Church Benefits Association
2010 Annual Meeting
Austin, Texas
November 30, 2010
Retirement Benefits Breakout Session
Danny Miller
© 2010 Conner & Winters, LLP
1627 I Street NW, Suite 900
Washington, D.C. 20006
CHURCH ALLIANCE LEGISLATION
S. 689 (introduced 3/25/2009) includes:
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Correction of problem relating to application of
controlled group rules to non-QCCOs.
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Provision to allow transfers between 403(b)(9) and
401(a) plans.
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Provision to preempt state wage withholding laws,
permitting auto-enrollment for church pension
plans.
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Remedy for 415 limit problem that applies to
403(b) defined benefit plans.
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Provision to clarify the ability of 403(b)(9) plans to
invest in 81-100 trusts.
STABLE VALUE FUND LEGISLATION
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In 2004, the Church Alliance was successful in
getting an amendment to the securities law which
permitted church plans to invest in collective
trusts.
Recently, counsel for several investment firms
have raised a concern about whether the
legislative language works for church 403(b) plans
or for church retirement plans with participants
who are self-employed ministers.
The Church Alliance is attempting to get legislation
passed that resolves these issues.
403(B) PROTOTYPE PROGRAM
IRS Announcement 2009-34:
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Proposed program for approving 403(b)
prototype plans which is similar to the opinion
letter program for master and prototype 401(a)
plans.
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Included draft sample language for 403(b)
plans.
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Proposed program does not include provisions
that typically apply to church plans.
403(B) PROTOTYPE PROGRAM
IRS Announcement 2009-34 (cont’d):
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Provides two different types of plans:
– Standardized plan – if plan permits other
than elective deferrals, plan must
automatically satisfy uniform coverage and
contribution standards.
– Nonstandardized plan – any plan that is not
standardized.
IRS Announcement 2009-89 – establishes a
remedial amendment period for 403(b)
prototype plan adopters.
403(B) PROTOTYPE PROGRAM
As noted, proposed program does not include
provisions that typically apply to church plans, but –
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IRS has informally indicated that the final program will
include provisions that typically apply to church plans
and provide for the establishment of 403(b)(9)
prototype plans.
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Prototype program requires that employers execute
adoption agreements; this would be a problem for
many denominational 403(b) plans.
•
Final guidance on prototype program is “in clearance”
at IRS and Treasury – should be released “soon.”
CHURCH PLAN MORATORIUM
• Informal moratorium on the issuance of all church plan
rulings; has been in effect for several years.
• IRS, DOL and PBGC have been re-assessing position on
the issuance of church plan rulings.
• Possible guidance could :
– Address giving retroactive church plan status to DB
plans that contain ERISA language and have paid PBGC
premiums.
– Include a change in the process for a church plan’s
making 410(d) election.
• Need to watch to see if IRS reconsiders its approach with
regard to determining church plan status.
EPCRS
• Rev. Proc. 2008-50 – Employee Plans
Compliance Resolution System (“EPCRS”).
• New EPCRS guidance is “in clearance” at IRS
and Treasury – should be released “soon.”
PUERTO RICAN PLAN ASSETS
Revenue Ruling 2008-40
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Permits a transfer from U.S. qualified plan to
Puerto Rican plan without creating taxable
event for participant.
•
Transfer must be made on or before December
31, 2010 .
•
Ruling, by its terms, does not apply to 403(b)
plans.
Note: IRS is considering whether to apply ruling to
403(b) plans and/or extend transfer relief into
2011.
ROTH CONVERSIONS
Effective 9/27/2010, in-plan Roth conversions are
permitted but only if plan permits .
•
Survey from PlanSponsor (Sept. 2010) – only 9% of
responding plan sponsors were currently planning on
providing the option to convert; 9% were not
planning to provide the option; 28% were still
undecided; and 46% were ineligible (because their
plans do not include designated Roth accounts).
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As is true for all Roth conversions, taxable portion of
distribution is included in gross income in year of the
distribution.
ROTH CONVERSIONS
Notice 2010-84 (issued 11-26-2010):
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Provides guidance on treatment of in-plan Roth
conversions.
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No mandatory 20% withholding required.
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Retroactive plan amendments permissible through end
of 2011. But in case of 403(b) plans, remedial
amendment period available only if employer adopts
pre-approved 403(b) plan or applies for individual
determination letter.
•
Plans allowing in-plan Roth conversions may have to
revise 402(f) notice provided to individuals receiving
eligible rollover distribution.
AUGSBURG FORTRESS LITIGATION
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Class action brought in U.S. District Court (Minnesota).
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Plaintiffs are participants or beneficiaries in DB
pension plan.
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Defendants are:
– Augsburg Fortress Publishers;
– Current and former members of Augsburg’s Board
of Directors;
– Augsburg’s officers;
– Pension Plan Committee; and
– ELCA.
AUGSBURG FORTRESS LITIGATION
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Complaint alleges that plan is not a “church plan”
and is therefore covered under ERISA.
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Complaint alleges that all defendants (including
ELCA) are fiduciaries with respect to Augsburg’s DB
plan.
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Plaintiffs are basically arguing that a single employer
cannot maintain a church plan based on their reading
of the applicable statute and its legislative history;
rather, church plan status is only available through
participation in multiple employer denominational
plan.
INVESTMENT ADVICE
Fiduciary Definition:
ERISA Section 3(21): A fiduciary is one who:
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Exercises authority or control with respect to the
management or disposition of plan assets; or
Renders investment advice for a fee or compensation
(direct or indirect) with respect to any money or other
property of an ERISA-covered plan, or has any authority
or responsibility to do so.
INVESTMENT ADVICE
Education vs. Advice
Interpretive Bulletin 96-1:
Offering the following items will not constitute the
provision of investment advice whether provided by
plan sponsor, fiduciary or a service provider:
• Information on the plan
• General financial and investment information
• Asset allocation models
• Interactive investment materials
INVESTMENT ADVICE
Prohibited Transaction Rules:
ERISA section 406(b) and Code section
4975 prohibit an investment advisor from
recommending investments with respect
to which advisor (or its affiliates) will
receive additional fees.
INVESTMENT ADVICE
SunAmerica Advisory Opinion (2001-09A)
DOL provided guidance to a representative of
SunAmerica with respect to an investment advice
program created by SunAmerica for use by
retirement plan participants.
Program features:
• Independent advice required.
• Investment portfolio created by independent
expert – no investment provider input.
• Fees paid to expert investment provider not
affected by investment choices.
INVESTMENT ADVICE
SunAmerica Advisory Opinion (cont’d)
Program features (cont’d):
• Disclosure to participants required.
• Investment provider must be a fiduciary.
INVESTMENT ADVICE
Other DOL Guidance and PTEs
• Fee leveling/fee offset arrangements:
Advisor (and affiliate) receive same fees no
matter which investment option is selected.
– DOL Advisory Opinion 97-15A
– DOL Advisory Opinion 2005-10A
• Prohibited Transaction Exemption 84-24.
• Prohibited Transaction Exemption 77-4.
INVESTMENT ADVICE
Pension Protection Act of 2006
Effective for 2007 plan years, two statutory
prohibited transaction exemptions created
permitting the provision of investment advice to
participants if a fiduciary/advisor is advising with
respect to its own or affiliated funds.
• Fee-leveling exemption: No variation in
advisor’s fees no matter which investments
are selected.
• Computer model exemption: Independent
third party certification required.
INVESTMENT ADVICE REGULATIONS
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DOL issued final regulations on Jan. 21, 2009, with
effective date of Mar. 23, 2009.
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Obama Administration arrives: Effective date of
regulations delayed until Nov. 18, 2009.
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November, 2009: Final regulations withdrawn by
DOL.
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Feb. 26, 2010: DOL issues new proposed investment
advice regulations, implementing the PPA statutory
prohibited transaction exemptions.
INVESTMENT ADVICE REGULATIONS
Fee leveling exemption:
• Advisor cannot receive fees from an affiliate that
benefits from the advice as a result of the advisor’s
recommendations.
• Fees paid to affiliate can vary depending on
investment advice chosen.
• Advisor must take into account individualized
information provided by participant.
INVESTMENT ADVICE REGULATIONS
Computer Model Exemption:
• OK to be created by advisor but must be certified
as unbiased by an independent expert.
• Individualized participant information must be
requested and taken into account.
• All investment options under plan must be taken
into account other than target date funds,
annuity options and brokerage window options.
• Recommendations within asset classes not
permitted on basis of a factor that cannot
confidently be expected to persist in the future.
INVESTMENT ADVICE REGULATIONS
Conditions applicable to both exemptions:
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Advice program must be authorized by fiduciary
unrelated to advisor.
Advice based on generally accepted investment
theories (active vs. passive management – DOL
request for input).
Program must take into account fees and
expenses.
Annual independent audit required.
Program not available for managed accounts –
recipient of advice must direct its implementation.
INVESTMENT ADVICE REGULATIONS
Conditions applicable to both exemptions (cont’d):
• Written disclosure to plan participants required:
– Role of related parties with respect to the
creation of the program.
– Fees advisor will receive (for advice or from sale
of security based on advice).
– Advisor is a fiduciary.
– Past performance and rates of return of
investment options.
– Participant can seek advice from a different
advisor.
• Model disclosure form provided.
INVESTMENT ADVICE REGULATIONS
Existing administrative/programs to comply
with prohibited transaction rules not changed
by the PPA:
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Impact on SunAmerica advisory opinion?
ANDREWS INVESTMENT ADVICE LEGISLATION
Conflicted Advice Prohibition Act of 2009 (H.R.
1988) – introduced by Rep. Rob Andrews (D –
N.J.)
• Included in 401(k) Fair Disclosure and Pension
Security Act passed by House Education and Labor
Committee on June 24, 2009.
• Computer-based advice program –affiliates not
permitted to provide one-on-one guidance (must
be certified as unbiased by independent third
party).
ANDREWS INVESTMENT ADVICE LEGISLATION
• Also can receive advice from independent
advisor who does not manage or provide
investment funds for DC plans; advisor’s fees
cannot be dependent on investment options
selected and cannot come from an entity
affiliated with an investment fund holding DC
plan assets.
• Impact on SunAmerica advisory opinion?
FEE DISCLOSURE REGULATIONS
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Final regulations issued Oct. 20, 2010, with effective
date of Dec. 20, 2010.
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Plan administrators must disclose following “planrelated” information to participants:
– General plan information.
– Administrative expense information.
– Individual expense information.
FEE DISCLOSURE REGULATIONS
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Plan administrators must also disclose following
investment-related information:
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name and category of the designated investment
alternative
performance data for each designated investment
alternative
fees and expenses associated with certain
investment alternatives
website address where participants may find
additional information about each alternative.
Plan fiduciaries must disclose the required
information in a chart or similar format that allows
for comparison of the alternatives.
FEE DISCLOSURE REGULATIONS
• The information must be provided to
participants on or before the date they can first
direct their plan investments and annually
thereafter.
• Plan administrator must disclose the actual
administrative expenses and actual individual
expenses charged against a participant’s account
to participants at least quarterly.
SERVICE PROVIDER DISCLOSURES
• Interim final regulations issued July 16, 2010,
with effective date of July 16, 2011
• Rules apply to service providers that enter into
a contract or arrangement with a retirement
plan under which the service provider
reasonably expects to receive $1,000 or more
in direct or indirect compensation.
SERVICE PROVIDER DISCLOSURES
• Prior to entering into a contract or arrangement
with a plan, service provider must disclose:
– A description of the services to be provided to the
plan;
– A statement that the service provider (and affiliates
or subcontractors) will be providing services to the
plan as a fiduciary;
– A description of all direct and indirect
compensation to be received by the service
provider (and affiliates or subcontractors), including
any compensation that will be received if the
contract or arrangement is terminated;
SERVICE PROVIDER DISCLOSURES
• Prior to entering into a contract or arrangement
with a plan, service provider must disclose
(cont’d):
– If recordkeeping services will be provided to the
plan, a description of all direct and indirect
compensation attributable to such services;
– A description of how the compensation will be
paid; and
– A description of any investment management or
similar fees charged against investment returns.
SERVICE PROVIDER DISCLOSURES
• Must disclose any changes to the information
described above to the plan fiduciary no later
than 60 days after the service provider is
informed of such change.
• Rules also require service providers to disclose
information necessary to satisfy ERISA’s
reporting and disclosure requirements upon the
request of a plan fiduciary or plan administrator.