Compliance May 12, 2014

IRS Provides Relief for Late Form 5500 Filers

The Internal Revenue Service (IRS) is providing penalty relief for certain late filers of Form 5500.
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In Notice 2014-35, the IRS said it will not impose penalties under Internal Revenue Code Sections 6652(d) and 6652(e) (as those sections relate to the filing of Form 5500, Form 5500-SF, and Form 8955-SSA) or under Section 6692 (relating to the filing of actuarial reports required by Section 6059) with respect to a year for which filing of such a form is required on a person who (1) is eligible for and satisfies the requirements of the Department of Labor’s (DOL’s) Delinquent Filer Voluntary Compliance (DFVC) Program with respect to a delinquent Form 5500 series return for such year and (2) files separately with the IRS, in the form and within the time prescribed by this notice, a Form 8955-SSA with any information required to be filed under Section 6057 for the year to which the DFVC filing relates. In other words, the notice provides relief from the penalties applicable under the Code to the late filing of Forms 5500 and 5500-SF only if any applicable Form 8955-SSA is also filed for the year at issue.

Although the IRS generally encourages filers to file electronically whenever possible, relief is provided under this notice only if a Form 8955-SSA is filed on paper with the IRS (including a fillable Form 8955-SSA completed online and then printed and filed on paper). The systems needed to provide relief for a delinquent Form 8955-SSA filed electronically are not currently in place.

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Form 5500 series returns must be filed electronically using EFAST2 in accordance with the requirements of the DFVC Program (see “EBSA Updates Delinquent Filer Correction Program”). If a Form 8955-SSA is filed pursuant to this notice, the filer must check the box on Line C, Part I (Special extension) of the Form 8955-SSA and enter “DFVC” in the space provided on Line C. Any Form 8955-SSA required to be filed with the Service pursuant to this notice must be filed on paper by the later of 30 calendar days after the filer completes the DFVC filing or December 1, 2014.

This requirement applies with respect to any DFVC filing submitted through EFAST2 (generally, all DFVC filings after December 31, 2009), regardless of whether the filing was submitted before the issuance of this notice. For example, if a DFVC filing for a delinquent 2008 Form 5500 was submitted in 2012 and information required to be filed under Section 6057 was never filed for 2008, a paper Form 8955-SSA must be filed with the IRS for the 2008 plan year by no later than December 1, 2014, to qualify for the relief provided under this notice.

The IRS said the late filer need not file a separate application for relief with the agency. It will coordinate with the DOL in determining which late filers are eligible for the relief provided under this notice.

The relief under this notice is available only to the extent that a Form 5500 series return is required to be filed under Title I of ERISA. Therefore, for example, Form 5500-EZ and Form 5500-SF filers for plans without employees are not eligible for the relief in this notice. Separately, the IRS issued Revenue Procedure 2014-32 establishing a temporary pilot program to afford penalty relief under the Code for delinquent Form 5500 series filers that are not covered under Title I of the Employee Retirement Income Security Act (ERISA), and has requested comments on whether the program should be permanent.

The Markets May 12, 2014

Institutional Investors Increasing ETF Use

The use of exchange-traded funds (ETFs) by institutional investors is increasing, a study finds.
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According to Greenwich Associates’ report “ETFs: An Evolving Toolset for U.S. Institutions,” as recently as 2011, less than 15% of U.S. institutions were using ETFs in their portfolios. That share climbed to 18% in 2012 and reached 21% in 2013.

But the overall averages understate the extent to which ETFs have been embraced by certain types of investors, Greenwich Associates says. For example, 40% of U.S. endowments employ ETFs in their portfolios, as do one-third of the largest public defined benefit (DB) pension funds—those with at least $5 billion in assets under management (AUM)—and roughly 25% of the largest corporate defined benefit funds.

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Although ETFs represent a small percentage of total U.S. institutional assets, some institutions have begun building sizable ETF allocations. Forty-six percent of institutional ETF users that participated in Greenwich Associates “2014 U.S. Exchange-Traded Funds Study” allocate 10% or more of their total assets to the funds, with almost three in 10 reporting ETF allocations from 10% to 25%, and nearly one in five making even greater allocations.

The current study shows that institutional investors adopt ETFs for routine portfolio functions, as well as a means to obtain long-term strategic investment exposures. This year, approximately 80% of participating institutions that use ETFs do so to obtain core portfolio exposures, making this the most common ETF application among study participants. That share is up from the 74% using ETFs for this task in 2013.

ETFs are gaining traction in asset classes outside equities, especially in fixed income, where changes in market structure could boost ETF use. The share of institutional users employing the funds in domestic fixed income increased to two-thirds this year from just 55% in 2013. Another 35% of institutions overall utilize ETFs for international fixed-income access, up from 29% last year. Forty percent of the institutional ETF users employ the vehicles in commodities, and 45% use them in real estate investment trusts (REITs).

In addition, ETF holding periods are lengthening. The share of institutions reporting average holding periods of two years or longer jumped to 49% in 2014 from 36% in 2013.

The results of the study suggest ETFs will continue to gain momentum in the coming year. Among institutions currently employing ETFs in their portfolios, nearly half say they expect to expand use in the next year. One-third of the institutions in the 2014 study expect to grow allocations by 1% to 10%, while nearly 15% plan to increase them by 10% or more.

For the study, Greenwich Associates interviewed 201 U.S.-based institutional exchange-traded fund users in an effort to track and uncover usage trends. The respondent base included 49 institutional funds (corporate pensions, public pensions, foundations and endowments), 32 asset managers (firms managing assets to specific investment strategies/guidelines), 31 insurance companies, 70 registered investment advisers (RIAs) and 19 investment consultants. The study was sponsored by BlackRock.

The study report may be requested from here.

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