Compliance October 23, 2018

Court Finds Retirement Assets Divided in Divorce Not Protected in Bankruptcy

During a couple’s divorce proceedings, a property settlement awarded the ex-husband half of the ex-wife’s 401(k) balance and the entire amount in her individual retirement account (IRA), but no (QDRO) was ever executed and the ex-husband has undertaken no other action to obtain possession of the assets.

Reported by

The 8th U.S. Circuit Bankruptcy Court of Appeals has affirmed a lower bankruptcy court’s ruling that retirement assets obtained in a divorce settlement are not exempt from creditors because they are not considered retirement funds as defined by a U.S. Supreme Court decision.

During a couple’s divorce proceedings, a property settlement awarded the ex-husband half of the ex-wife’s 401(k) balance and the entire amount in her individual retirement account (IRA). A court order directed counsel to submit a qualified domestic relations order (QDRO), but his was not done, and the ex-husband has undertaken no other action to obtain possession of the assets. The ex-husband has filed for Chapter 7 bankruptcy protection.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

In its brief opinion, the Appellate Court noted that the relevant statutory definition of retirement funds states, “Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” The ex-husband contended that the assets awarded to him satisfy this statutory definition because the assets are not taxable to his ex-wife and this inures to his benefit.

The 8th Circuit cited the U.S. Supreme Court decision in Clark v. Rameker in which it addressed the definition of retirement funds. The Supreme Court decision states, “The Bankruptcy Code does not define ‘retirement funds,’ so we give the term its ordinary meaning. The ordinary meaning of ‘funds’ is a ‘sum of money set aside for a specific purpose.’ And ‘retirement’ means ‘withdrawal from one’s occupation, business, or office.’ Section 522(b)(3)(C)’s reference to ‘retirement funds’ is therefore properly understood to mean sums of money set aside for the day an individual stops working.”

The ex-husband argued that the 401(k) and IRA represent marital property that his ex-wife saved for their joint retirement and that he intends to use the assets for his retirement. However, the Appellate Court found this subjective and said it is not required to consider these arguments.

“Any interest he holds in the accounts resulted from nothing more than a property settlement. Applying the reasoning of Clark, the 401(k) and IRA accounts are not retirement funds which qualify as exempt under federal law,” the Appellate Court concluded.
The Markets October 23, 2018

DCIO Providers Under Increasing Sales Pressure

Leading distributors are consolidating assets, and new groups are growing in influence.

Reported by

Many defined contribution investment only (DCIO) asset managers are fighting to maintain positive net inflows this year, according to Sway Research.

Leading distributors are consolidating assets and new groups are growing in influence, namely third-party fiduciaries, distributor 3(38) modelers and investment scorecard providers.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Many employer-benefits specialists, or aggregators, have been busy growing through acquisitions or affiliations. With each new acquisition, these firms grow in scale and importance, and they are now beginning to raise demands on DCIOs for custom investment vehicles to lower DC plan costs and increase their competitive advantage. Not only are defined contribution (DC) assets consolidating with these aggregator firms, but leading recordkeeping platforms are also expanding market share and beginning to demand more of DCIO managers for access to their staff and placement within their 3(38) models and select lists.

Sway estimates that DCIO assets will reach $4.1 trillion by the end of the year, up 7.9% from $3.8 trillion at the end of 2017. At year-end, DCIO assets will comprise 50% of assets in DC plans. Proprietary assets, those managed by an affiliate of the plan administrator, will account for a 40% market share. The remaining 10% is invested in company stock and via brokerage and mutual fund windows.

The DCIO managers with positive net sales tend to have assets exceeding $100 billion, or asset bases under $10 billion. The steady shift of assets from active to passive management in core U.S. equity categories, such as large cap blend, and the explosive rise of target-date solutions, together tend to lead to more DCIO assets flowing out than coming in. More than half of the managers Sway surveyed said they have had net outflows in 2017 and the first half of this year. The situation was reversed for those managers at the upper and lower ends of the DCIO asset spectrum, as only one third of these firms experienced net outflows.

There are 15 firms in the aggregator universe, and they managed roughly $640 billion of DC assets, or 8%, at the end of 2017. Their share in the small (<$10 million) and mid-size plan ($10 million to $50 million) segments is 32%, but they are gradually moving up market, and with each new acquisition or affiliation deal, their influence on plan menus grows. Sway believes that within the next five years, aggregators will have $1 trillion or more in DC assets.

More than half of DCIO executives that Sway interviewed said that 20% or more of sales at their firm are coming from aggregators and that it is getting increasingly difficult to access investment personnel at these key partners.

Looking ahead, Sway expects DCIOs to focus even more on aggregators, which can deliver assets in return, but that aggregators are also likely to increase their demands, which will make it more costly for DCIOs to service them.

«