IRS Preps for Cash Balance Plan Program

The Internal Revenue Service (IRS) intends to expand its pre-approved defined benefit plan program to permit plans with certain cash balance features to be submitted by sponsors and practitioners.

In Announcement 2014-4, the IRS extended to February 2, 2015, the deadline to submit on-cycle applications for opinion and advisory letters for pre-approved defined benefit plans for the plans’ second six-year remedial amendment cycle. The submission deadline has been extended to allow time for the agency to develop the necessary language and tools to implement its expansion of the pre-approved program. However, new deadline applies to all on-cycle pre-approved defined benefit plan submissions, even those that will not be modified to contain cash balance features.

In general, plans will continue to be reviewed for qualification items based on the 2012 Cumulative List (see “IRS Issues 2012 Cumulative List”), which is the Cumulative List applicable to sponsors of defined benefit pre-approved plans submitting during the second six-year remedial amendment cycle. Future guidance will address permissible cash balance features under the pre-approved program.

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The IRS said it will announce in future guidance when applications for opinion and advisory letters for pre-approved defined benefit plans with cash balance features may be submitted. Until that time, such plans should not be submitted under the pre-approved program.

In order to preserve (or, in the case of a new plan, obtain) reliance on the terms of their plans, sponsors of individually designed plans who intend to adopt a pre-approved defined benefit plan document in the future may, before the end of their applicable individually designed on-cycle deadline, complete Form 8905, Certification of Intent to Adopt a Pre-approved Plan, in lieu of submitting an application for an individually designed determination letter. The deadline for submitting the form is March 31, 2014.

Adoption of Smart Beta ETFs Increases

The adoption of smart beta exchange-traded funds (ETFs) is increasing among institutional asset managers, a new study finds.

“The Evolution of Smart Beta ETFs,” which was commissioned by Invesco PowerShares Capital Management LLC, a provider of domestic and international ETFs, finds that one in four institutional investors use smart beta ETFs and that adoption among non-users is likely to accelerate in the near future.

Results of the study also reveal that nearly half (46%) of institutional decisionmakers not currently using smart beta ETFs indicate they are likely to start using the products over the next three years, particularly institutional investors with assets in excess of $500 million.

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Within the smart beta ETF category, low volatility funds experienced the greatest growth in 2013, a 99% increase in assets. This trend is expected to continue, say the study authors, as two-thirds (67%) of institutional decisionmakers not currently using smart beta ETFs indicate they are most likely to use low volatility funds moving forward. In addition to low-volatility products, nearly half (46%) of non-smart beta ETF users anticipate using high dividend ETFs and just over one-third (34%) plan on using fundamentally weighted investment strategies.

“We have been seeing increased interest in smart beta ETFs with various institutional segments, and the research findings confirm that increasingly institutions are implementing smart beta ETFs,” says John Hoffman, Invesco PowerShares director of ETF institutional sales and capital markets, based in Chicago. “Smart beta ETFs make a lot of sense for institutional investors seeking lower costs, intraday liquidity, increased transparency, ease of implementation, and strategies that go beyond market cap weighting.”

Non-users indicate that the primary drivers of future usage include making tactical adjustments to asset allocation (42%), accessing higher beta strategies (40%) and portfolio completion (40%). In addition, 39% of non-users plan to use smart beta ETFS to reduce portfolio volatility (see “Smart Beta ETFs Can Be Used to Reduce Volatility”).

“We educate both users and non-users about the many benefits of PowerShares smart beta ETFs, and these results reinforce our belief that these products are great investment tools for institutional asset managers as well as retail investors,” says Dan Draper, Invesco PowerShares managing director of global ETFs. “We’re very excited about the future potential of our investment category.”

Data for the study was collected from 193 participants between September 5 and October 2, 2013. An online survey was administered by Cogent Research (on behalf of Invesco PowerShares) to institutional decisionmakers including pensions, endowments/foundations, nonprofit institutions and mutual funds, as well as registered investment advisers who manage institutional assets. Respondents were not made aware of Invesco PowerShares’ involvement in this research initiative.

More information about the study can be found here.

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