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www.payroll401k.com for information about 401k plan fees and irs form 5500 reporting-Topics include: - 401k Advisory Council Study, - Sample IRS Reporting for 401k, - Executive
Summary of IRS 5500 401k Reporting, - Recommendations of Regulatory Change, - Who is responsible for ensuring that plan participants understand 401k fees?

www.lifestyle401k.com for information about lifestyle funds are for 401k plans-Topics include: - Investment Companies, - Each type has its own unique features, - The average
401K account balances, - Hedge Funds, - SEC's Definition of a Hedge Fund, - The Danger of ETF for the 401k Investor

www.cpas-401k.com for information about 401k compliance testing rules-Topics include: - Non-Discrimination Requirements, - ERISA 404c Compliance, - Using 401k
Software to Run compliance Tests, - 401k Plan Operations

www.easy-401k-online.com for information about compliance testing rules for 401k plans-Topics include: - Actual Deferral Percentage (ADP) Testing, - ERSA Compliance
Features, - Plan Testing of 401k and Auto Enrollment, - 401k Plan Operations

www.web-ira.com for information about small 401k enrollment negative elections-Topics include: - 401k for small businesses using automatic enrollment to increase
participation, - small business 401k salary deferrals, - 401k enrollment assistance and information, - 401k elective deferrals, automatic enrollments and negative elections

www.compare401k.com for information about principles of 401k investing in lifecycle funds-Topics include: - General Principles of 401k Investing, - Risk and Risk Tolerance,
- Types of 401k investments, - Familiarity with 401k Investments

www.low-cost-investing-advice.com for information about selecting a pension plan for your small business-Topics include: - Choosing a small business retirement pension
plan, - 401k for small businesses, - Qualified plans and 401k plans, - Small business retirement savings chart, - Report on small business 401(k) pension plans, - What you
should know about pension rights

www.401kenginuity.com for information about 401k Enginuity; record-keeping and administration software for third-party administrators for 401k plans of all sizes.


 

Commentary

30-Sep-1999

IRS Establishes Balanced Measurement System

An integral part of the overall IRS modernization program is the establishment of balanced performance measures that support and reinforce achievement for the IRS' restated mission and strategic goals. For a complete discussion of establishing a performance measurement system, see How will we measure our work? under Modernizing America's Tax Agency.

The IRS has issued a regulation, Establishment of a Balanced Measurement System, that requires a balanced system to measure organizational performance. The regulation establishes requirements that all employees be evaluated on whether they provide fair and equitable treatment to taxpayers and bars the use of records of tax enforcement results to evaluate or impose goals for IRS employees.

IRS Policy Statement P-1-20 previously prohibited the use of records of tax enforcement results to evaluate employees or to impose or suggest production quotas or goals. The balanced measurement regulation replaces Policy Statement P-1-20 as the regulation strengthens and clarifies the prohibition of the use of records of tax enforcement results; therefore, Policy Statement P-1-20 is no longer needed and has been rescinded.

The new regulation requires employees to make decisions solely on the correct application of the law to the facts of each case and the exercise of reasonable judgment in the light of the circumstances of the taxpayer. The new system of balanced performance measures is derived from IRS' three strategic goals: Service to Each Taxpayer; Service to all Taxpayers; and Productivity Through a Quality Work Environment. The IRS is developing training to provide managers and employees with information on the content and application of the balanced measurement regulation.

401k Fact:
Distributions from a 401(k) plan may qualify for optional lump-sum distribution treatment or rollover treatment as long as they meet the respective requirements. Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs. Generally, hardship distributions from a 401(k) plan are limited to the amount of the employee's elective deferrals only, and do not include any income earned on the deferred amounts. Hardship distributions are not treated as eligible rollover distributions. Target Labs, a small California-based employer (www.targetlab.com) , has a very successful 401(k) loan program for its employees.


02-Aug-1999

Caution - Form 2290 Instructions (Rev. July 1999)
Contain an Incorrect Mailing Address

If you downloaded the July 1999 version of the Instructions for Form 2290 before June 25, 1999, you should be aware that the product has an incorrect address on page 2, under How To Make Your Payment. The address in the second bulleted item should be:

Internal Revenue Service
P.O. Box 6229
Chicago, IL. 60680-6229

The corrected version of the 1999 Instructions for Form 2290 is available here.


22-Jul-1999

Open season for Membership in IRS Advisory Council (IRSAC)

IRS is requesting nominations for members in the IRS Advisory Council. Nominations will be accepted for current vacancies and vacancies that will or may occur during the next 12 months. Interested persons may nominate themselves and/or one or more qualified persons for membership on the IRS Advisory Council. All applicants must complete an Advisory Council - Membership Application and Tax Check Waiver. In addition, FBI and practitioner (if applicable) checks are required of all applications. Please refer to the Advisory Council 1999 Member Recruitment - Fact Sheet for specific details about the nomination and selection process. The deadline for submitting applications is Tuesday, August 31, 1999.

The IRS Advisory Council provides an organized forum for discussion of relevant tax administration issues between IRS officials and representatives of the public. Through the years, IRS Advisory Council has focused on broad tax administration policy matters. Various groups have suggested operational improvements, offered constructive observations about IRS' current or proposed policies, programs, and procedures, and advised the Commissioner of Internal Revenue on particular issues having substantive effect on Federal Tax Administration. It is important that IRS Advisory Council membership continue to represent the range and make-up of broad and diverse taxpayer and key stakeholder base.

For additional information, please contact Lorenza Wilds at (202) 622-6440, or e-mail at Public-Liaison@m1.irs.gov.


21-Jul-1999

Small Business Talk is Here!

Publication 1853, Small Business Talk, is available! The publication was recently revised and redesigned to provide our small business/self-employed taxpayers with the latest information on programs, products, and services specifically tailored to their needs. In addition, the new version of Pub. 1853, includes information about the ways in which IRS is changing and how these changes will help us to better serve small business taxpayers.

Publication 1853 (Rev. 5-99), Catalog Number 21523G, can be ordered by calling 1-800-829-3676, or download it here.


14-Jul-1999

Electronic Funds Transfer Temporary Waiver of
Failure to Deposit Penalty For Certain Taxpayers

In News Release IR-1999-27, the IRS announced that beginning July 1, 1999, certain taxpayers currently required to deposit federal taxes using the Electronic Federal Tax Payment System (EFTPS) will be eligible for continued penalty waiver until December 31, 1999. Notice 99-20 provides guidance regarding application of the failure to deposit penalty to taxpayers currently required to deposit by electronic funds transfer. It also provides guidance on the waiver of the failure to deposit penalties for taxpayers whose deposit obligations are $200,000 or less in 1998.


18-Jun-1999

Small Business Workshop Workbook

Publication 1066, Small Business Workshop Workbook, is now in print and available at the Area Distribution Centers. The publication was developed for use in the IRS' Small Business Workshops (SBW). About 1,500 SBWs are presented by our districts annually. The workshops are targeted to taxpayers that are interested in starting a business or that recently went into business.

The workbook contains general information about different types of business organizations, recordkeeping requirements, and business tax returns. Publication 1066 includes an introduction and four basic lessons:

  • Business Tax Requirements;
  • Employment Taxes;
  • Form 941, Employer's Quarterly Federal Tax Return; and
  • Business Use of the Home

The publication is also available in electronic format.


08-Jun-1999

New Version of EFTPS Software

We would like to remind Batch Filers and taxpayers that there are new versions of the EFTPS software programs available for your use from Anexsys (formerly First Chicago) for the northern portion of the country, and Bank of America (formerly NationsBank) for the southern portion of the country.

The most recent versions of the software have been upgraded to comply with Y2K requirements. The newest versions of the software are as follows:

  • For Bank of America*
    • Batch Filer software 16 Version 1.0, Batch Filer 32 Version 2.0,
    • Taxpayer software EFTPS PC Version 2.0 and EFTPS PC 32 Version 1.0
    *If you are requesting software from Bank of America it is important that you specify your operating system, Windows 3.1, Windows 95, Windows 98 or Windows NT to insure receipt of the correct software package.
  • For Anexsys
    • Taxpayer software Version 01.07.01.

If you wish to receive a free copy of a new version, please contact Customer Service at 1-800-555-4477 (Bank of America) or 1-800-945-8400 (Anexsys).

Please note that installation of the new version insures that your EFTPS software is Y2K compliant, but we cannot guarantee that your computer and any peripherals are Y2K compliant, and we make no representation or warranty therewith.

If you have any questions or problems, please call the toll-free Customer Service Center. Thank you for using EFTPS ~ the easiest way to make your Federal tax payments.


06-May-1999

The IRS and Small Business Administration (SBA)
Are Teaming Up to Help Small Businesses

Are you thinking about going into business or have you already taken the plunge? Do you need help? The SBA and the IRS are teaming up to offer small businesses educational tax assistance at four of the SBA's Business Information Centers (BICs) in Atlanta, Boston, Chicago and Los Angeles. For years, the BICs have been helping entrepreneurs start up and expand their businesses. Now thanks to the IRS/BIC partnership, people can also learn more about their business tax responsibilities from IRS educational specialists at the four BIC locations.

This test program will place IRS tax educational specialists at the four BICs for eight hours each week. If successful, the educational assistance program may later be offered at more of the 57 BIC locations. Although the IRS tax specialists at the four BICs will not be able to give assistance with individual business tax liabilities, they will be able to provide many other services including:

  • answering business tax questions;
  • providing business tax seminars;
  • teaching a series of free small business workshops targeted to new and prospective business owners; and,
  • distributing IRS business tax forms and publications.

Below, are the BIC locations that are offering direct IRS assistance. If you would like more information about the educational services and the hours they are provided please call the IRS at the following number(s).


Atlanta      270 Peachtree Street, Suite 140, Atlanta, GA 30303        Call IRS at (404) 338-8670  
Boston       10 Causeway Street, Room 265, Boston, MA                  Call IRS at (617) 565-4325  
Chicago      500 West Madison St., Suite 1250, Chicago, IL 60661-2511  Call IRS at (312) 886-7802  
Los Angeles  600 Wilshire Blvd, L-100, Los Angeles, CA. 90010          Call IRS at (213) 894-4574  



10-Apr-1999

Electronic Funds Transfer
Temporary Waiver of Failure to Deposit
Penalty For Certain Taxpayers

In News Release IR-1999-27, the IRS announced that beginning July 1, 1999, certain taxpayers currently required to deposit federal taxes using the Electronic Federal Tax Payment System (EFTPS) will be eligible for continued penalty waiver until December 31, 1999. Notice 99-20 provides guidance regarding application of the failure to deposit penalty to taxpayers currently required to deposit by electronic funds transfer.


08-Apr-1999

IRS, SBA Join Forces to Help Small Businesses

The IRS and Small Business Administration (SBA) have teamed up on several new initiatives designed to help small businesses handle tax issues. The new programs reflect a growing partnership between the two agencies aimed at providing timely, convenient tax information for the small business community. Information Release 1999-37 provides more details on the programs announced by IRS Commissioner Charles Rossotti and SBA Administrator Aida Alvarez at an April 8 press conference.


22-Mar-1999

Relief for Small Business EFTPS Depositors

Responding to small business concerns about mandatory participation in the Electronic Federal Tax Payment System (EFTPS), Commissioner of Internal Revenue Charles Rossotti has announced changes in the administration of the electronic funds transfer program. Beginning in January 1, 2000 the threshold for mandatory EFTPS participation will be raised to deposits over $200,000. During the interim period, July 1 through December 31, 1999, IRS will continue to waive penalties for businesses currently required to use EFTPS that made Federal tax deposits of $200,000 or less in calendar year 1998.

The proposed changes should significantly reduce regulatory burden to small businesses. The new threshold eliminates mandatory use of EFTPS by 91 per cent of all businesses beginning January 1, 2000. Detailed highlights of the provisions in the proposed regulations can be found in the Electronic Federal Tax Payment System (EFTPS) Questions and Answers and news release IR-1999-27 on the IRS Newsstand. The relief measures will give undecided businesses an opportunity to find out more about the business benefits of EFTPS. More than $2 trillion has been collected to date from more than 2 million users, making EFTPS one of the largest and most successful electronic payment collection systems in existence.

For more information about EFTPS, visit the IRS EFTPS web page. You are also invited to submit comments on the proposed regulations via the Internet by selecting the Tax Regulations option.


10-Mar-1999

IRS Moves to Revise Third Party Notices

The IRS is seeking comments from small businesses, tax practitioners, and other interested persons on a letter advising taxpayers that the Service may contact third parties to gather information in the course of handling their cases. In last year's IRS Restructuring and Reform Act, Congress required the agency to provide taxpayers reasonable notice before contacting outside parties for information in connection with the determination of tax liability, including audits or collection actions. The contacts are generally used as a last resort to resolve unanswered questions about the assets, address, or tax liability of the taxpayer. The IRS began mailing the letter to taxpayers after January 18, 1999.

Your comments are welcomed on Letter 3164, Third Party Notice, and Letter 3173, Third Party Contacts. Letter 3173 is a follow-up letter that IRS periodically sends to taxpayers to notify them of individuals the Service has contacted. For more information, see News Release IR-1999-19 on the IRS News Releases and Fact Sheets page of the IRS Newsstand.

You may fax your comments to the Office of Public Liaison and Small Business Affairs at 202-622-8345.

WHO PAYS 401(K) PLAN FEES AND EXPENSES?

The evidence shows that the largest element of expense for 401(k) plans is the investment management fees that are imposed principally as expense ratios in the case of mutual funds or as wrap fees imposed on assets in group annuities. It has been shown that investment management fees typically range from 75% to 90% of the total administrative fees and expenses imposed on a plan. The participants in a typical plan bear the mutual fund expense ratio and annuity wrap expenses.

Recent surveys provide information showing that, apart from the investment management fees, participants are bearing a substantial fraction of the costs of administering 401(k) plans. Plan participants are more likely to pay non-mutual fund/group annuity investment management fees, while plan sponsors are more likely to pay other fees and expenses. Buck Consultants report that, in 51% of plans surveyed, participants paid all of the investment management fees; while sponsors shared in these fees in 19% of plans. The Profit Sharing/401(k) Council of America survey indicated that in 62% of plans participants paid all of the investment management fees. Hewitt Associates reported that, in 1997, participants paid 56% of non-mutual fund investment management fees.

The opposite is the case with administrative fees (non-investment management fees). RogersCasey reports that, on average, 54% of plan sponsors pay all of these administrative fees, while 28% share these costs with participants. Larger plans (>10,000 lives) are more likely to shift administrative fees to participants. The Profit Sharing/401(k) Council of America survey results mirror these findings.

The following table shows the results of a 1997 survey that asked plan sponsors how administrative fees and expenses are paid.

Table III-1 Who Pays Plan Expenses? 

Percent of Plans1                         

Participant Pays  Employer Pays  Shared   Expense 
Audit fees  24%  73%  3%
Internal administrative staff compensation  4%  93%  3%
Employee communication  14%  75%  11%
Investment education:

Seminar/workshops

 9% 83%  8%

Other media 

10% 82%   8%
Non-mutual fund investment management fees 56% 39% 5%
Legal/design fees  9% 85% 6%
Recordkeeping fees 35%   58% 7%
Trustee fees  40% 55% 5%
Other administrative fees 24% 61% 15%
 (Source: Hewitt Associates, 1997)
1 (441 plans reporting)


The trend in recent years has been for plan sponsors to shift administrative and non-mutual fund expenses of the plans to plan participants (Hewitt Associates, 1997). The following table illustrates this trend.

Table III-2

Plan Expenses Paid by Participants Only

Percent of Plans1                  

1991 
Survey
1993 
Survey
1995 
Survey
1997
 Survey
Audit fees 16%  17% 18% 24%
Internal administrative staff

compensation 

4% 3% 4% 4%
Employee communication 5% 10% 10% 14%
Investment education:

Seminar/workshops

--  --  --  9%

Other media

-- -- -- 10%
Non-mutual fund investment 

management fees

44% 50% 56% 56%

Legal/design fees

 9%  7% 10% 9%
Recordkeeping fees 22% 27% 29% 35%
Trustee fees 27% 32% 33% 40%
Other administrative fees 14% 17% 18% 24%

(Source: Hewitt Associates, 1997)
1 (656 plans reporting in 1991; 486 plans reporting in 1993; 429 plans reporting in 1995; and 441 plans in
1997)



Another survey research study conducted over a four year base yielded comparable results. Table III-3 displays the results of this study.

Table III-3

Plan Expenses Paid by Participants Only

Percent of Plans1          

1992
Survey
1994
Survey
1996
Survey
General Recordkeeping 11.6%    13.1% 22.0%
Compliance 10.4% 8.9% 12.3%
Communications 5.2% 8.8% 13.8%
Asset Management 35.8% 34.4% 53.9%
Investment Education 18.7%
Loans 46.4%
(Source: Spencer Associates, 1996)
1 (229 plans reporting in 1996)

The evidence that there is a trend to shift expenses from plan sponsors to plan participants is reinforced by a survey conducted in 1996 that asked plan sponsors to indicate their intentions for the future. This survey indicated that a modest but significant number of respondents intended to pay a lower percentage of such fees in the future. Table III-4 displays the results of this survey.

Table III-4

Future Payment of Administrative Fees

Percent of Plan Sponsors      

Participant
Pays
Employer 
Pays
  Shared
Expense
In 1996 in 1996 in 1996
Company will pay a higher percentage of fees  1%   0%   2%
Company will pay a lower percentage of fees 7% 15% 24%
Company will pay the same percentage of fees 91% 85% 73%
Number of respondents  (82) (245) (128)
(Source: RogersCasey)


ARE PLAN SPONSORS AND PARTICIPANTS ADEQUATELY INFORMED ABOUT FEES AND EXPENSES?

The adequacy of the disclosure of fees and expenses to both plan sponsors and participants has been introduced as an important issue. (This was the focus of the public hearing held by the Department of Labor on November 12, 1997.) It is clear from evidence in the literature that not all investment products disclose the fees and expenses charged to a 401(k) plan, nor are all of the fees and expenses charged by service providers disclosed. For example, we have demonstrated that the fees imposed on stable value accounts are not usually identified and that other charges, such as sales fees, are often not disclosed. Adequate disclosure of fees and expenses should be important to sponsors as they select 401(k) service providers and monitor their performance. The disclosure of fees and expenses is also important to plan participants as they select among available investment options. ERISA charges DC plan sponsors with a fiduciary responsibility to act in the best interests of the plan participants. This implies that plan sponsors will know the costs of the services they procure and will apply due diligence to minimize these costs in the light of the level of services desired.

There is evidence, however, that there is a lack of information about costs that may affect the level of some administrative fees and expenses. A Dalbar study in 1992 shows that 78% of plan sponsors did not know how much their costs were, largely because there are about 80 different ways in which vendors charge fees (Benjamin). Some observers have suggested that some plans absorb as much as 100 basis points in higher fees and expenses presumably due to ignorance about the extent of fees being charged (Butler, November 12, 1997). The logic supporting this assertion is that, absent knowledge of the fees and expenses, many plan sponsors will select a higher cost provider than would be selected with detailed cost information.

The existence of such a large number of service providers suggests that competition in the marketplace should serve to minimize 401(k) plan fees and expenses. However, some observers believe that sponsors are not especially price sensitive in their purchasing decisions (Butler, November 12, 1997). Perhaps this is due to a lack of knowledge about the total fees and expenses being assessed. It also appears that some segments of the market are more efficient than are others. It is asserted, for example, that competition makes the market for large corporation plans very efficient (Barry). However, a valid distinction can be made between competitiveness in the market for services to large and small plans. This suggests that smaller plans do not benefit from this price competition (Cronin).

Another issue related to whether sponsors need a greater disclosure of fees and expenses is the costs of the many plan features that are now characteristic of a typical plan. More services are being provided to plan participants today than was the case ten years ago - indeed - many did not exist ten years ago (interactive voice response systems, for example) (Saxon). The provision of these services is driven by demand. A valid question is: if participants knew how much optional features of their plans cost, would they demand so many (O'Brien). In a recent study conducted on the Internet, 85% of the 1000 respondents voted for greater investment returns versus more services from their plans (Butler, November 12, 1997).

The imperatives for a greater disclosure of fees and expenses to participants are less clear. In one opinion, given in testimony at the public hearing before the Department of Labor on November 12, 1997, additional information would not benefit plan participants (Barry). They have one of two choices to make among the inventory of options offered by their plan. These decisions are yes or no for each investment option, and all they really need to know is now disclosed including historical rates of return and investment objectives. This argument would be much more persuasive if the evidence showed that plan sponsors have complete knowledge of fees and expenses and are acting responsibly on this information to minimize costs.

An opposing view is that employees deserve the same access to information that the plan sponsors should be receiving when they select plan providers and investment vehicles. This argument starts from the construct of the DC benefit and especially of 401(k) plans in relation to an employee's retirement income security. Responsibility has been placed on employees to direct their own investments and to assume the risk of making bad decisions. Thus, they are entitled to all of the relevant information bearing on these decisions (Fink). Another factor arguing for the disclosure of information about plan costs to participants is that they have influence on the decisions of the plan sponsors in many firms. This influence may be exerted through employee advisory committees, their bargaining units, or through informal channels of communication. Thus participants deserve access to the information they need for informed participation in the sponsor's selection process.

ERISA requires that participants receive information about the amount of fees and expenses charged against their plan in the summary annual report. In addition, plans are encouraged by section 404(c) (the ERISA safe harbor provision) to provide full disclosure of fees and expenses. However, except for investments covered by the Securities Act of 1933, for which a prospectus must be furnished to participants, there is generally no requirement in the law or Federal Code for a complete disclosure of investment expenses to plan participants (Fink).

The disclosures required by plans seeking to comply with section 404(c) do not always display the full range of expenses charged to participants. Only that information relevant to the participant's capability to make rational choices among the investment options must be included. Thus, items such as the wrap fee and internal computations of the net asset values for stable value accounts would not necessarily be disclosed.

What do the stakeholders in the 401(k) universe think about the adequacy of available information about fees and expenses? Testimony before a public hearing held by the Department of Labor revealed differing perspectives on this issue by industry and advocacy group representatives. The mutual fund industry appears to be solidly for a full disclosure of all fees and expenses to both plan sponsors and participants (McNabb; Fink). The Vanguard representative presented a model for a disclosure format that would appear to be acceptable to the mutual fund industry (McNabb; Fink; Tiemann). However, the industry's position on disclosure may be somewhat self-serving. The Securities Act of 1933 already requires them to disclose their administrative and investment management fees in a prospectus. Therefore, under current law, they are somewhat at a competitive disadvantage because they are subject to more stringent disclosure requirements than are insurance and bank investment products that are not similarly regulated and whose fees and expenses are often concealed in the net asset valuation computations. The Vanguard model disclosure would combine the asset-based, census-based, and itemized expenses into one "all-in" cost expressed as an expense ratio on total plan assets (McNabb). (This model disclosure is included in Appendix B, where several such models are displayed.)

Representatives for the banking industry stated their support for adequate disclosure of information about fees and expenses but believe that such information is now available (Barry; Dudley). Strong sentiment was expressed that no actions should be taken to mandate what fees and expenses could be charged (Barry). Such an action would disrupt the structures that have been created to service the 401(k) industry. There was additional comment opposing the establishment of mandatory disclosure requirements (Barry; Saxon).

The insurance industry was underrepresented at the hearing; the one insurance firm offering testimony operates in a niche market that offers mutual fund products wrapped in a group annuity to mostly small plans (Ryan). Anecdotal evidence was offered that some insurance companies would object to changes in their disclosure procedures that would separately identify their fees and expenses, such as distribution and M & E fees incorporated in the annuity wrap fees, to plan sponsors or participants (Butler, November 12, 1997; Snyder; Schultz).

Testimony from individuals representing participants in 401(k) plans strongly advocated the need to provide participants with detailed information on the fees and expenses being charged against their accounts (Benna, O'Brien, Snyder).


401(k)plans

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