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Articles: Changes on tap for 401(k)s

The  U.S.  Department  of  Labor  (DOL)  recently  released long-awaited final regulations requiring retirement plan service providers and administrators to provide detailed information about services and fees to plan participants. In addition to minor modifications, the new regulations postponed the effective date of these rules from April 1, 2012 to July 1, 2012, to give plan sponsors more time to comply.

As a result of the new regulations, plan sponsors and participants will have more access to information about plan fees. This can help them better understand plan-related costs and make informed investment decisions.

The new final regulations were issued in conjuction with other initiatives expanding retirement plan payout options and providing greater transparency. Here’s a general overview.

Background: The 401(k) plan, a type of defined contribution plan, is the most popular type of qualified plan in the country. According to the DOL, more than 72 million participants  currently  have  invested  more  than  $3  trillion  in 401(k) plans.

Assuming certain requirements are met, participants can contribute amounts up to specific thresholds, adjusted for inflation each year.  The limit for 401(k) deferrals in 2012 is $17,000 ($22,500 if you are age 55 or older).

In addition, employers may provide “matching” contributions up to a set percentage of compensation.  All contributions are eligible to generate earnings on a tax-deferred basis.

In the past, 401(k) participants and plan sponsors for smaller companies often did not know the breakdown of fees for their retirement plans.  Under the new rules, retirement plan providers must disclose to employees all fees associated with the retirement plans being offered to employees.  Plan participants will then have to be informed about the fees, and quarterly reports must be issued.

The new rules will require an explanation of any administrative expenses and individual expenses charged to an individual’s account.   This information can currently be unearthed by participants and plan sponsors, but the new regulations require that it be offered regularly by the plan providers.  Note that some plan providers already offer the additional information.

Related proposed regulations issued this year also include the following provisions:

  • Currently, employees may have to choose between a lump sum or an annuity upon retirement. The new proposed regulations would change a federal requirement to make it easier for defined benefit pension plans to offer a combination of both.

  • The regulations remove obstacles to so-called longevity annuities. These begin late in life (e.g., at age 80 or 85), so the premiums are relatively inexpensive, and retirees don’t have to worry about outliving their savings.

  • The regulations also clarify the rules for plan rollovers used to buy annuities and rules for spousal protection in 401(k) deferred annuities.

Do you need to know more details about the new 401(k) rules?  Don’t hesitate to seek professional assistance.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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