and the after-tax contributions will be reported on each employee's W-2 just as is done now.
A separate recordkeeping account must be established for each participant who wishes to make Roth 401 (k) contributions.
Rules of the Roth 401(k)
To help with your decision, it is important to understand the rules of the Roth 401(k):
Roth 401(k) accounts are required to be separate accounts - the after-tax contributions cannot be combined with pre-tax contributions.
Distributions from the Roth 401(k) will be tax free for federal income tax purposes provided that both a 5-year holding period and a qualifying event requirement are met:
a) The 5-year holding period begins with the first contribution to any Roth 401(k) account in the employer's plan.
b) Qualifying events are limited strictly to attainment of 591/2, death, or disability.
Rollovers to a Roth 401k may be made from other employer sponsored Roth accounts. If rolled over to a Roth 401k, the 5-year holding period begins with the earlier of the date the rolled over account was established, or the date the receiving Roth account was established.
Our Reservations
A. The IRS should issue guidance clearing up that the determination of the five-taxable-year holding period is based on a calendar year rather than the plan year.
B. Requiring the plan administrator of the receiving plan to be responsible for tracking eligible rollovers of Roth contributions into a 401(k) plan and the time at which a Roth contribution was first made would be a deterrent to accepting rollovers of Roth contributions and would effectively restrict the transfer of these amounts. Participants should be responsible for tracking both the basis in the rollover account and the time at which a Roth contribution was first made.
C. Sponsors of plans that allow for Roth contributions should also have the ability to include plan provisions that set out ordering rules with respect to the account sources for all types of plan distributions.
D. The IRS should issue sample or good-faith amendments that plan sponsors may use without affecting reliance on prior determination letters, notification letters or opinion letters as to the qualification of the terms of their plans.
E. Sponsors of 401(k) plans that allow for Roth contributions and who want to implement an automatic enrollment feature should be able to choose whether pre-tax or Roth elective contributions will be the default election for participants.
F. Sponsors of 401(k) plans that allow for designated Roth contribution programs should be allowed to impose limitations on the ability and frequency of plan participants to choose between Roth and pre-tax elective contributions in a given calendar year without violating IRS rules.
G. A new model Distribution Notice to take into account distributions of both pre-tax and designated Roth elective contributions will be necessary. The current model is already 6 pages in length.
H. A plan sponsor should be able to maintain a plan that only allow for Roth contributions and no pre-tax salary deferrals.
Final Note
Again, we recommend that Employers and Sponsors of 401(k) Plans that are considering adopting the Roth provisions seriously consider the notes above. Perhaps it may be best to allow others to race ahead and see how they fare.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. As an entrepreneur who quickly built his own successful consulting business he also empathetically helps other business owners set priorities and create the retirement programs that get results.
Wednesday, March 29, 2006
Five-Steps to Successfully Monitoring 401k Investments
Employers --who make decisions about their 401k plans--are required by ERISA to employ a prudent process in the management and monitoring of their 401k plan investments. Plan Sponsors are required to not only look at the right information but also do it in the right way.
Five best practices for fiduciary compliance of 401k investments. The five steps are practical moves to minimize your risk of a fiduciary liability lawsuit;
1. Review plan investments once a year
2. Produce a written report covering, the investments and their use by the participants. (Written reports are good evidence of due diligence)
3. Make decisions from the report about the quality and use of the investments
4. Review the plan’s operations and participation levels.
5. Review the investment policy statement and determine whether it continues to be appropriate or requires improvement.
While this short checklist cannot capture all of the issues and deliberations in monitoring a plan’s investments, this is a good start toward both fiduciary compliance and a successful plan.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. He also empathetically helps other business owners create the retirement programs that get results.
Five best practices for fiduciary compliance of 401k investments. The five steps are practical moves to minimize your risk of a fiduciary liability lawsuit;
1. Review plan investments once a year
2. Produce a written report covering, the investments and their use by the participants. (Written reports are good evidence of due diligence)
3. Make decisions from the report about the quality and use of the investments
4. Review the plan’s operations and participation levels.
5. Review the investment policy statement and determine whether it continues to be appropriate or requires improvement.
While this short checklist cannot capture all of the issues and deliberations in monitoring a plan’s investments, this is a good start toward both fiduciary compliance and a successful plan.
Want to retire with $1,127,376.04? With more than two decades of operational and management experience Lawrence Groves has developed a sharp eye for how businesses get clobbered with retirement plan fees and how they can retool for a sleeker, smoother, strategically focused retirement plan. He also empathetically helps other business owners create the retirement programs that get results.
Thursday, March 23, 2006
401k Loans
Loan refinancing and multiple loans in Solo 401k
A quick Q & A of the IRS regulations
Q-20: May a solo 401k participant refinance an outstanding loan or have more than one loan outstanding from a plan?
A-20: (a) Refinancings and multiple loans--(1) General rule. A solo 401k participant who has an outstanding loan that satisfies section 72(p)(2) and this section may refinance that loan or borrow additional amounts if, under the facts and circumstances, the loans collectively satisfy the amount limitations of section 72(p)(2)(A) and the prior loan and the additional loan each satisfy the requirements of section 72(p)(2)(B) and (C) and this section. For this purpose, a refinancing includes any situation in which one loan replaces another loan.
(2) Loans that repay a prior loan and have a later repayment date. For purposes of section 72(p)(2) and this section (including the amount limitations of section 72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by a loan (a replacement loan) and the term of the replacement loan ends after the latest permissible term of the loan it replaces (the replaced loan), then the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction. For purposes of the preceding sentence, the latest permissible term of the replaced loan is the latest date permitted under section 72(p)(2)(C) (i.e., five years from the original date of the replaced loan, assuming that the replaced loan does not qualify for the exception at section 72(p)(2)(B)(ii) for principal residence plan loans and that no additional period of suspension applied to the replaced loan under Q&A-9 (b) of this section).
Thus, for example, if the term of the replacement loan ends after the latest permissible term of the replaced loan and the sum of the amount of the replacement loan plus the outstanding balance of all other loans on the date of the transaction, including the replaced loan, fails to satisfy the amount limitations of section 72(p)(2)(A), then the replacement loan results in a deemed distribution. This paragraph (a)(2) does not apply to a replacement loan if the terms of the replacement loan would satisfy section 72(p)(2) and this section determined as if the replacement loan consisted of two separate loans, the replaced loan (amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replaced loan) and, to the extent the amount of the replacement loan exceeds the amount of the replaced loan, a new loan that is also amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replacement loan.
(b) Examples. The following examples illustrate the rules of this Q&A-20 and are based on the assumptions described in the introductory text of this section:
Example 1. (i) A Solo 401k participant with a vested account balance that exceeds $100,000 borrows $40,000 from a plan on January 1, 2005, to be repaid in 20 quarterly installments of $2,491 each. Thus, the term of the loan ends on December 31, 2009. On January 1, 2006, when the outstanding balance on the loan is $33,322, the loan is refinanced and is replaced by a new $40,000 loan from the plan to be repaid in 20 quarterly installments. Under the terms of the refinanced loan, the loan is to be repaid in level quarterly installments (of $2,491 each) over the next 20 quarters. Thus, the term of the new loan ends on December 31, 2010.
(ii) Under section 72(p)(2)(A), the amount of the new loan, when added to the outstanding balance of all other loans from the plan, must not exceed $50,000 reduced by the excess of the highest outstanding balance of loans from the plan during the 1-year period ending on December 31, 2005 over the outstanding balance of loans from the plan on January 1, 2006, with such outstanding balance to be determined immediately prior to the new $40,000 loan.
Because the term of the new loan ends later than the term of the loan it replaces, under paragraph (a)(2) of this Q&A-20, both the new loan and the loan it replaces must be taken into account for purposes of applying section 72(p)(2), including the amount limitations in section 72(p)(2)(A). The amount of the new loan is $40,000, the outstanding balance on January 1, 2006 of the loan it replaces is $33,322, and the highest outstanding balance of loans from the plan during 2005 was $40,000.
Accordingly, under section 72(p)(2)(A), the sum of the new loan and the outstanding balance on January 1, 2006 of the loan it replaces must not exceed $50,000 reduced by $6,678 (the excess of the $40,000 maximum outstanding loan balance during 2005 over the $33,322 outstanding balance on January 1, 2006, determined immediately prior to the new loan) and, thus, must not exceed $43,322.
The sum of the new loan ($40,000) and the outstanding balance on January 1, 2006 of the loan it replaces ($33,322) is $73,322. Since $73,322 exceeds the $43,322 limit under section 72(p)(2)(A) by $30,000, there is a deemed distribution of $30,000 on January 1, 2006.
(iii) However, no deemed distribution would occur if, under the terms of the refinanced loan, the amount of the first 16 installments on the refinanced loan were equal to $2,907, which is the sum of the $2,491 originally scheduled quarterly installment payment amount under the first loan, plus $416 (which is the amount required to repay, in level quarterly installments over 5 years beginning on January 1, 2006, the excess of the refinanced loan over the January 1, 2006 balance of the first loan ($40,000 minus $33,322 equals $6,678)), and the amount of the 4 remaining installments was equal to $416. The refinancing would not be subject to paragraph (a)(2) of this Q&A-20 because the terms of the new loan would satisfy section 72(p)(2) and this section (including the substantially level amortization requirements of section 72(p)(2)(B) and (C)) determined as if the new loan consisted of 2 loans, one of which is in the amount of the first loan ($33,322) and is amortized in substantially level payments over a period ending December 31, 2009 (the last day of the term of the first loan) and the other of which is in the additional amount ($6,678) borrowed under the new loan. Similarly, the transaction also would not result in a deemed distribution (and would not be subject to paragraph (a)(2) of this Q&A-20) if the terms of the refinanced loan provided for repayments to be made in level quarterly installments (of $2,990 each) over the next 16 quarters.
Example 2. (i) The facts are the same as in Example 1(i), except that the applicable interest rate used by the plan when the loan is refinanced is significantly lower due to a reduction in market rates of interest and, under the terms of the refinanced loan, the amount of the first 16 installments on the refinanced loan is equal to $2,848 and the amount of the next 4 installments on the refinanced loan is equal to $406. The $2,848 amount is the sum of $2,442 to repay the first loan by December 31, 2009 (the term of the first loan), plus $406 (which is the amount to repay, in level quarterly installments over 5 years beginning on January 1, 2006 the $6,678 excess of the refinanced loan over the January 1, 2006 balance of the first loan).
(ii) The transaction does not result in a deemed distribution (and is not subject to paragraph (a)(2) of this Q&A-20) because the terms of the new loan would satisfy section 72(p)(2) and this section (including the substantially level amortization requirements of section 72(p)(2)(B) and (C)) determined as if the new loan consisted of 2 loans, one of which is in the amount of the first loan ($33,322) and is amortized in substantially level payments over a period ending December 31, 2009 (the last day of the term of the first loan) and the other of which is in the additional amount ($6,678) borrowed under the new loan. The transaction would also not result in a deemed distribution (and not be subject to paragraph (a)(2) of this Q&A-20) if the terms of the new loan provided for repayments to be made in level quarterly installments (of $2,931 each) over the next 16 quarters.
A quick Q & A of the IRS regulations
Q-20: May a solo 401k participant refinance an outstanding loan or have more than one loan outstanding from a plan?
A-20: (a) Refinancings and multiple loans--(1) General rule. A solo 401k participant who has an outstanding loan that satisfies section 72(p)(2) and this section may refinance that loan or borrow additional amounts if, under the facts and circumstances, the loans collectively satisfy the amount limitations of section 72(p)(2)(A) and the prior loan and the additional loan each satisfy the requirements of section 72(p)(2)(B) and (C) and this section. For this purpose, a refinancing includes any situation in which one loan replaces another loan.
(2) Loans that repay a prior loan and have a later repayment date. For purposes of section 72(p)(2) and this section (including the amount limitations of section 72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by a loan (a replacement loan) and the term of the replacement loan ends after the latest permissible term of the loan it replaces (the replaced loan), then the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction. For purposes of the preceding sentence, the latest permissible term of the replaced loan is the latest date permitted under section 72(p)(2)(C) (i.e., five years from the original date of the replaced loan, assuming that the replaced loan does not qualify for the exception at section 72(p)(2)(B)(ii) for principal residence plan loans and that no additional period of suspension applied to the replaced loan under Q&A-9 (b) of this section).
Thus, for example, if the term of the replacement loan ends after the latest permissible term of the replaced loan and the sum of the amount of the replacement loan plus the outstanding balance of all other loans on the date of the transaction, including the replaced loan, fails to satisfy the amount limitations of section 72(p)(2)(A), then the replacement loan results in a deemed distribution. This paragraph (a)(2) does not apply to a replacement loan if the terms of the replacement loan would satisfy section 72(p)(2) and this section determined as if the replacement loan consisted of two separate loans, the replaced loan (amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replaced loan) and, to the extent the amount of the replacement loan exceeds the amount of the replaced loan, a new loan that is also amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replacement loan.
(b) Examples. The following examples illustrate the rules of this Q&A-20 and are based on the assumptions described in the introductory text of this section:
Example 1. (i) A Solo 401k participant with a vested account balance that exceeds $100,000 borrows $40,000 from a plan on January 1, 2005, to be repaid in 20 quarterly installments of $2,491 each. Thus, the term of the loan ends on December 31, 2009. On January 1, 2006, when the outstanding balance on the loan is $33,322, the loan is refinanced and is replaced by a new $40,000 loan from the plan to be repaid in 20 quarterly installments. Under the terms of the refinanced loan, the loan is to be repaid in level quarterly installments (of $2,491 each) over the next 20 quarters. Thus, the term of the new loan ends on December 31, 2010.
(ii) Under section 72(p)(2)(A), the amount of the new loan, when added to the outstanding balance of all other loans from the plan, must not exceed $50,000 reduced by the excess of the highest outstanding balance of loans from the plan during the 1-year period ending on December 31, 2005 over the outstanding balance of loans from the plan on January 1, 2006, with such outstanding balance to be determined immediately prior to the new $40,000 loan.
Because the term of the new loan ends later than the term of the loan it replaces, under paragraph (a)(2) of this Q&A-20, both the new loan and the loan it replaces must be taken into account for purposes of applying section 72(p)(2), including the amount limitations in section 72(p)(2)(A). The amount of the new loan is $40,000, the outstanding balance on January 1, 2006 of the loan it replaces is $33,322, and the highest outstanding balance of loans from the plan during 2005 was $40,000.
Accordingly, under section 72(p)(2)(A), the sum of the new loan and the outstanding balance on January 1, 2006 of the loan it replaces must not exceed $50,000 reduced by $6,678 (the excess of the $40,000 maximum outstanding loan balance during 2005 over the $33,322 outstanding balance on January 1, 2006, determined immediately prior to the new loan) and, thus, must not exceed $43,322.
The sum of the new loan ($40,000) and the outstanding balance on January 1, 2006 of the loan it replaces ($33,322) is $73,322. Since $73,322 exceeds the $43,322 limit under section 72(p)(2)(A) by $30,000, there is a deemed distribution of $30,000 on January 1, 2006.
(iii) However, no deemed distribution would occur if, under the terms of the refinanced loan, the amount of the first 16 installments on the refinanced loan were equal to $2,907, which is the sum of the $2,491 originally scheduled quarterly installment payment amount under the first loan, plus $416 (which is the amount required to repay, in level quarterly installments over 5 years beginning on January 1, 2006, the excess of the refinanced loan over the January 1, 2006 balance of the first loan ($40,000 minus $33,322 equals $6,678)), and the amount of the 4 remaining installments was equal to $416. The refinancing would not be subject to paragraph (a)(2) of this Q&A-20 because the terms of the new loan would satisfy section 72(p)(2) and this section (including the substantially level amortization requirements of section 72(p)(2)(B) and (C)) determined as if the new loan consisted of 2 loans, one of which is in the amount of the first loan ($33,322) and is amortized in substantially level payments over a period ending December 31, 2009 (the last day of the term of the first loan) and the other of which is in the additional amount ($6,678) borrowed under the new loan. Similarly, the transaction also would not result in a deemed distribution (and would not be subject to paragraph (a)(2) of this Q&A-20) if the terms of the refinanced loan provided for repayments to be made in level quarterly installments (of $2,990 each) over the next 16 quarters.
Example 2. (i) The facts are the same as in Example 1(i), except that the applicable interest rate used by the plan when the loan is refinanced is significantly lower due to a reduction in market rates of interest and, under the terms of the refinanced loan, the amount of the first 16 installments on the refinanced loan is equal to $2,848 and the amount of the next 4 installments on the refinanced loan is equal to $406. The $2,848 amount is the sum of $2,442 to repay the first loan by December 31, 2009 (the term of the first loan), plus $406 (which is the amount to repay, in level quarterly installments over 5 years beginning on January 1, 2006 the $6,678 excess of the refinanced loan over the January 1, 2006 balance of the first loan).
(ii) The transaction does not result in a deemed distribution (and is not subject to paragraph (a)(2) of this Q&A-20) because the terms of the new loan would satisfy section 72(p)(2) and this section (including the substantially level amortization requirements of section 72(p)(2)(B) and (C)) determined as if the new loan consisted of 2 loans, one of which is in the amount of the first loan ($33,322) and is amortized in substantially level payments over a period ending December 31, 2009 (the last day of the term of the first loan) and the other of which is in the additional amount ($6,678) borrowed under the new loan. The transaction would also not result in a deemed distribution (and not be subject to paragraph (a)(2) of this Q&A-20) if the terms of the new loan provided for repayments to be made in level quarterly installments (of $2,931 each) over the next 16 quarters.
Subscribe to:
Posts (Atom)