Compliance April 14, 2009

IRS Publishes Sample 403(b) Prototype Document Language

The Internal Revenue Service has published some sample prototype 403(b) language – and wants to know what you think.
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The draft information package contains samples of plan provisions that satisfy certain specific requirements of the Internal Revenue Code applicable to section 403(b) plans, and as provided in Announcement 2009-34, “interested persons’ are invited to submit comments to the IRS on the sample plan provisions.
In publishing the language, the IRS notes that the sample language is designed for use in a new Employee Plans Section 403(b) Prototype Plan Program. “The Section 403(b) Prototype Program will operate generally in the same manner as the current Master and Prototype Program for plans qualified under section 401(a) of the Internal Revenue Code,’ according to the announcement. The IRS notes that a sponsoring organization (generally a service provider) using the prototype document will submit a section 403(b) plan document to the IRS for review, and if the plan satisfies the requirements of section 403(b), the IRS will issue a favorable Opinion Letter to the sponsor with respect to the plan document. The sponsor may then offer the approved plan document for adoption by employers.
The IRS notes that the draft sample language is based on language previously developed for other IRS prototype plan programs (see Listing of Required Modifications for Defined Contribution Plans, Cash or Deferred Arrangements, Traditional IRAs and Roth IRAs) as well as the model section 403(b) plan language published in Revenue Procedure 2007-71.
The IRS notes that this information package contains samples of plan provisions that have been found to satisfy certain requirements of section 403(b) of the Internal Revenue Code, the final regulations issued July 26, 2007, Revenue Procedure 2007-71, and Revenue Procedure _____ [section 403(b) prototype plan revenue procedure]. “This language may or may not be acceptable in different plans depending on the context in which used,’ the IRS noted. “We have prepared this package to assist prototype sponsors who are drafting section 403(b) prototype plans, and to enable us to process and approve section 403(b) prototype plans more quickly,’ the agency explained.
Part I of the package contains sample plan provisions appropriate for section 403(b) prototype plans that are limited to elective deferrals. Part II contains additional sample provisions for section 403(b) prototype plans that accept contributions other than elective deferrals.
The IRS notes that certain section 403(b) plans may be covered by Title I of the Employee Retirement Income Security Act of 1974 (ERISA), but that since the IRS does not have jurisdiction over Title I, this package does not contain sample Title I plan provisions. However, the IRS also notes that prototype sponsors “may find that certain plan provisions developed to enable section 401(a) master and prototype plans comply with Internal Revenue Code qualification requirements that have parallel Title I requirements may be helpful in drafting plan provisions intended to comply with Title I (see, e.g., Listing of Required Modifications for Defined Contribution Plans).
However, even if such provisions are used, IRS opinion letters do not provide reliance for section 403(b) prototype plans with respect to Title I requirements, the Service cautioned.
The 403(b) Plan Draft Listing of Required Modifications and Information Package (LRM) is online at http://www.irs.gov/pub/irs-tege/draft_lrm_403b_prototypes.pdf
The Markets April 14, 2009

Oregon Sues 529 Fund Manager

The state of Oregon has sued OppenheimerFunds Inc., charging the fund manager with understating the risk it took with a bond fund in Oregon's state college-savings plan.
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Oregon has sued the firm for losses of $36.2 million incurred by participants in the Oregon College Savings Plan, a 529 college savings plan which Oppenheimer manages. According to the Wall Street Journal, at least four other states had hired Oppenheimer to manage parts of their college-savings plans, including Texas, New Mexico, Illinois and Maine. A spokeswoman for Illinois’s state treasurer said the state is working with the other states, “to try to negotiate a settlement,” according to the WSJ.

In the lawsuit, filed in Marion County, Ore., the State Treasurer and Oregon 529 College Savings Board allege violations of Oregon securities law, breach of contract, breach of fiduciary duty, negligence and negligent misrepresentation. Treasurer Ben Westlund and Attorney General John Kroger said the lawsuit was filed on behalf of families and aims to recoup their losses.
“We are taking action on behalf of Oregon families whose college accounts were battered — and their financial futures jeopardized — because of OppenheimerFunds,’ said Treasurer Westlund. “Families were doing the right thing and saving for college, but unknown to them or Oregon, their money was invested in ways that were plainly inappropriate for those saving for college or already in college.’
Investigation Undertaken
Monday’s filing comes after a three-month investigation by the Oregon Attorney General, which found that Oppenheimer Funds represented that certain investments were appropriate for conservative and ultra-conservative portfolios – “but shuttled college savings instead into a hedge-fund like investment fund that took extreme risks in a search for speculative large returns,’ according to an announcement of the action.
In response, OppenheimerFunds said in a statement it was “…very disappointed by the actions of the Oregon Attorney General Office’s in filing a lawsuit against it today seeking to recover amounts lost in investments held in the Oregon College Savings Plan.’ The fund manager said that it had “cooperated fully with the State of Oregon in its inquiry into OFI’s role as program manager for the funds at issue’ over the past several months, and “despite this cooperation and ongoing dialogue with the State, Oregon proceeded to file its suit without so much as a single meeting with OFI or its representatives in an effort to discuss their concerns or potential solutions.’ Noting that it was “deeply concerned with the investigative process followed by Oregon and its decision to file a suit given the fact that the State Attorney General did not conduct the investigation but rather hired and paid an outside attorney to do so,’ OFI said “we are prepared to defend ourselves and our reputation vigorously against these claims which lack legal merit.”

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The lawsuit focuses on the Oppenheimer Core Bond Fund, which was part of five age-based portfolios in the Oregon College Savings Plan. The lawsuit alleges that the character of the OppenheimerFunds Core Bond Fund changed in 2007 and 2008, but neither the state nor investors were alerted that the fund had become “significantly more aggressive and risky”. The Investment Policy for the Oregon College Savings Plan provided that “Ultra-Conservative/In College’ and “Conservative/1-3 Years to College’ portfolios had the primary investment objectives of “protection of principal’ and “income,’ according to the announcement.

Steep Losses
While the Core Bond Fund lost a total of nearly 36% for the year 2008, its benchmark index was actually up 5% for the year, according to Oregon officials – and through March 2009, the Core Bond Fund lost another 10% while the index remained virtually even. Oregon officials noted that Morningstar Inc. gave OppenheimerFunds a grade of “F’ in February for failing to communicate with its investors about the true nature of its funds.
According to the WSJ, Oppenheimer Core Bond fund’s sharp losses in 2008 stem partly from bets on high-quality commercial mortgage-backed securities, which its manager believed would rise in value. To make these investments, the fund used a type of derivative called total-return swaps, which are agreements between parties to exchange cash flows in the future based on how a set of securities performs. But commercial mortgage securities have deteriorated since last year, thanks to the worsening economy.
Unprecedented Volatility
In its response to the suit, OFI acknowledged that “the mutual funds cited in the complaint experienced significant losses due to unprecedented market volatility in 2008, as did other mutual funds and investments’, going on to note that the investment consultant hired by the State of Oregon’s Board noted at a meeting of the Board in January 2009 that OFI wasn’t the only firm that made the types of investments that the fund at issue held and that the fund was hit badly by “the dislocation of the market.’ OFI said that “that consultant went on to state that OFI provided “full transparency in the portfolio, allowing it to be analyzed at both the sector and security level.’’ For its part OFI said it “did not radically change the investment policies of the Fund in 2007 and 2008, as alleged in the suit, and made no changes in the fund’s investment policies and strategies without telling the board. For the Attorney General to suggest otherwise in the complaint is simply a distortion of the facts.’
Also named in the suit are OppenheimerFunds Distributor Inc. and OFI Private Investments Inc. Both are based in New York.
The Oregon 529 College Savings Board voted in January to remove the Oppenheimer Core Bond Fund from the state 529 portfolio.

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