Data & Research December 21, 2006

Study Finds 401(a) Growth

A new survey has found a notable hike in the number of larger corporate employers offering 401(a) money purchase plans.
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A Diversified Investment Advisors news release about its Report on Retirement Plans – 2006 said more than a third (36%) of large corporate employers now offer a 401(a) plan – up markedly from the 12% who did so two years ago.

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“In most cases, these companies are offering a 401(a) defined contribution plan such as a money purchase plan funded with matching contributions to a 401(k) plan not only to help contain the risk inherent in defined benefit plans, but because they remain committed to help fund their employees’ retirement benefits,” said Patrick Kendall, vice president and national practice leader of defined benefit and 401(k) markets at Diversified, in the news release.

The study also found that even before passage of the Pension Protection Act, 44% of large companies had implemented auto enrollment. Another 11% of respondents said they implemented the feature at the time the survey was completed.

In addition, corporate sponsors said they have already installed or are currently implementing automated features such as deferral increases (15%), rebalancing (24%), and managed account options (32%).

In defined contribution plans in the coming year, besides adding investment options (46%) and enhancing participant education (45%), offering investment advice (31%) was a priority. Nineteen percent of defined contribution plan sponsors indicated they plan to change providers in the upcoming year.

Also, even though 401(k) plans have been in existence for over 20 years, employee participation in them continues to increase, with 57% of 401(k) plan sponsors reporting participation rates of at least 70%, according to the announcement. This is up from 53% a year ago.

Meanwhile, on the defined benefit side, 23% of plan sponsors surveyed said they intend to terminate their DB plan; 28% intend to freeze their plan and another 26% reported they plan to reduce DB plan benefits over the course of the next year, the press release said.

In a related area, while 36% of respondents said they have never considered total retirement outsourcing (TRO), 34% said they are either currently considering it, already using it, or are in the process of implementing it. Slightly more (39%) said they are considering or have implemented total benefits outsourcing (TBO), citing the lower cost of administration as the single greatest advantage. This represents a 6% increase over last year’s TBO findings.

The survey was conducted by Diversified Investment Advisors, Inc. and administered by LIMRA International and FGI Research, Inc. among US companies with at least 1,000 employees. The survey featured responses from 233 individuals responsible for the administration of benefits at their firm. Of those companies surveyed, all offer a defined contribution plan and 156 offered a defined benefit plan. The survey contains data based on the 2005 plan year.

More information about diversified is at http://www.divinvest.com.

Compliance December 20, 2006

Final Regs Issued Concerning Prohibited ESOP Allocations

The Internal Revenue Service (IRS) and Treasury Department have issued final regulations that provide guidance concerning prohibited allocations and disqualified person requirements under section 409(p) of the Internal Revenue Code for employee stock ownership plans (ESOPs) holding stock of Subchapter S corporations.
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Section 409, intended to prevent the concentration of ownership among ESOP participants, provides that, during an allocation year, no employer securities may accrue (or be allocated directly or indirectly) for the benefit of a disqualified person. In general, a disqualified person is any person whose deemed-owned ESOP shares are at least 10% of the number of deemed-owned shares held by an ESOP, or for whom the aggregate number of shares owned by the person and members of the person’s family is at least 20% of deemed-owned ESOP shares.

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A non-allocation year, under the section, includes any plan year during which the ownership of the S corporation is so concentrated among disqualified persons that they own or are deemed to own at least 50% of its shares.

Under the final regulations, in the event of a non-allocation year, S corporation shares held in a disqualified person’s account and all other ESOP assets attributable to S corporation stock, including distributions, sales proceeds, and earnings, are treated as an impermissible accrual whether attributable to contributions in the current year or a prior year.

If there is a prohibited allocation during a non-allocation year, the ESOP ceases to be an ESOP, according to the final regulations. As a result, the exemption from the excise tax on prohibited transactions for loans to leveraged ESOPs would also cease to apply to any loan, and the employer would owe an excise tax with respect to any previously exempt loan. In addition, a prohibited allocation is a deemed distribution that is not an eligible rollover distribution.

The final regulations clarify that a prohibited allocation would also result in plan disqualification. The IRS and Treasury provide an example of the impact of the final rules on S Corporations.

Guidance on prevention of a non-allocation year is included in the publication, as well as guidance on the calculation of number of shares of synthetic equity to which a person is entitled for purposes of determining whether he or she is a disqualified person.

The regulations generally are applicable for plan years beginning on or after January 1, 2006, but retain the 2004 regulations for plan years beginning before January 1, 2006.

The publication of 26 CFR Part 1 is scheduled to be in the Federal Register for December 20, 2006.

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