Compliance October 28, 2010

Trade Groups Request Guidance on In-Plan Roth Conversions

The Investment Company Institute (ICI) and the American Benefits Council (ABC) have requested immediate guidance on section 2112 of the Small Business Jobs Act of 2010.
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The act allows conversions of assets in defined contribution plans into Roth accounts within the plans. In a letter to The Treasury Department and Internal Revenue Service, the ABC said since the provision was effective upon enactment, “it has resulted in an immediate and urgent need for guidance necessary to implement this provision.” Both the ICI and ABC pointed out that participants are eager to transact conversions during 2010 because they are allowed to defer taxation until 2011 and 2012.  

ICI said the most pressing issues are: withholding, 1099-R reporting, recharacterization, the steps needed to complete an in-plan Roth conversion, plan amendment requirements, application of the five-year waiting period, and loans.  

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Specifically, the groups are asking the IRS to clarify whether an in-plan Roth conversion is subject to the mandatory 20% federal tax withholding or whether, since it is similar to an eligible rollover distribution, no withholding is required. They also ask for clarification on whether 1099-R reporting is required and how to code the distribution on the 1099-R. ICI recommended in its letter that because of the short amount of time providers have to make programming changes, the distributions should be coded the same as for direct Roth rollovers (Code G).  

ICI also recommended that a plan should be able to complete an in-plan Roth conversion in a manner that will not result in the actual liquidation and reinvestment of the converted amount, as long as the plan’s records reflect the in-plan conversion.  

Also, due to the shortage of time, the groups asked that a remedial plan amendment period be provided in which to amend plans to permit Roth accounts and conversions.  

The ABC asked the IRS to confirm that outstanding loans of any participant may be converted even if the loan has been deemed distributed.  

Currently, Roth contributions to a plan are subject to a five-year holding period before they can be considered for qualified distributions made after age 59 ½, death or disability, or for a first-time home purchase. There is also a five-year period for determining whether the special early distribution tax rule applies. The groups asked for clarification on whether contributions into a Roth account and conversions into the account need to be tracked separately for purposes of these five year rules.   

The ICI letter is here.  

The ABC letter is here.  

Others have warned plan sponsors about the challenges of and still unanswered questions about in-plan Roth conversions (see In-Plan Roth Conversions Present Challenges and SPARK Institute Urges Caution on In-Plan Roths).
Products October 28, 2010

Benefits and Methods of Client Segmentation

Charles Schwab issued a report today that examines how independent registered investment adviser (RIA) firms can benefit from segmenting their client base and offers strategies on how to going about doing so.   
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The report, “Best-Managed Firms: Client Segmentation Strategies – Optimizing client experience and firm performance,” is part of the Schwab Market Knowledge Tools (MKT) series.  It gives reasons why client segmentation is a wise strategy to increase a firm’s profitability and scalability, as well as offering suggestions on how segmentation can be approached.

The main reason Schwab suggests RIAs segment their client base is to better manage the immense diversity between clients.  Plans that have $1 million assets under management (AUM) have greatly different needs than plans with $5 million or more in AUM.  Trying to handle these plans using the same strategy and giving them equal attention can be unproductive for both the RIA and the client.   

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The report outlines benefits of client segmentation from both the client’s perspective and the firm’s.  Schwab says clients will benefit from:

  • Consistency in the client experience by setting clear definitions around the level and types of services offered to different sets of clients,
  • Deeper client relationships by providing specialized expertise to clients with specific needs (and not over delivering to clients who have more basic needs), and
  • Optimization of non-core client relationships that without segmentation tend to be managed on an ad hoc basis leading to inefficiency and inconsistency.

At the firm level, advisers are using segmentation to realize:

  • Improved team member efficiency and productivity through better resource allocation and development of standardized workflows for serving clients,
  • Better alignment of revenues and cost to serve clients by strategically matching time and staffing to each client’s level of need and the amount of revenue they generate for the firm, and
  • Strategic business development support by helping firms define an ideal client profile, articulate their firm’s unique value proposition, and put a more systematic framework around driving more targeted client referrals.

 The last part of the report outlines four steps to implement client segmentation within an advisory firm.  They are:

  1. Strategic planning - establish vision and goals, identify strengths, weaknesses, opportunities and threats, develop an ideal client profile and firm value proposition, and seek to understand the dynamics of the current client experience provided to clients.
  2. Segmentation strategy development - set clear goals for the program, articulate the components of what will be offered to different sets of clients and the staffing and resources decked against each offer.  Calculate the cost to serve different sets of clients and determine client-level profitability for each segment.
  3. Delivery planning and rollout - identify any existing gaps between current capabilities and the services advisers want to offer clients. Implement necessary processes and procedures, such as coding of clients and accounts and integrating any necessary systems, and clearly define client-facing and back-office roles and responsibilities. Most importantly, communicate clearly and effectively to clients to ensure they understand the changes and the benefits to them.
  4. Monitoring and refinement - develop a formal system for gathering client feedback and define specific success metrics for the program before it is rolled out to clients.

“Even if a firm does not implement a formal client segmentation strategy, just walking through the analytics behind segmentation can provide tremendous value,” said Scott Slater, managing director of business consulting with Schwab Advisor Services. “The process can improve firm performance by better aligning a firm’s profitability with the services it provides clients, and can enhance client experience by identifying the specific needs of different types of clients setting clear expectations around how the firm will meet those needs.”  

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