The Mutual Fund industry s push toward expanded distribution channels continues to result in a shift from conventional

Transcription

1 Q THE uality forum June 2012 Volume 7, Issue 2 Intermediary Oversight and Risk Management Developing a Dynamic Oversight Program for Your Organization By James P. Nee, Senior Manager, Deloitte & Touche LLP The Mutual Fund industry s push toward expanded distribution channels continues to result in a shift from conventional shareholder servicing by funds and their transfer agents, toward servicing by the distribution partners who are maintaining the omnibus sub-accounting records. This evolution of the service model has increased the pressure to expand risk management and oversight to the extended enterprise model that includes these service providers. This has prompted many funds to begin assessing the compliance controls of the broker-dealers, fund supermarkets, and other financial intermediaries that hold and service client accounts. Prominent recent drivers that have prompted fund companies to revisit their intermediary relationships include: Increasing and shifting fees - An increasing proportion of fees traditionally associated with transfer agency services are now being paid to intermediaries, raising pressure on the fund companies to perform commensurate oversight and due diligence of these service providers activities. Compliance breaches - Market timing, late trading, and breakpoint incidents revealed that selling agreements and other contracts do not effectively insulate fund companies from the financial, reputational, and legal risks posed by actions that occur at their intermediaries. Board responsibility - The upward trend of omnibus conversions has resulted in a heightened awareness among fund boards and chief compliance officers that there is a responsibility to effectuate compliance oversight throughout the firm s extended enterprise, as well as consistent oversight of fees and services regardless of distribution method or service provider. Continued on page 2 Critical Dates July 2, 2012 August 31, 2012 Date by which service providers must deliver fee disclosure information to plan sponsors under new regulations [ERISA Section 408(b)(2)] (originally due July 1, which falls on a Sunday in 2012). Date by which first disclosure of plan expenses, investment expenses, and investment performance must be delivered to plan participants by the plan administrator. I n T h i s I s s u e Intermediary Oversight and Risk Management Retirement Distributions Taxation and Withholding Chart... 3 Roth Features Comparison Chart... 3 News Clips... 4 Compliance Calendar

2 Continued from page 1 Intermediary Oversight and Risk Management Developing a Dynamic Oversight Program for Your Organization While the basic ingredients of a risk program may be readily identifiable, funds often face numerous internal and external challenges with launching a successful oversight model for subaccounting intermediaries. These challenges may include: Awareness: identifying and quantifying the potential impact that the continuing emergence of the subaccounting model has on the funds from a financial, reputational, and legal risk perspective. Implementation: developing an oversight program that fits within budget constraints, allocating skilled resources, and creating a manageable roll-out plan. Integration: balancing competing objectives from key stakeholders, establishing a protocol for addressing potentially difficult decisions arising from increased oversight, and providing consistent application of oversight principles across broader relationship components. Risk Management: establishing a risk management process that will be accepted across the enterprise, while creating a holistic approach that efficiently harnesses and leverages existing data. New and evolved fund practices continue to emerge that are designed to help mitigate the risks associated with the omnibus model. Regardless of the maturity level of your current oversight program components, a number of leading industry practices have emerged. These potential risk management and oversight activities include: Enhancing the contracting process to encompass a consideration of shareholder servicing capabilities and due diligence assessment activities in addition to simply evaluating the intermediary s distribution potential; Implementing a scalable monitoring strategy that tracks available data points that correlate to key performance responsibilities (e.g., rate of CDSC collections and order history of regulatory mailings); Leveraging questionnaires or performing targeted inquiries and reviews of sample processing activity documentation; Developing a better understanding of each intermediary s operating environment (e.g., systems, procedures, and controls) as well as its regulatory regime; Monitoring publicly available information regarding the intermediary (e.g., press releases and enforcement actions); Requesting or requiring independent controls attestations, such as a Financial Intermediary Controls & Compliance Assessment report (FICCA), which examine, on an intermediary s behalf, the intermediary s processing, servicing, and compliance capabilities. Intermediary oversight and risk management continue to be hot topics in the industry. Although this brief article has just started to scratch the surface of these topics, a future article will take a deeper dive into the emerging and leading industry practices related to the establishment and management of a risk intelligent framework. n... About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a SwissVerein, its member firms and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names Deloitte, Deloitte & Touche, Deloitte Touche Tohmatsu or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein. Deloitte & Touche USA LLP is the U.S. member firm of Deloitte Touche Tohmatsu. In the United States, services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP, and their subsidiaries), And not by Deloitte & Touche USA LLP

3 Retirement Distributions Taxation and Withholding for % PENALTY 10% TEFRA FEDERAL TAX ON PREMATURE 20% MANDATORY VOLUNTARY PLAN TYPE INCOME TAX DISTRIBUTIONS WITHHOLDING WITHHOLDING 401(k) No 403(b) No GOVERNMENTAL 457 No No SIMPLIFIED EE PENSION PLAN (SEP) No TRADITIONAL IRA No SIMPLE IRA 3 No ROTH IRA No 1 No 1 No applies to qualified Roth distributions 2 applies to non-qualified Roth distributions 3 10% penalty increases to 25% if distribution is made within the 2-year holding period Roth Features Comparison Chart for 2012 ROTH 401(K) ROTH IRA 402(g) Contribution Limit = $17,000 Contribution Limit = $5,000 Age 50 Catch-up Contribution = $5,500 Age 50 Catch-up Contribution = $1,000 Contribution may be matched by employer No matching contributions Post-tax contribution; no current tax benefit Same Contributions not allowed beyond age 70 Contributions allowed beyond age 70 Must be an active plan participant to contribute No plan participation requirement Available to all participants regardless of income Contributions limited to people whose income does not exceed $120,000/single or $176,000/married Subject to Required Minimum Distribution rules Not subject to Required Minimum Distribution rules Offers anti-alienation protection Anti-alienation protection not available (including rollovers from IRAs) Distribution to finance first-time home purchase is Distribution to finance first-time home purchase not qualified or tax-free is qualified and tax-free Participant loans permissible Loans not permitted 3

4 News Clips Guidance Priority List On June 1, the American Society of Pension Professionals & Actuaries (ASPPA) sent a letter to the Internal Revenue Service (IRS) in response to Notice which asked for public comment on the issues which should be included on the Guidance Priority List. This list will establish focus for the work of the Treasury Department and the IRS for the period beginning July 1, 2012, and ending June 30, Among the 17 topics which ASPPA suggested be included in the Guidance Priority List, the following four could significantly impact plan administration and recordkeeping of defined contribution plans: (b) Plans : ASPPA recommends that the IRS provide guidance for: a. The new pre-approved (prototype) 403(b) plan program; b. Relief for hardship distributions from certain 403(b) contracts; c. A determination letter program for individually-designed 403(b) plans (f) Notice: ASPPA recommends that the IRS: a. Update the 402(f) Notice for changes in the law (including in-plan Roth rollovers); b. Permit basis rolled-last approach for partial and split rollovers. 3. Retirement Plan Deadlines: ASPPA recommends that the IRS provide guidance on which retirement plan deadlines are extended when a deadline falls on a weekend or holiday. 4. Roth 5-Year Nonexclusion Period: ASPPA recommends that the IRS issue guidance to confirm that the 5-year nonexclusion period for in-plan Roth conversions begins at the time of the conversion to a Roth 401(k)account. n 4

5 Compliance Calendar Q July 2 July 30 Date by which Covered Service Providers must deliver fee disclosure information to retirement plan fiduciaries under new regulations [ERISA Section 408(b)(2)] (originally due on July 1, which falls on a Sunday in 2012). Date by which Summary of Material Modifications (SMM), describing any plan changes, are due to retirement plan participants for plans with December 31 plan year end (no later than 210 days after end of plan year in which plan change is adopted; usually due by July 29, which falls on a Sunday in 2012). July 31 Date by which 2011 Form 5500 and SF are due to the Employee Benefit Security Administration (EBSA) of the Department of Labor (DOL) for retirement plans with December 31 plan year end (7 months after plan year end). Date by which 2011 Form 5500-EZ is due to the IRS for retirement plans with December 31 plan year end (7 months after plan year end). July 31 Date by which Form 5558, Application for Extension of Time to File Certain Employee Plan Returns (2011 Form 5500 Extension), is due to the IRS for retirement plans with December 31 plan year end (by the due date of the Form 5500). July 31 Aug 30 Date by which to obtain a qualified accountant s audit or limited scope audit to include in Schedule H (Financial Information) as an attachment to Form 5500 for retirement plans with more than 100 eligible participants and December 31 plan year end. Date by which first disclosures of plan expenses, investment expenses, and investment performance must be delivered to retirement plan participants by plan fiduciaries. Sept 17 Date by which deposit due for 2011 required contributions to Money Purchase Plans and Target Benefit Plans with December 31 plan year end (within 8 ½ months of plan year end to satisfy minimum funding standards) (usually due by September 15, which falls on a Saturday in 2012). Sept 17 Oct 1 Date by which deposit due for 2011 Employer Profit Sharing and Match Contributions to retirement plans with December 31 plan year end (for plan sponsors that filed a corporate tax return extension; usually due by September 15, which falls on a Saturday in 2012). Date by which 2011 Summary Annual Report (SAR) is due to retirement plan participants for plans with December 31 plan year end (within 9 months after plan year end or within 2 months after filing Series 5500 Forms) (usually due by September 30, which falls on a Sunday in 2012). Editor: Patricia D. Jones, Director of Compliance Published by: National Quality Review Summer Exchange Building, Suite 50, 101 Arch Street, Boston, MA This publication is designed to provide accurate, but general, information in regard to the subject matter. This publication should not be construed as legal, tax, or other business advice. 5