Compliance September 8, 2009

IRS Distributes Final 401(a)(9) RMD Qualification Rule

Federal tax officials have put out a final rule (TD 9459) allowing government plans carrying out 401(a)(9) required minimum distributions to prove their compliance with a reasonable and good faith standard.

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That was the key takeaway from the final mandate released by the U.S. Treasury Department and Internal Revenue Service (IRS) that affects all qualified federal, state, or local government plans including 403(b) contracts that are part of a governmental plan, individual retirement accounts described in 408, and 457(b) eligible deferred compensation plans.

The regulations generally require plans to start distributing each participant’s plan assets by whichever date is later: April 1 of the calendar year after the year in which the plan participant turns 70 1/2 or by April 1 of the calendar year following the year in which the participant retires.

If the entire interest of the participant is not distributed by the required beginning date, then section 401(a)(9)(A) provides that the entire interest of the participant must be distributed beginning not later than the required beginning date, in accordance with regulations, over the life of the participant or lives of the participant and a designated beneficiary (or over a period not extending beyond the life expectancy of the participant or the life expectancy of the participant and a designated beneficiary).

The Pension Protection Act directed the Treasury Secretary to distribute regulations giving government plans the ability to qualify under the reasonable and good faith interpretation standard of 401(a)(9).

The final rules are effective September 8. The rules will apply to all plan years to which Section 401(a)(9) applies, IRS said.

The final rule is available here.

The Markets September 8, 2009

Callan DC Index Turns Around in Q209

After six consecutive quarters of losses, the Callan DC Index posted a gain of 12.26% in the second quarter of 2009.

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According to a Callan analysis, the strong performance of the Index reflects well-timed transfers by participants back into equities. For the first quarter since the end of 2007, stable value saw net outflows, as DC participants sought to increase equity exposure in order to benefit from the market rally. Gains from this flow activity equaled 0.17% for the quarter.

Turnover activity rose to above-average levels while still very modest at 0.94% of total DC balances for the quarter. The largest inflows were to domestic large-cap, target-date, and domestic/global balanced funds.

Still, Callan said, the equity allocation of DC plans remained materially lower than that of the typical 2030 target date fund (59% and 78%, respectively). Callan said that unlike DC investors, the typical target date manager engaged in rebalancing throughout the 2008 market collapse—which heightened losses during the second half of last year, but also increased gains during the recent recovery. The typical 2030 target date fund outperformed the Index during the second quarter by an average of nearly five percentage points.

The index ended last quarter ahead of the average corporate defined benefit (DB) plan, which returned 11.49% gross of fees; but DB plans still outperformed the Index by more than two percentage points per year since inception in January 2006, the analysis said.

After the second-quarter turnaround, growth in DC plan balances since 2005 have turned positive again, Callan said. Participants in the Callan DC Index now enjoy positive annualized asset growth of 0.6% over that period, compared to the first quarter, when annualized asset growth was in negative territory (-3.22%).

However, Callan said growth in DC assets since 2005 remains wholly attributable to contributions by plan sponsors and participants. While annualized growth from total return was -3% over the period, growth from net flows was 3.6%.

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