Data & Research December 17, 2015

More High-Performing RIAs Have Succession Plans

More than half of high-performing firms (52%) have succession plans ready for implementation compared with 40% of all other firms.
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More than one in three registered investment adviser (RIA) firm owners—37%—plan to exit the business within the next ten years, up from 30% in 2014, according to research from the Fidelity RIA Benchmarking Study.

The study finds a majority of firms (59%) prefer an internal succession. However, only 27% of firms have next-generation owners in place and only 9% of equity, across all firms, is held by those next-generation owners.

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Fidelity’s research also identified a group of “high-performing firms”— those firms which outperformed others in growth, productivity and profitability—and found them more prepared when it comes to succession planning.

  • More than half of high-performing firms (52%) have succession plans ready for implementation compared with 40% of all other firms;
  • A higher percentage of these firms have changed their approach or readiness for succession over the last three years (68% vs. 52%); and
  • More of these firms have hired, identified or begun developing potential successors in the past three years (23% of high-performing firms vs. 15% of all other firms).

High-performing firms also appear to be connecting the dots between succession planning and valuation: 75% of them have a mechanism in place to determine firm value in the event of an internal succession or ownership transition versus 61% of all other firms.

“As firm leaders sit down to think about their business plan for 2016, they should also consider what their 5-year, 10-year, even 20-year, plan is for their business. What will their legacy be?” says David Canter, executive vice president, practice management and consulting, Fidelity Clearing & Custody Solutions. “They can look at the succession plans their peers are crafting for insights on what they need to do and steps they need to take now, not later.”  

The 2015 Fidelity RIA Benchmarking Study surveyed 441 registered investment adviser (RIA) firms between April 21 and June 15 in collaboration with an independent third-party research firm.

Compliance December 17, 2015

SCOTUS Decision Could Impact Retirement Plans

The Supreme Court same-sex marriage decision is applied to retirement plans in IRS guidance.
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A notice from the Internal Revenue Service (IRS) gives guidance to plan sponsors, applying the Supreme Court’s same-sex marriage case to retirement plans, as well as other benefits. The landmark case, Obergefell v. Hodges, decided in June 2015, held that under the 14th Amendment states cannot deny same-gender couples the right to marry and must recognize same-gender marriages performed in other states.  

The Treasury and the IRS said they understand that some plan sponsors may alter aspects of their employee benefit plans, or how their plans are administered, in response to the decision, and some plan sponsors have already asked for clarification of how it might apply to some employee benefit plans, such as a discretionary expansion of benefits not required under the federal tax rules.

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IRS Notice 2015-86 provides a Q-and-A to address issues, such as the ones below, that plan sponsors might be grappling with. 

For federal tax law purposes, does Obergefell require that a sponsor of a qualified retirement plan change the terms or operation of its plan?

The short answer is “no.” A qualified retirement plan is not required to make additional changes as a result of the decision. An earlier IRS notice from 2014 did require qualified retirement plans to be amended to reflect the Windsor decision. However, a plan sponsor may decide to amend its plan following Obergefell to make certain optional changes or clarifications.

NEXT: Amending a qualified retirement plan

May a qualified retirement plan be amended to provide new rights or benefits with respect to participants with same-sex spouses?

In response to Windsor, some plan sponsors may have amended their qualified retirement plans to provide new rights or benefits with respect to participants with same-sex spouses in order to make up for benefits or benefit options that had not previously been available to those participants.

For example, such an amendment may have provided participants who commenced a single life annuity distribution before June 26, 2013 (the date of the Windsor decision) with an opportunity to elect a qualified joint and survivor annuity form of distribution as of a new annuity starting date.

Following Obergefell, some plan sponsors might similarly decide to make discretionary plan amendments to provide new rights or benefits with respect to participants with same-sex spouses. Plan sponsors are permitted to make such amendments, which must comply with the applicable qualification requirements (such as the nondiscrimination requirements of section 401(a)(4)).

Is an amendment to a single-employer defined benefit plan that is intended to respond to Obergefell or this notice (for example, by extending certain rights and benefits to a same-sex spouse) subject to the requirements of section 436(c)?

In general, a discretionary amendment to a single-employer defined benefit plan that increases the liabilities of the plan cannot take effect unless the plan’s adjusted funding target attainment percentage is sufficient or the plan sponsor makes the additional contribution specified under section 436(c)(2). Because an amendment that extends rights and benefits to a same-sex spouse in response to Obergefell or this notice is a discretionary expansion of coverage, the amendment is subject to the requirements of section 436(c).

More information and other questions are on the IRS website.

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