Author: jfortenberry@fortenberrylaw.com

Yesterday, the Wall Street Journal carried this report: “Mutual Funds Vow To Fix Their Clocks: Earlier Deadlines Are Proposed For Investors to Place Orders; Will New Fees Frustrate ‘Timers’?” Reuters also reports via Yahoo! News: “Mutual Fund Reform Proposals Draw Fire.” Both articles discuss changes to share-trading practices endorsed by the Investment Company Institute as reported here at their website. Under the proposal, fund orders would have to be in the hands of the fund companies themselves by 4 p.m. — a move that would require deadlines several hours earlier at intermediaries such as brokerage firms and 401(k) plans. Apparently, the ICI’s proposal is an endorsement of the late trading action plan laid out by SEC Chairman Donaldson a few weeks ago. Quote of Note:

Institute Chairman Paul Haaga said the ICI Executive Committee “was aware that this decision, if embraced by the SEC, would substantially alter longstanding business practices. We also recognize that it will affect millions of fund shareholders, thousands of intermediaries, and hundreds of fund companies.” Haaga said the ICI would nevertheless urge the SEC to move as rapidly as possible given the practical challenges associated with implementation. “The ICI Executive Committee was presented with a range of policy options. We considered but rejected exceptions to the deadline for entities subject to full SEC regulation. We considered but rejected several procedural options that would have closed the late trading window substantially, but not all the way. Finally, we considered but rejected reliance on accelerated technological developments.”

The Wall Street Journal article notes:

The change could be most dramatic for participants in 401(k) plans. Currently, some orders placed by retirement-plan participants don’t make their way to the fund companies for processing until early the next morning, but still get the price the day the order was placed. With a firm 4 p.m. order deadline, by contrast, many 401(k) orders might have to be executed at the next day’s price and not the current day’s price, ICI president Matthew Fink said in a conference call Thursday.

The Society of Professional Administrators and Recordkeepers (“SPARK”) Institute, a 401(k) industry trade organization, had this to say:

We stressed the adverse implications of a proposed 4:00 PM deadline for placement and processing of orders, making it clear that imposing such a deadline would not only be unworkable, but also would have a negative effect on participant investment accounts in the nearly 400,000 U.S. 401(k) plans

In this press release, you can read about how members of SPARK were invited to meet with the SEC on Tuesday to discuss proposed rulemaking initiatives dealing with late trading and market timing in mutual funds.

You can read the Profit Sharing/401(k) Council of America’s thoughts on the issue here.

The 401khelpcenter.com has this to say in a press release via Benefitslink.com entitled–“A Strictly Enforced Trading Deadline Will Not Threaten Retirement Plans“:

Already industry lobbying groups have begun to cry that such a requirement on retirement plan trades will create additional costs which may have the unintended consequence of actually lowering retirement savings and will cause other undesirable consequences to plan participants. . . This simply is not true. Many of the nation’s 401k plans operate in just such an environment today with no “adverse implications” for plan participants. Further, these late trade submission arrangements that intermediaries have with the mutual fund companies only became common in the 1990’s. 401k retirement plans operated perfectly well long before there advent. Making an easily enforceable absolute 4:00 pm deadline is the right thing to do. The retirement industry should put aside their own self interest in order to help rebuild investor confidence in the mutual fund industry.

UPDATE on 11/2: The Philadelphia Inquirer today has a great article by Jeff Brown which discusses in detail why the SEC should adopt the ICI’s proposals: “Changes would end unfair fund trading.”

Yesterday’s Wall Street Journal contained an article discussing “the widening inquiry into mutual-fund firms” which has “prompted some employers to put new restrictions on the trading activity workers can conduct in their 401(k) retirement plans.” The article–“Fund Probe Prompts 401(k) Trading Curbs“–notes that AT&T Corp. and DuPont Co. have recently adopted measures aimed at keeping employees from too rapidly trading in or out of certain funds offered in their 401(k) plans. According to the article, AT&T has levied new fees for making certain trades in some international funds, and DuPont has imposed a 15-day window for trades in two of its funds. The article also states that “[p]ension experts and the Labor Department are urging retirement plans to keep a sharp eye on how funds the plans offer may be affected by the investigations.”

Previous posts on the mutual fund scrutiny and the ERISA fiduciary issues connected with it are here and here.

USA Today also reports: “Heavy trading in 401(k)s watched.”

This is a great article from the Wall Street Journal describing all of the retirement planning difficulties and challenges expatriates face: “Retirement Traps Expats Can Avoid As They Make Moves: A Checklist of Issues to Consider, From Gauging Pension Options To Collecting Your Benefits Later.” The article advises employees who are planning to work abroad for less than five years to keep paying into social security and private retirement programs in their home country since most countries allow expatriates a five-year exemption from local social-security taxes.

Quote of Note: “The real headache for expatriates are employer-sponsored pensions. For now, there are no international, or pan-European, pensions. When an employee works in three countries, he will have three retirement plans that are next to impossible to consolidate due to discord in international tax laws. In addition, short periods spent in various countries can mean a loss of long-term benefits.”

Aon Consulting reviewed more than 1000 private sector defined benefit plans and found that more than 20% of those surveyed have already frozen plan benefits or are actively considering such action. You can access some information about the study in a Press Release. Breaking that 20% down, the press release indicates:

• 13 percent have frozen benefits since January 1, 2001
• An additional 2 percent are planning freezes before year-end
• An additional 6 percent of pension plans are actively considering a plan freeze

Be sure not to miss Mike O’Sullivan‘s unique perspective of the fires in California at this post at Corp Law Blog.

The Senate Committee on Health, Education, Labor and Pensions unanimously passed Chairman Judd Gregg’s (R-NH) bipartisan pension proposal. Main components of the bill which is called the “Pension Stability Act” are as follows:

• Three-Year Fix: replaces the 30-year Treasury bond rate for a period of three years with a corporate bond rate based on “conservative indexes.”
• Bi-Partisan Blue Ribbon Commission Appointed: Creates a commission to review all outstanding issues with a report to Congress in 2005.

You can read Senator Gregg’s press release here.

The Wall Street Journal reports: “Senate Panel Approves Bill: To Reform Pension Funding.” (Subscription required.)

Also, Reuters reports: “Senate Panel Backs Stopgap Pension Fix.” The article notes that the Senate Finance Committee measure sponsored by Senator Charles Grassley was approved earlier this year and would provide a transition to a permanent pension funding formula known as a yield curve. According to the article, “Senator Grassley will continue to work with Senator Gregg on a pension fix, but Senator Grassley feels that a permanent fix is the right way to go,” his spokeswoman said. “A three-year fix, he fears, would just become an extender.”

“Emotional Rescue: Keep your own wits about you when investing“: this is a very interesting article at National Review Online which discusses how “[w]hen it comes to money, our emotions often cause us to take stupid, self-destructive actions.” Quote of Note: “The mere chance of a loss is so frightening that many people prefer to make what they believe are riskless investments, rather than making investments which, over the years, have proven far more profitable with only slightly more risk. What does this mean in real life? For one thing, a lot of people in their thirties and forties direct part of their 401(k) retirement contributions to money-market funds, a foolish choice. Also, “through mid-2003,” says the Bernstein Journal article, “investors were still pouring more money into bond funds than stock funds, even though interest rates had fallen to less than nothing after inflation and taxes while the stock market was finally showing signs of life. . . “

Barrons’ Online via the Wall Street Journal Online (Subscription required) has this: “Retiring With Help: Pension investing should be simple.” The article points out how badly participants need help in investing their 401(k) accounts and notes that in May, “the House of Representatives passed a bill containing language to loosen .. . .restrictions on advice.” The article goes on to say that “the House has made this effort during past legislative sessions but the bills have fallen short of becoming law” and that “[s]ome lawmakers, especially in the Senate, are more concerned with preventing conflicts of interest on the parts of investment advisors than with getting advice to those who need it.” Quote of Note: “Recently, a young professional woman handed me a folder of disheveled 401(k) enrollment materials and asked me to translate them for her. If the instructions hadn’t read like a financial analysts’ exam, she might have discovered the life cycle account buried at the bottom of the form, which was all she really needed.”

Northern Trust has announced today that it is the first custodian to develop and implement a cross-border pooling solution for pension assets. The Newswire says “Northern Trust’s solution has identified structures flexible enough to support individual client needs as well as accommodate a myriad of complex individual country, regulatory, and tax requirements.” The Newswire quotes Steve Potter, Executive Vice President of Northern Trust, as saying that the arrangement “allows smaller country plans to enjoy economies of scale as part of a larger pool.”

Some additional thoughts regarding discussions with the IRS at the Mid-Atlantic Pension Liaison Group Meeting:

(1) The question has been asked by a reader as to why the fees listed in the Nonamender Fee Schedule at this post and given to practitioners at the Mid-Atlantic Pension Liaison Group meeting are higher than the fees listed here in Rev. Proc. 2003-44 (link via Benefitslink.com). The question has to do with my discussion of the IRS’s new Nonamender Fee Schedule detailing fees that the IRS will impose if a plan sponsor makes a favorable determination letter application for a qualified plan and, in the process, it is discovered that certain amendments are missing. With respect to the question asked, Rev. Proc. 2003-44 contains the following language:

A submission of a plan under the determination letter program does not constitute a submission under VCP. If the Service in connection with a determination letter application discovers a Qualification Failure, the agent may issue a closing agreement with respect to the failures identified or, if appropriate, refer the case to Employee Plans Examinations. In either case, the fee structure in section 12, applicable to VCP, will not apply. Instead, the fee structure in section 14 relating to Audit CAP will apply. (See sections 13 and 14.) If the Plan Sponsor discovers a Qualification Failure, the Plan Sponsor should submit an application under VCP to correct the failure.

The Nonamender Fee Schedule posted here at Benefitsblog only applies to the determination letter application process. In other words, the fees would only be utilized in the situation where a determination letter application is filed and it is discovered that the amendments are missing. Under the Revenue Procedure, the plan would no longer be eligible for the voluntary submission procedure known as “VCP” and would then be thrown into “audit CAP.” Without the Nonamender Fee Schedule, the sanction under Audit CAP would normally be a negotiated percentage of the Maximum Payment Amount according to the Revenue Procedure.

Thus, the difference in fees has to do with the point at which the document failure is disclosed to the IRS. If the document failure is submitted to the IRS under VCP, then the fees listed in Rev. Proc. 2003-44 would apply (i.e. the lesser fees.) However, if the document failure is discovered in the determination letter process, it is my understanding that the higher fees listed in the Nonamender Fee Schedule and posted previously would be applied.

According to comments made at the Liaison meeting, there is also a third level fee schedule being developed by the IRS which would be applied in cases where document failures are discovered in an audit situation (as opposed to the determination letter application process.) The IRS indicated that the fees imposed in an audit would likely be even higher than those listed in the Nonamender Fee Schedule posted previously.

Comment: The bottom line in all of this is that playing a round of “Ignorance is Bliss” or “Catch Me If You Can” may end up being more costly for plan sponsors than imagined, when evaluated in light of the less costly route of “Bearing the Soul” under VCP. In addition, when submitting plans under the determination letter process, practitioners would be wise to have in hand copies of previous versions of the documents and any required amendments at the time of filing in order to avoid the perilous “where is the amendment” routine which can occur, in some instances, if and when the IRS asks for copies of prior documents.

(2) On another note, I was reminded by a practitioner who was in attendance at the meeting of another comment made by the IRS which readers may find important. IRS News Release 2003-112 announced an extension of the deadline to file selected returns and to pay certain taxes for affected taxpayers located in (or whose records were housed in) the Hurricane Isabel disaster area. At the meeting, the IRS emphasized the point that this extension does include an extension of the 401(b) remedial amendment period. Apparently, it was not clear from the original News Release that 401(b) remedial amendment period relief was available. However, the IRS has posted the following statements regarding the 401(b) remedial amendment period relief at its website:

The tax relief granted by the Service to victims of Hurricane Isabel includes an extension of the GUST remedial amendment period under section 401(b) of the Internal Revenue Code. If the GUST remedial amendment period for a plan of an affected employer expired on or after September 18, 2003, the deadline to amend the plan to comply with GUST is extended to November 18, 2003.

This extension also applies to any other remedial amendment period under section 401(b) for a plan of an affected employer that expired on or after September 18, 2003.

Affected employers who qualify for the extension and who file a determination letter application should write “Hurricane Isabel” at the top of the determination letter application.

According to the News Release, plan sponsors located in certain specified parts of Delaware, Maryland, North Carolina and Virginia would be able to take advantage of this relief.