February 2017

Inside this issue:


The scrutiny of fees within retirement plans has reached a fever pitch and shows no signs of abating. The endless stream of lawsuits accusing plan fiduciaries and service providers of charging excessive fees, of all types, has fostered a heighted sense of anxiety among plan sponsors and advisors. Understanding plan expenses in relation to services provided and paying only reasonable costs is of the utmost importance; however, examining fees in isolation is problematic. This is particularly true when applied to investments.

Selecting the lowest cost option or a passive fund due to fear of litigation does not fulfill fiduciary obligations nor does it excuse liability and, potentially, may not be in the best interest of plan participants. According to a recent Cerulli report and survey titled “Facing Fiduciary Fears: Choosing passive does not equal fiduciary hall pass,”¹ the primary motivating factor for plan sponsors to select a passive fund over an active fund was to alleviate concerns related to lawsuits as opposed to having a developed argument against the investment merit of active management. This approach toward investment selection could be interpreted as putting the plan sponsor’s interest ahead of those of the plan participants and their beneficiaries, violating a fiduciary’s responsibility under ERISA.

According to an often overlooked study titled “Out of Sight, Out of Mind: The Effect of Expenses on Mutual Fund Flows” by Brad M. Barber, Terrance Odean, and Lu Zheng which was published in the Journal of Business in 2005, “there is no discernible relationship between performance and expenses for the majority of funds.”² The authors obtained data on U.S. equity mutual funds between 1970 and 1999 from the CRSP database. They then sorted the funds by expense ratios into deciles and calculated the mean monthly return, capital asset pricing model (CAPM) alpha, and Fama-French alpha. After examining the results, their research concluded that only funds in the two most expensive decile groups “underperform by an economically large margin (26 to 37 basis points per month).”

Fiduciaries of all size plans, from the mega market to the small market, should be cognizant that selecting investments based on expenses alone may not be considered a prudent process and may expose themselves to additional liability. Additionally, we feel it is imperative that plan sponsors and advisors keep in mind, just as the Department of Labor states in their publication titled “A Look at 401(k) Plan Fees”, “cheaper in not necessarily better.”³

¹The Cerulli Edge – U.S. Edition October 2015
²Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows
³A Look at 401(k) Plan Fees

This article is excerpted from a longer article by Calamos Investments. To read “Fees, Funds and Fiduciaries – Cheaper is Not Always Better” in its entirety please click here or copy and paste the link below into your web browser.



According to ERISA, plans intending to comply with 404(c) must provide that participants:

  • Have the opportunity to choose from a broad range of investment alternatives (which are adequately diversified);
  • may direct the investment of their accounts with a frequency which is appropriate;
  • and can obtain sufficient information to make informed investment decisions.

The plan sponsor must provide annual written notification to participants with its intent to comply with 404(c), and be able to provide the following:

  • Information about investment instructions (including contact information of the fiduciary responsible for carrying out participant investment instructions);
  • Notification of voting and tender rights;
  • Information about each investment alternative; and
  • A description of transaction fees and investment expenses.

Compliance with section 404(c) of ERISA protects plan fiduciaries from liability for losses that result from the investment decisions made by participants. Conversely, failure to comply with 404(c) could result in liability for losses due to poor investment decisions made by plan participants. To comply with some of the important requirements of 404(c), we encourage our clients to review and execute a formal 404(c) Policy Statement and Employee Notice and send the Notice at least annually to all employees. Contact your plan consultant for assistance.


The Internal Revenue Service (IRS) allows distributions to be excluded from income if they are rolled over to an eligible retirement plan or Individual Retirement Account (IRA) within 60 days. Revenue Procedure 2016-47 offers additional guidance, as well as a self-certification process that details how a taxpayer could accomplish a rollover that does not meet the 60-day requirement under certain circumstances.

Conditions for Written Self-Certification
Before a taxpayer may self-certify that the 60-day waiver has been met, the following conditions must be satisfied:

  • No prior IRS denial
  • Rollover must be made as soon as practicable. This requirement is deemed to be satisfied if made within 30 days after one of the reasons below no longer prevents the taxpayer from making the rollover.
  • 60-day deadline missed due to one or more of these 11 approved reasons:
    • Receiving or distributing financial institution error
    • Misplaced and never cashed check
    • Taxpayer mistakenly believed money was already invested in eligible retirement plan
    • Taxpayer’s principal residence was severely damaged
    • Taxpayer’s family member died
    • Taxpayer or family member was seriously ill
    • Taxpayer was incarcerated
    • Foreign country imposed restrictions
    • Postal error
    • Distribution due to a levy under §6331 and the proceeds of levy have been returned to the taxpayer
    • Party making the distribution delayed providing required information despite the taxpayer’s reasonable efforts to obtain the information

IRA Requirement
Currently, IRA trustees report rollover contributions received for that year on a Form 5498, IRA Contribution Information. The IRS intends to update Form 5498 instructions to require that IRA trustees also report rollovers that are accepted after the 60-day deadline. More guidance is expected once instructions are released.

Next Steps
The Revenue Procedure includes a model self-certification for taxpayers to use. Effective August 24, 2016, the plan administrator or IRA trustee may rely on the taxpayer’s self-certification in determining whether the 60-day waiver has been satisfied until or unless the IRS states otherwise as a result of an audit; or, the IRA trustee or plan administrator has actual knowledge to the contrary.

This article was written by Principal Financial Group and originally published in their September 2016 Compliance Newsletter.

No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

For Plan Sponsor use only – Not for use with Participants or the General Public. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. 

Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

Montgomery Retirement Plan Advisors offers investment advisory services through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Montgomery Retirement Plan Advisors are separate entities.

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Montgomery Retirement Plan Advisors offers investment advisory services through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Montgomery Retirement Plan Advisors are separate entities.