The Markets May 1, 2007

Advisers a Key Part of Fund Sales for Many

About half (49%) of investors who hold mutual fund shares outside their workplace retirement plans have purchased fund shares through a financial adviser.
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Another third (33%) of investors has used advisers as well as other purchasing sources, according to an Investment Company Institute (ICI) survey.
In addition to fund purchases, ICI said, nearly two-thirds of shareholders receive at least five distinct services from their advisers: regular portfolio reviews, financial planning assistance, retirement asset management, and investment recommendations.
Investors chose to work with professional financial advisers because they have expertise that investors lack in specific areas, ICI said. Most shareholders with ongoing advisory relationships use advisers because they want a financial expert to evaluate their total financial picture, help them with asset allocation, ensure they are saving enough to meet financial goals, and explain investment options to them. The demographics most likely to have an ongoing advisory relationship, according to ICI, are shareholders who do not go online for investment information, older shareholders, shareholders with greater household financial assets, and female shareholders who are the household investment decisionmakers.
“The research shows that there is a valuable partnership between shareholders and financial advisers,” said Sarah Holden, Director of Retirement and Investor Research, in a news release about the survey. “Respondents indicate that financial advisers enhance their investment decision-making, improve their chances of growing their money, and give them peace of mind about their investments.”
More than half of fund investors with ongoing advisory relationships initially sought advice between their mid-twenties and mid-forties. ICI said such relationships started for 16% of respondents when they were younger than 25; for 32% at ages 25 to 34; for 25% at ages 35 to 44; for 19% at ages 45 to 54; for 8% when they were age 55 or older.
Among fund investors who first sought financial advice between their mid-thirties to mid-forties one-half indicated they initially did so because they wanted to begin saving for retirement, their children’s education, or some other specific goal. Another trigger event that often causes individuals to seek advice, according to ICI, is a change in the composition of their households – such as getting married, having a child, or losing a spouse or partner. About one-fifth of fund investors with ongoing advisory relationships say a change in the makeup of their households triggered the need for professional financial advice.
Also, receiving a lump sum of money often initially prompted fund investors to seek professional financial advice, with more than one-quarter of shareholders with ongoing advisory relationships surveyed saying that they initially sought advice after receiving a lump sum payout.
Respondents also supplied a number of reasons why they decided against an adviser relationship:
  • Want to be in control of own investments – 66%
  • Have access to all the resources needed to invest on their own – 64%
  • Know enough to make own investment decisions – 56%
  • Enjoy investing on their own – 44%
  • Believe advisers are too expensive – 36%
  • Believe advisers put their own interests before those of their clients – 34%
  • Unsure how to find a trustworthy adviser – 21%
  • Don’t have enough money saved yet to have an ongoing relationship with an adviser – 19%
  • Receive free investment advice from a friend or family member – 14%
Among those without an adviser relationship, 30% used to have an adviser; 28% of that group said a bad experience explained the ending of the relationship, 28% said it was a minor contributing factor, and 44% said it did not come into play.
The research, Why Do Mutual Fund Investors Use Professional Financial Advisers, is based on interviews with more than 1,000 households owning mutual funds outside workplace retirement plans. It reflects the experiences of both investors who have ongoing advisory relationships and those who do not.
Compliance May 1, 2007

Final Roth 401(k) Distribution Guidance Issued

Newly issued rules on the taxation of distributions from Roth 401(k) accounts keep many provisions of the proposed version of the regulations.
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The Treasury Department and Internal Revenue Service released the final regulations (T.D. 9324) that provide guidance under Section 402A on taxing the Roth 401(k) distributions. The regulations impact administrators of, employers maintaining, participants in, and beneficiaries of 401(k) and 403(b) accounts, as well as owners and beneficiaries of Roth IRAs.
The final rules redefine “designated Roth accounts” to include only those accounts under a plan to which designated Roth contributions are made instead of elective contributions or deferrals. That means a distribution from a designated Roth account may only be rolled over to a 401(k) or 403(b) plan if the receiving account has a designated Roth program.
The rules assert that employers setting up designated Roth 401(k) or 403(b) accounts have to keep separate accounting of the contributions, gains, and losses in those plans. Qualified distributions can only begin after the participant has held the account for at least five years, after the participant has reached age 59 1/2, or becomes disabled. Roth distributions can only be rolled over to other Roth plans or to IRAs, the rules indicate.
The final rules also maintained the proposed provisions on determining the five-taxable-year period for qualified distributions. Under the rules, the period begins on the first day of the employee’s taxable year in which the employee first had designated Roth contributions made to the plan and ends when five consecutive taxable years have been completed.
Exceptions
There are several exceptions to the five-year rule provided in the new release. If a direct rollover is made from a designated Roth account under another plan, the period for the recipient plan begins on the first day of the employee’s taxable year for which the employee first had designated Roth contributions made to the other plan, if earlier.
The latest regulatory release kept the proposed rule saying that the distribution rollover must be accomplished through a direct rollover to roll over any amount of the basis in a designated Roth account into a designated Roth account under another plan. However, the final rules eliminated the proposed mandate that the receiving plan separately account for designated Roth contributions that are rolled over.
Certain contributions do not kick off the five-taxable-year participation period, the rules said, including excess deferrals, excess amounts distributed to avoid nondiscrimination test failure, and amounts returned under automatic enrollment plans.
The final rules are effective April 30 and generally apply to taxable years beginning on or after January 1, 2007.

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