Reform Could Help 401(k) Plans Steer Clear of Trouble

Kenneth Vilcheck and Gary Shuford

After the worst stock market performance since the Great Depression, 401(k) plans have come under intense scrutiny from their sponsors, participants and Congress. The question is why weren’t the losses avoided or minimized, especially for workers close to retirement, whose accounts won’t have time to recover. That’s an especially acute question for target-date lifestyle funds. These were created to be a single-choice, risk adverse investment for participants who wanted someone else to make their investment choices as well as decisions about asset allocation. As the target date of retirement approaches, the funds’ asset mix becomes increasingly conservative – the asset allocation favors bonds over stocks. Unfortunately, participants in such plans didn’t avoid the market’s recent collapse – both the stock and bond markets were decimated at the same time, which is rare. The plans also tend to have little or no holdings of risk-free investments, so sharp losses were unavoidable. As a result, Congress is clamoring for reform. One solution is an advised 401(k) plan that could avoid future catastrophes.

Fiduciaries Must Disclose Plan Fees and Costs

Do you know what you are being charged in plan fees? You will soon under a Department of Labor final regulation issued October 14, 2010.

Within the year, retirement plan administrators will be required to disclose to participants the plan operating expenses and all investment-related operating expenses and shareholder fees for each investment option offered in participant-directed individual account plans. Fiduciaries must also disclose the expense ratio and all shareholder fees for investment options.

The rule is not applicable until the first plan year beginning on or after Nov. 1, 2011. For calendar-year plans, the rule would apply Jan. 1, 2012

According to Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration: “The law, prior to the new rule, did not guarantee that all workers received sufficient information on fees and expenses in formats that were consistent and accessible.”

Each disclosure must include a simple, plain language explanation of what the charges are for and a glossary explaining investment terms in an easy-to-understand manner.

Borzi added: “These categories of information have to be given to participants on or before the day they can first make their investment decision and then every year thereafter.”

Beyond the initial general disclosures, fiduciaries also must provide plan participants with statements at least once a quarter that show the dollar amount of plan-related fees and expenses that will be charged to or deducted from participants’ accounts.

For both categories of investments—mutual funds and fixed-rate investments—the new disclosure rules will require plan administrators to provide investment returns and benchmarks based on one-year, five-year, and 10-year investment returns.

Reaction from Industry Insiders

Brian Graff, executive director and chief executive officer at the American Society of Pension Professionals and Actuaries, said the new regulation “without question” imposes a new fiduciary liability on plan sponsors. Even though as fiduciaries, they are not liable for the completeness or accuracy of the information disclosed, “Participants can sue under the new rule,” he said.

Our Viewpoint

What do the new fee disclosure rules mean for you? They mean that plan sponsors will have the ammunition they need to choose the right advisor. It also means that advisors will be held accountable for what they charge plans. By making fees more transparent, the aim is for plan fees to decrease while performance increases.

If you have any questions about the regulations, please contact:

Kenneth J. Vilcheck, AIF®, Elliott Davis Investment Advisors

Gary E. Shuford II, AIF®, CRSP, Elliott Davis Investment Advisors

DOL Issues New Disclosure Rules

The September issue of Greater Charlotte Biz magazine featured articles by Elliott Davis Investment Advisors’ retirement plan advisor Gary Shuford, AIF, CRSP and Elliott Davis tax senior manager Marguerite Hardy, CPA. Shuford’s article “DOL Issues New Disclosure Rules – What do they mean for you and your 401(k) plan?” focuses on the Department of Labor’s interim final rules on retirement plan disclosures. Hardy’s article “Traditional IRA vs. Roth IRA – What’s best for you?” discusses the advantages and considerations when making this decision.

Health Care Reform Triggers New Provisions, Taxes

Representing a sweeping overhaul of the U.S. health care system, the Patient Protection and Affordable Care Act was signed into law on March 23 followed by a companion reconciliation act. Together, the bills will significantly change the nation’s health care system and will cost $940B. To pay for these changes, the bills impose $438B in new taxes and fees on insurers, businesses, and individuals. The remainder of the cost is paid for by cuts in Medicare funding. The implications of this legislation are outlined in the article.

Tax Breaks, Incentives Offered in HIRE Act

It is important for taxpayers to act quickly in order to receive the benefits offered by the Hiring Incentives to Restore Employment (HIRE) Act. Signed by President Obama in March, the act is aimed at boosting job creation. The two most important provisions are a tax credit and a limited “payroll tax holiday”, both of which encourage companies to hire unemployed workers in 2010. Even though some of the benefits may not be available until your next taxable year, gathering information now will help you easily qualify next year. Detailed information is outlined in the article.

Claire Ollinger, CPA

A recent Internal Revenue Service (IRS) ruling aims to provide relief to taxpayers who missed check-the-box elections.

On September 3, 2009 the IRS issued Rev. Proc. 2009-41 which provides guidance for an eligible entity that requests relief for a late-filed entity classification election (commonly referred to as a “check-the-box election”) within three years and 75 days of the requested effective date of such election.

The Rev. Proc. supersedes and significantly liberalizes the relief for late-filed entity classification elections that was allowed under Revenue Procedure 2002-59.

As you plan, so shall you save

In a year of generally bad economic news, the good news is that smart tax planning can help you mitigate losses and keep more of your hard-earned income. But to save the most, you’ll need to start planning before year end — or sooner.

This guide highlights recent tax law changes and provides an overview of tax breaks and planning strategies for individuals, families and business owners. You’ll find helpful information about ways to save tax on investments and business income, as well as tax-smart ideas for funding education, saving for retirement and transferring wealth to your heirs.

You’ll also realize how complicated tax planning has become, and how important it is to check with an advisor about the strategies that are best for you. Your best tax-saver may well be one we simply haven’t had room to include in here.

Use Tax Assessments on the Rise

To our Clients and Friends of the Firm:

We are writing you about an often misunderstood tax, “use tax.” Use tax is regularly the cause of large tax assessments. Use tax is the evil alter ego of sales tax. Tangible items purchased by consumers are generally subject to sales tax. If sales tax was not charged on the initial sale, use tax would become due in the same amount the sales tax would have been, if the vendor had charged it.

Are Accommodations Taxes Due on Your Summer Rental?

To our Clients and Friends of the Firm:

With summer vacation season just around the corner, we wanted to remind our clients that sales tax and accommodation/occupancy tax may be due on the rental of vacation homes and other short-term rental of rooms or homes. As a general rule, if you are renting a residence for periods less than 90 days you are required to collect sales tax and possibly accommodations tax from your customers. It is important that these taxes are charged correctly and remitted to the correct taxing authority. The taxing authorities will look to the landlord for payment whether the tax was collected from tenants or not.

By: Debbie McDonough, senior tax manager, Elliott Davis, LLC

Even with the current downturn in the real estate market, like‐kind exchanges continue to be a popular way to dispose of property while deferring the taxable gain. An example of a like‐kind exchange is the exchange of an apartment building for an office building. An exchange of likekind property will receive nontaxable treatment if the exchanging party satisfies the following conditions:

The transaction is, in fact, an “exchange” (not a sale);
The property transferred and the property received are held for productive use in a trade or business or for investment; and
The properties are qualifying and of like‐kind.

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