Data & Research April 28, 2010

Fidelity Finds Confusion about Roth Conversion Rules

While investors demonstrated more knowledge about Roth IRAs than last year, many still do not understand the tax implications of a Roth, according to a Fidelity Investments survey.
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The survey of investors with both retirement plan assets at former employers and annual household incomes of more than $100,000 showed that awareness of the Roth IRA conversion opportunity has increased over the past six months, but is still relatively low. According to the survey, 35% of respondents are aware of the Roth IRA conversion eligibility changes, up from just 12% in a Fidelity survey conducted in August 2009.

Nearly half (45%) said they know whether their 401(k) assets qualify for a Roth IRA conversion, up from only one-third (33%) in 2009. However, 55% of newly eligible investors who have old 401(k)s with former employers are still not certain whether their assets can be converted to Roth IRAs.

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When asked about the biggest barriers to converting assets to a Roth IRA, one-third (33%) of respondents said they do not understand the tax implications of converting to a Roth IRA and 22% are confused by the conversion process itself.

According to Fidelity, before being provided with any information, respondents were asked whether they had ever considered rolling 401(k) assets from a former employer to a Roth IRA, and only 24% said yes. After receiving information about the benefits of a Roth IRA, nearly six in 10 (58%) said they would be likely to investigate converting their 401(k) with a former employer to a Roth IRA and half (50%) said they were considering rolling into one, but had not yet made a decision.

 

Compliance April 28, 2010

Aon Agrees to Pay $1.8M to Settle Stock-Drop Suit

Aon Corp. has agreed to pay $1.8 million to settle a lawsuit alleging 401(k) participants lost tens of millions of dollars when Aon’s overvalued company stock price collapsed in 2004.
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In addition to the $1.8 million payment, Aon agreed to retain for a period of at least five years an independent adviser or an independent third-party fiduciary to advise the plan fiduciaries regarding the plan’s investment in Aon stock. The company also agreed that it will take no action for a period of at least five years to restrict participants’ ability to sell company stock in the plan.

The settlement also calls for the plan’s fiduciary structure to be identified in future plan documents and summary plan descriptions starting with the 2010 SPD, and for Aon to make available to plan participants investment education/advisory services for at least five years.

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The U.S. District Court for the Northern District of Illinois has given preliminary approval of the settlement agreement.

The suit charged that Aon breached its ERISA fiduciary duty by having more than 40% of the plan’s assets in company stock between October 1998 and October 2004 (see “Court OKs Class Action in Aon 401(k) Company Stock Suit”). During that time, the participants alleged that Aon pressured clients to buy insurance from providers when doing so would maximize payment of contingent commissions.

The suit also claimed Aon inflated its revenues with “clawbacks,” where it allegedly provided discounts to insurers on the condition that Aon would recover those discounts by convincing its clients to deal with those providers.

Aon made known its activities on October 14, 2004, causing its stock to plummet 30% within days.

The case is In re Aon ERISA Litigation, N.D. Ill., No. 04 C 6875.

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