IRS Probes 401(k) Compliance

The Internal Revenue Service has begun mailing out questionnaires to 401(k) plan sponsors to assess compliance with retirement plan regulations. The IRS random sample is going to 1,200 401(k) plan sponsors that filed a Form 5500 for the 2007 plan year. Plan sponsors who receive a letter will complete the questionnaire by accessing a special website.

The questionnaire categories are: demographics; 401(k) plan participation; employer and employee contributions; top-heavy and nondiscrimination rules; distributions and plan loans; other plan operations; automatic contribution arrangements; designated Roth features, IRS voluntary compliance programs; and overall plan administration

The IRS will then issue a report summarizing the results and identifying areas where additional education, guidance, and outreach is needed-as well as how IRS enforcement can address or avoid non-compliance in 401(k) plans. The IRS emphasized that the questionnaire is a compliance check, not an audit or investigation. Nonetheless, failure to complete the questionnaire will result in further enforcement action.

SEC Proposes Consolidated Audit Trail for SROs

The Securities and Exchange Commission has proposed a new rule requiring self-regulatory organizations (SROs) to create a consolidated audit trail that would greatly improve regulators' ability to track trading information.

"If adopted, this consolidated audit trail would, for the first time ever, allow the SEC and other market regulators to track trade data across multiple markets, products and participants in real time," said SEC Chairman Mary Schapiro. "It would allow us to rapidly reconstruct trading activity and quickly analyze both suspicious trading behavior and unusual market events."

Currently there is no single database of readily accessible data for orders and executions. The SEC said investigators tracking suspicious market activity must obtain and merge enormous amounts of data from a range of different markets and market participants.

"One of the challenges we face in recreating the events of May 6 is the reality that technologies used for market oversight and surveillance have not kept pace with the technology and trading patterns of the rapidly evolving markets," Schapiro said recently before the Senate Banking Committee. "A consolidated audit trail would be invaluable to enhance the ability to detect and monitor aberrant and illegal activity across multiple markets."

SEC Warns of Stock Scams Related to Gulf Oil Spill

The SEC and FINRA are warning investors to beware of stock scams that promise easy profits from cleanup efforts related to the catastrophic BP oil spill in the Gulf of Mexico. They noted that while some of the companies touting their role in the cleanup may be legitimate, others could be bogus operations that are only looking to clean out unsuspecting investors.

In a recent action, on May 25, the SEC suspended trading in shares of ACT Clean Technologies Inc., of Huntington Beach, Calif. The SEC took this action because of questions about the accuracy and adequacy of publicly disseminated information concerning, among other things: British Petroleum's purported expression of interest in using a so-called oil fluidizer technology purportedly licensed to ACT's wholly-owned subsidiary for use in cleanup operations in the Gulf of Mexico; and the purported results of field tests finding that the oil fluidizers are effective for use in cleanup efforts in the Gulf of Mexico.

The SEC and FINRA noted that some companies may issue press releases, or send unsolicited faxes or spam emails that might include:

* Claims to have products or technologies that are effective in remediating oil spills or restoring the eco-system

* Mention of contracts or expected contracts with BP, formerly British Petroleum, that will aid the cleanup effort

* Claims that the company is providing technical assistance or expertise to BP or to U.S. government agencies such as the Coast Guard or the Environmental Protection Agency

* Predictions of rapid, exponential sales growth

* Pressure to invest immediately without proper explanation

Funds Bleed $16.6 Billion

Investors pulled $16.6 billion from long-term mutual funds in the week ended May 26, the Investment Company Institute said Wednesday. It was the second week of outflows since mid-May, reversing the previous 57 straight weeks of inflows. Long-term funds lost $9.9 billion in the week ended May 12 and managed to take in $4.3 billion the following week ended May 19.

Industry insiders had heralded the strong inflows as a sign of continued investor trust in the markets, even though the lion's share of the money over the past year poured into bond funds and international equity funds.

In the latest week, that trend continued, with bond funds reaping $2.879 billion of new assets, with $2.420 of that into taxable bond funds and $459 million into municipals.

Those inflows offset the $17.387 billion that investors withdrew from equity funds. What was notable in the latest week, however, were the outflows from foreign stock funds, which were hit with $3.945 billion in redemptions. Investors also redeemed $13.442 from domestic stock funds.

Hybrid funds lost $2.102 billion, after having taken in $635 million the previous week. And money market funds also lost, with assets falling to a total of $2.798 trillion. At the peak of their recent popularity as a safe haven amid all of the market and financial services turmoil, in January 2009, money market funds totaled $3.8 trillion.

But money market funds' appeal has since waned, with the best-performing now delivering yields of 20 to 25 basis points. Even that could decline in light of the Securities and Exchange Commission's new money market fund rules which took effect at the end of last month.

Also last week, IRA Metals of Scottsdale, Ariz.-citing assets in the largest bullion gold and silver exchange-traded funds-said a growing number of investors are "opting for the original currency of kings, using gold and silver bullion to balance out or even replace mutual funds-based retirement portfolios." As of May 28, the GLD ETF held $49.2 billion and SLV $5.5 billion.

According to Davis Sullivan, IRA Metals marketing director, investors are wary of "the deteriorating political environment and a devaluing USD, and want the security of an asset class with a low historic correlation to world markets."

Banks Have High Hopes for Kinder, Simpler Annuities

CHAPEL HILL, N.C.-Banks expect hybrid annuities that include long-term-care riders to be the next hot product on brokerage platforms as soon as product providers ramp up their offerings in this area, said Scott Stathis, Kehrer-LIMRA's chief operating officer and managing director, speaking at the company's Annuity Product Management Roundtable here.

The 15 banks present at the event ranged from the very largest to community banks. Kehrer-LIMRA polled them throughout the event on what was working, what wasn't and where they saw opportunities for future growth.

Most bankers, 57%, said that out of a choice of seven annuity types, hybrid annuities with a long-term-care component are the most likely to take off in terms of sales. "Banks think these combo products best meet their customers' evolving needs," Stathis said.

Providers at the meeting said they recognize the opportunity, but there's a lot of risk involved from an underwriter's perspective.

"They all said they had products in the works, but no one wants to dive in first," Stathis said. "There have been combo products for a long time, but now tax changes have put them on the radar, so everyone's looking at them. The problem with the first ones is that more people used them than they thought."

Tax changes mean that money in a hybrid product that is used to pay for long-term care isn't taxed, he said.

In terms of what's selling now, 67% of bankers said fixed annuities with between two and four-year terms are selling the best, followed by 22% who said five- to seven-year products were most popular. While rates are still very low, they're a little higher on these longer-term products than they are on one-year annuities, which bankers say aren't selling at all.

Meeting attendants were upbeat about indexed annuities' future. While Stathis said that indexed annuities "are getting cannibalized by indexed CDs right now," 41% of bankers said indexed annuities are somewhat important and 18% said they're very important to future revenues. "Once their guarantees get a little richer, they'll start winning the day," Stathis said.

Global Recovery Has Legs, MFS CIO Swanson Says

U.S. corporations have hearty cash flows. Consumers are inclined to keep spending. And European banks have the means to weather a sovereign debt default, according MFS Investment Management.

Those are the makings of a sustainable global and domestic economic recovery, said Jim Swanson, chief investment officer at the Boston-based asset management firm, during a conference call for the firm's mid-year outlook last week.

In the U.S., large-cap corporations are following well-established patterns for a strong recovery supported by capital expenditures (capex) and more hiring. As a group, large-caps have plenty of cash on their balance sheets-an 11% cash- to market-cap ratio, Swanson said. That is the highest amount of cash that the category has seen in a generation, and positions the group to do five important things. They could do mergers and acquisitions, stock buybacks, raise their dividend payouts, hire new workers or make more capital expenditures, he said.

The latter two options would give the economy a great boost, and there is already evidence that companies are doing those two things. Swanson says MFS has already seen capex pick up, and the stage is set for an increase, because as a percentage of depreciation, capex is running below historic norms, he said.

In terms of expanding the workforce, companies have been benefiting from productivity that started to increase during the recession, and unit labor costs that started to fall before the downturn. Historically, when U.S. companies have reached a new record in GDP per worker, the labor force increases four months later. As if following a script, worker productivity hit a new high in November, and payroll numbers were up in March.

"In this country, profits as a share of GDP are continuing to rise," Swanson said. "This is a recipe for this economic expansion to be sustainable."

And consumers, an all-important cohort within the GDP, are not huddling in their homes, hoarding cash in fear of the worst, according to Swanson. Indeed, consumption in the U.S. fell 1.6% through 2008 and 2009, during the worse of the Great Recession. "I don't know where this thesis comes from that the U.S. consumer is tapped out, overleveraged, and going to save more," Swanson said. "There is very little evidence, historically, of this."

MFS also has a brighter outlook on the outcome of the European sovereign debt crisis. And although European economic and have not completely solved the problem, they have a fallback: a banking system that has been immensely profitable in recent years and has built up enough reserves to absorb a worst-case fallout, Swanson said. If Spain, Portugal or Greece were to default on their debt, the event might trigger a 50% loss rate, and deplete 28% to 30% of the banks' Basel II capital reserves. While that impact is significant, it wouldn't completely wipe out the banks.

Also, European banks have leverage levels of 8x or 9x, which is far less than the 30x times leverage levels in the financial system preceding the Lehman Brothers failure in October 2008. Profits are on an upswing in European companies as well, Swanson said.

BoA Enhances Retirement Platform for Small Biz

To attract more business from small businesses, Bank of America Merrill Lynch announced Thursday it relaunched a retirement services platform for companies with fewer than 100 employees.

The platform, Adviser Alliance, will allow Merrill Lynch advisers to sell recordkeeping and retirement plan administration services to small business owners. Andy Sieg, the head of retirement and philanthropic services for Bank of America Merrill Lynch [BAC], said that there are opportunities to offer more to the bank's four million small business customers.

"This is an important next step for the bank," he said. "Look at the reach that this bank has. We think that there are a very strong set of reasons to relaunch this platform. It is designed to convey how important the role of the financial advisers is to serving smaller businesses."

Merrill Lynch had offered services to small and mid-sized business clients through its MLConnect platform since 2001. Armed with what that platform has collected in the past nine years, Adviser Alliance opens with more than 900,000 individuals customers from more than 40,000 businesses, representing more than $23 billion in retirement plan assets.

Kevin Crain, the head of institutional client relationships at Bank of America Merrill Lynch, said that traditionally retirement plans for small businesses are "templated" and "not that flexible," but the Charlotte-based company has created a web-based, customizable platform.

(c) Copyright 2010 Money Management Executive and SourceMedia Inc. All rights reserved.

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