Compliance December 12, 2013

IRS Clarifies Roth In-Plan Rollover Rules

The Internal Revenue Service (IRS) has issued more guidance about in-plan rollovers into Roth accounts.
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Notice 2013-74 says plan sponsors must amend their plans to include the conversions to Roth accounts no later than December 31, 2014. The American Taxpayer Relief Act of 2012 includes a provision allowing for in-plan Roth conversions of defined contribution retirement plan accounts otherwise not distributable, without any income limitations (see “Fiscal Cliff Deal Extends Roth Conversions”).

Previously, only amounts deemed distributable—such as upon attainment of age 59 ½ by a participant—could only be converted to Roth accounts. The provision was effective January 1, 2013.

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In the case of a § 403(b) plan that has a remedial amendment period pursuant to Rev. Proc. 2013-22, a plan amendment permitting in-plan Roth rollovers of otherwise nondistributable amounts is permitted to be adopted on or before the last day of that remedial amendment period or, if later, the last day of the first plan year in which the amendment is effective, provided the amendment is effective as of the date the plan first operates in accordance with the amendment.

In the guidance, the IRS says the following contributions (and earnings thereon) may now be rolled over to a designated Roth account in the same plan, without regard to whether the amounts satisfy the conditions for distribution: elective deferrals in § 401(k) plans and § 403(b) plans; matching contributions and nonelective contributions, including qualified matching contributions and qualified nonelective contributions; and annual deferrals made to governmental § 457(b) plans.

The amount rolled over and applicable earnings remain subject to the distribution restrictions that were applicable to the amount before the in-plan Roth rollover.

An in-plan Roth rollover of an otherwise nondistributable amount is treated as an eligible rollover, so no withholding applies. Also, because this amount is not distributable, no part of the rollover may be withheld for voluntary withholding. An employee making an in-plan Roth rollover may need to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty.

The notice also includes guidance regarding all in-plan rollovers—whether or not they were made at the time of a distributable event.

Notice 2013-74 is here.

The Markets December 12, 2013

Despite Equity Boost, LDI Favors Fixed Income

Even with strong capital market performance, many liability-driven investors decreased equity allocations this year in favor of fixed-income vehicles.
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In fact, 43% of U.S. defined benefit (DB) plan sponsors decreased equity allocations thus far in 2013, and 35% reported increasing fixed-income allocations, according to an analysis released by investment management and processing firm SEI.

The total average asset allocation to fixed income among private U.S. pension portfolios reached 44%.

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Analysis results show more than seven in 10 (71%) U.S. pension funds utilize a liability-driven investing (LDI) strategy, compared with 67% measured in 2012. As the name suggests, an LDI strategy involves making investment decisions largely determined by the sum of current and future liabilities attached to an investor.

According to SEI researchers, growth in LDI strategies can be explained by an increasing focus among plan sponsors on creating a holistic investment strategy that incorporates not just asset allocation, but also plan liabilities, corporate finance and enterprise risk. The goal is to protect a plan’s funded status through difficult market environments by eliminating risks that do not need to be taken to meet cash flow needs. 

Looking at the whole field of pension plans polled by SEI—including plans in Canada and the UK—nearly six out of 10 (57%) plan sponsors said their organization use an LDI strategy. SEI observed the same overall participation rate last year, representing a six percentage point drop from the high water mark measured in 2011.

LDI Goals Evolve

While overall usage for LDI strategies remains stagnant, goals for using LDI are changing.

As in previous years, SEI found the most widely cited reason for initializing LDI is to control a pension plan’s funded status liability. But this year, more plans said they are using the strategy to improve funding levels compared with 2012, pushing that incentive from the fourth- to the second-ranked position.

On the other hand, less plan sponsors ranked minimizing their plan’s impact on corporate liquidity and cash flows as the most important factor in implementing LDI. The same goes for controlling cash contributions and plan expenses.

Other results show that, on average, poll participants are allocating about half (49%) of assets to what they would define as LDI strategies. These strategies utilize a variety of fixed-income products to reduce volatility, with the most popular being long-duration bonds in the U.S. and Canada, and gilts and index-linked gilts in the U.K.

Additionally, a strong majority (74%) of glide path strategies implemented with LDI use funded status as the key trigger for automatic de-risking of a portfolio. According to the survey, more than two-thirds (69%) of plan sponsors currently use or are planning to implement a glide path strategy.

For more on SEI’s 2013 annual Global Liability Driven Investing Poll, which reached 130 corporate pension executives across the U.S., Canada and the UK, readers can visit www.seic.com/LDIpoll7.

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