Hey! What’s My Number? How To Improve The Odds You Will Retire In Comfort (Book Review)

Cover-NEW-2014.11.18.6-600x900pxLet’s say, for example, you’re concerned about not having enough money saved for retirement. You’re certainly not alone based on the myriad number of polls, surveys, and studies that have been in the news. So where do you start?

You might start at Amazon and search under “Retirement Savings”. At this frozen moment in time when I’m writing this blog post, there were 12,618; or if you were a Prime member, you could whittle that number down to 10,576.

(If you’re an Amazon customer, consider signing up for Amazon Smile, though which Amazon will donate a portion of the purchase price to your choice of one of nearly one million charitable organizations).

Allow me to save you time and point you in the right direction. It’s Chris Carosa’s new book, What’s My Number: How to Improve the Odds You Will Retirement in Comfort.

If you’re someone who is in the retirement industry, it’s likely you know who Chris Carosa is. You may be a subscriber to his Fiduciary News or have read one of his many books, one of which I covered on this blog, 401(k) Fiduciary Solutions.

But that one was for us pension people as evidenced by the subtitle:

Expert Guidance for 401(k) Plan Sponsors on How to Effectively and Safely Manage Plan Compliance and Investments by Sharing the Fiduciary Burden with Experienced Professionals

But as you can see from the subtitle of his new book, How To Improve The Odds You Will Retire In Comfort, this one is written for those of you that are concerned about not having enough money to retire and would like expert guidance on the journey to get there. In plain language, Chris provides a 4-step process for that journey with a Retirement Readiness Calculator to check in along the way.

You can make up your own mind by checking out Chris’s book here.

In the meantime, I’m going to take the next step as a grownup beyond Robert Fughum’s best seller, All I Really Need to Know I Learned in Kindergarten. 

That’s Chris’, A Pizza The Action: Everything I Ever Learned About Business I Learned by Working in a Pizza Stand at the Erie County Fair.

The Dirty Dozen Tax Scams for 2015: Infographic

Every year around this time, the Internal Revenue Service publishes a list of the year’s “Dirty Dozen Tax Scams”. Here they are as an infographic courtesy of  The Accounting School Guide.

Tax Scams
Source: AccountingSchoolGuide.com

You can find more detailed information from the testimony of the IRS’ Timothy P. Camus before the Committee on Finance U.S. Senate on Tax Schemes and Scams During the 2015 Filing Season.

Illinois Secure Choice Savings Program?

IL-120Illinois legislation, the first in the country, recently authorized a new state sponsored retirement savings vehicle called the Secure Choice Savings Program (Secure Choice). The program is aimed at upwards of 2 million Illinois workers who are not currently covered by an employer provided retirement plan. There are at least 16 other states considering legislative proposals providing similar retirement programs.

The Secure Choice program offers a pooled investment fund for employees who are not covered by employer provided qualified retirement plans. With a promise of low fees and competitive investment results, the program is mandatory for businesses and not-for-profit employers with 25 or more employees age 18 and over that have been in existence for at least two years. Smaller employers can participate but that participation is optional.

The highlights of the Secure Choice program include:

  •  Covered employees will be auto-enrolled to make contributions by payroll deduction at a default contribution rate of three percent of compensation (employees can adjust this rate or opt out of participation at any time).
  •  Employer contributions are not permitted (this helps keep the program from imposing the federal compliance burdens on employers).
  •  Limited investment options will be provided including a default “life cycle” fund for employees who do not make their own investment choices.
  •  Employee contributions will, like Roth IRA contributions, not be deductible for income tax purposes but investment gains are to be sheltered from tax until distribution.
  •  Participating employees will have access to their funds at any time but tax advantaged distributions can be made only after the employee attains age 59½.
  •  Program assets are in a single investment pool managed by the state treasurer and others on a seven person board that includes a majority of elected officials, state employees and government appointees.
  •  Non-compliant employers can be punished with a fine of $250 per employee per year.

The program is to be rolled out in Illinois by 2017 when the complicated program infrastructure needs to be up and running to enroll all eligible employees. The cost to Illinois of the rollout process has not been estimated but it could be substantial. The program is also subject to regulatory review by the federal government for consistency with federal laws.

From an employer’s perspective, the promise of administrative simplicity could prove to be illusory. There will have to be ongoing employee communications, an enrollment process, a deposit arrangement, and account management functions that will have to accommodate employees who do not have access to internet portals that are customarily provided to manage personal retirement funds.

From an employee’s perspective, how reliable is the pledge of low cost, competitive investments? The program is to be managed, at no cost to the state, by a private administrator for a projected fee of .75 percent of account assets. Is this on top of management fees of the mutual funds that will likely be included as investment choices? Will there be additional charges for the custody of plan assets? Will the plan charge participants for specific services such as plan distributions or the processing of domestic relations orders?

And from the tax payers standpoint, is it really free? Won’t there have to be detailed regulations? And even though the management board is not compensated, what about the costs of the infrastructure set up and rollout? The challenges could be comparable to that of the Affordable Care Act rollout which involved substantial expenses just for outside contractors ($135 million was spent for advertising and PR alone).

It is entirely possible that Governor Rauner’s administration will pull the plug on this program or that it will not make it through the federal regulatory hurdles. Other alternatives might make more sense. The federal “myRA” program is now up and running to provide participant contributions by direct deposit to a cost-free Roth-IRA type savings vehicle. Also pending in Congress is the Secure Annuities for Employees (SAFE) Act that proposes a simplified 401(k) plan for smaller employers. In any event, subject employers have until the 2017 deadline to consider alternatives. Many will find that adopting an IRA-based retirement plan makes more sense.

And keep in mind, this is Illinois, an insolvent state with a history of insider deals and corruption involving the management (and mismanagement) of state pension funds – a state with its own funding liability for state sponsored retirement benefits measured in tens of billions of dollars. So, what could possibly go wrong?

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

401(k) Loans: A “Temporary Band-Aid”?

That’s not my metaphor which is why it’s in quotes. It belongs to Eve Tahmincioglu, the Career Diva, about whom I wrote in 2008. Eve wrote a blog post about the increasing number of 401(k) loans, It’s for retirement stupid…, which very directly expressed her sentiments. Just to reinforce it, her parting words were

People, this is a temporary Band-aid, and it’s going to hurt when you have to rip it off.

That’s pretty much been the opinion since then until recently. J.R. Robinson, writing in the Christian Science Monitor yesterday says Now could be a great time to borrow from your 401(k). He provides a number of advantages why this could be an appropriate personal financial strategy.

Mr. Robinson also cites a November, 2014 article in the Journal of Financial Planning to support his premise. That article, Benefits and Drawbacks of 401(k) Loans in a Low Interest Rate Environment, written by Jarrod Johnston, Ph.D., CFP®; and Ivan Roten Ph.D., CFP® provides a number of scenarios in which 401(k) loans are advisable.

The authors do point out that a major disadvantage is a deemed distribution if the loan is not paid back. The defaulted loan is taxable at ordinary income tax rates. In addition, a 10% early withdrawal penalty applies f the borrower is younger than age 59½.

But just how prevalent is this major disadvantage of loan default, and what is it’s impact on retirement savings? A February, 2014 Pension Research Council Working Paper written by Timothy (Jun) Lu, Olivia S. Mitchell, Stephen P. Utkus, and Jean A. Young provides us the  answers. Their study, Borrowing from the Future: 401(k) Plan Loans and Loan Defaults (registration required to download), focused on answering the questions:

  1. Who borrows from their 401(k) plans?
  2. Who defaults on an outstanding loan?
  3. What are the implications of 401(k) borrowing for retirement security?

Here is what their research shows:

  • At any one time, 20% of defined contribution participants have an outstanding loan.
  • Approximately 40% of all participants borrow against their 401(k) accounts over a 5-year period.
  • While 90% of all loans are repaid, 86% of employees who terminate with loans default.

The authors estimate that loan defaults are approximately $6 billion per year which is larger than previous estimates. The data implies, the authors say, that this high rate of defaults could be for reasons of low financial literacy, impatience, or inattention. Many employees, they found, were surprised  by an unanticipated job change or its effect on an outstanding loan.

Public policy and plan design considerations aside, the takeaway for me is more immediate: more and better financial education in the workplace.

Frozen pension plans becoming a high maintenance item

When defined benefit pension plans come up in conversation (that’s what we ERISA folks do when we get together), it’s usually about the decline of traditional pension plans and the increase in of cash balance plans. Frozen pension plans are rarely included.

They should be since they are a significant part of the retirement plan universe. At last count, there were approximately 7,800 plans covering 5.5 million employees with $317 billion in assets.

What exactly is a “frozen pension plan”? Generally speaking, it’s a defined benefit plan that has:

  • Ceased benefit accruals for all employees, or
  • Accrues benefits for existing participants, but is closed to new entrants

As an aside, the later may have compliance issues with respect to Minimum Coverage, Minimum Participation, and Top-Heavy requirements under the Internal Revenue Code.

But both types of frozen pension plans have one thing in common. Although benefit accruals have ceased or there are no new participants, the cost of maintaining the plan continues. Service providers are still required, e.g., actuaries, third party administrators, accountants, attorneys, investment managers, and recordkeepers.

Expenses inherent to the plan itself also continue. It’s substantial increases in two of those expense items that are making frozen pension plans high maintenance – and all pension plans for that matter.

First, PBGC Premium Increases

Defined benefit plan sponsors experienced back to back PBGC premiums in 2012 as part of the Moving Ahead for Progress in the 21st Century Act (MAP-21) and in 2013 as part of the Bipartisan Budget Act of 2013 that was signed into law on December 26, 2013. This legislation significantly increases both the flat-rate and variable-rate single employer PBGC premiums.

These premiums to which employers have to pay each year to the PBGC are comprised of two portions:

  1. Flat-Rate
  2. Variable-Rate

The flat-rate portion is determined by multiplying the flat premium rate by the number of participants in the plan. One estimate I’ve seen show the future PBGC flat–rate premiums could be a significant percentage of the present value of that participant’s benefit payments.

For example, the present value of future PBGC flat -rate premiums would be about $1,800 for a 40 year old participant, assuming 5% interest and 3% inflation indexing.

That’s the “then”. But in the “now”, it’s the variable-rate premium that will make it make it much more expensive for employers than in the past. The variable rate premium is that portion of the PBGC premium that is based on the amount of a plan’s unfunded vested benefits (“UVB”), or the difference between plan assets and liabilities.

Take the example of a frozen pension plan covering 50 participants that is $500,000 underfunded. This employer will see their PBGC premiums increase from $6,600 in 2013, to $9,450 in 2014, to $14,850 this year, and to $14,850 next year – 168% increase in 4 years.

Second, New Mortality Tables

The Society of Actuaries has issued a new set of mortality tables that recognizes longer lifespans. Longer lifespans means retirement benefits are paid longer. Because mortality is a key assumption in measuring pension obligations, the new set of mortality tables could significantly increase pension liabilities.

The IRS has the authority under the Pension Protection Act of 2006 (“PPA”) to prescribe mortality rates used in the calculation of funding liabilities. The PPA requires a review of the mandated mortality tables for at least every 10 years. Since actuaries are currently using a 2000 mortality table adjusted for expected mortality improvements, the IRS could require the use of the new tables next year for both funding requirements and lump distributions.

What will be the impact? Projections I’ve seen indicate that

  • Plan liabilities could increase 6% to 8%, and
  • Depending on participant age and retirement date, lump sum distributions could increase from 7% to 15%.

So what should employers with frozen pension plans be thinking about now? Certainly consider terminating the plan, or if not financially feasible now consider alternative strategies to get a better handle on their retirement plan expenses. What those strategies are and how they play out in a frozen pension plan are beyond the scope of this blog post, but will be discussed soon.

What Advisors Need to Know About Retirement Plans: Presentation to Illinois CPA Society

I had the opportunity recently to make a presentation on qualified retirement plans to the Illinois CPA Society (ICPAS). Actually, it was using PowerPoint to begin a dialogue with the members of the ICPAS Investment Advisory Services/Personal Financial Planning Forum

The ICPAS describes their Forums as being “composed of members with shared interests who interact either in person and/or online to discuss topics of mutual interest, share best practices, ideas, problem-solving strategies and other information”. That was certainly my experience. Here’s the presentation that started the discussion.

Qualified Plan Overview for Advisors from National Benefit Services, Inc.

Employee Classification as Part-Time or Full-Time: Not the Same Under the Affordable Care Act and ERISA

Some of the most difficult and contentious provisions of the Affordable Care Act (“ACA”) are the employer mandate and upcoming reporting requirements effective in 2015.

“Difficult” because the employer mandate requires applicable large employers, generally those with 50 or more “full-time” employees, to offer coverage to full-time employees and dependents (other than spouses). If the employer mandate is not met, employers would be subject to penalties if a full-time employee receives government premium assistance through the marketplace. In addition, beginning this year, the ACA imposes new reporting requirements that will assist the Treasury Department in enforcing the employer and individual mandates.

“Contentious” because, well, the ACA is all about politics. Not surprisingly, the new Congress got off to a quick start. On January 8, the House passed the Save American Workers Act of 2015 which amended the Internal Revenue Code to change the definition of “full-time employee”, an employee who is  employed on average at least 30 hours a week.  The Act increases the threshold to 40 hours a week. The Act has been sent to the Senate where if passed will probably get vetoed by the President.

From a retirement plan standpoint, however, it’s different. While many employers do not want to include part-time employees in 401(k) plans for both cost and discrimination testing purposes, the IRS takes a decidedly dim view of any eligibility class that could exclude any employee who completes 1,000 hours of service. Indeed, the IRS issued guidance in 2007 regarding the extent to which part-time, temporary, seasonal, and project employees can be excluded under qualified retirement plans.

Retirement plans that improperly exclude these employees can be disqualified resulting in significant adverse tax consequences. Here are two takeaways for any concerns about this issue:

  1. Review the plan document to determine whether it has been properly drafted to exclude part-time and other non–full-time employees.
  2.  Determine whether any of those employees were correctly excluded from plan participation.

Any issues? Then take advantage of one of the available IRS correction procedures.

Taking credit for setting up a retirement plan

2014-2015As we near the end of the year, many business owners rush to establish retirement plans to capture calendar fiscal year tax deductions. If you’re one of those small business owners, you may also be eligible to receive a tax credit for expenses you incurred to implement your plan.

What’s the difference between a tax deduction and a tax credit? A  tax deduction is something that your business can use to reduce the amount of taxable income. A  tax credit can be used to reduce how much tax is owed.

But as with all things taxes, certain requirements must be met. Here is a brief summary:

  • The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added a tax credit of up to 50% of the first $1,000 in retirement plan start up expenses for the first three years of a plan.
  • An employer is an eligible employer if, during the preceding year, there were 100 or fewer employees who received at least $5,000 of compensation.
  • The plan must cover at least one Non-Highly Compensated Employee.
  • The employer must not have established or maintained any employer plan during the three tax-year period immediately preceding the first tax year in which the new plan is effective.
  • Eligible plans include qualified plans such as 401(k) plans, profit sharing plans, traditional pension plans, cash balance pension plans, and employee stock ownership plans, SEP IRAs, and SIMPLE IRAs.
  • Eligible expenses include those incurred to establish the plan, administrative fees and costs incurred to educate employees about the plan.
  • To claim the credit, an employer must file IRS Form 8881 – Credit for Small Employer Pension Plan Start-Up Costs.

For additional information on the retirement plan tax credit, here is a link to our FAQs. Be sure to talk to your tax adviser to determine whether you can take advantage of it.

IRS issues updated Rollover Chart

What’s an eligible rollover distribution and what’s not can be a complicated and confusing matter. Here’s a recent and handy rollover chart by the Internal Revenue Service updated for new rules that may be helpful.

1 Qualified plans include, for example, profit-sharing, 401(k), money purchase and defined benefit plans
2 Beginning in 2015, only one rollover in any 12-month period. A transitional rule may apply in 2015.
3 Must include in income
4 Must have separate accounts
5 Must be an in-plan rollover
6 Any amounts distributed must be rolled over via direct (trustee-to-trustee) transfer to be excludable from income
For more information regarding retirement plans and rollovers, visit Tax Information for Retirement Plans.

Editor’s Note: Hat tip to BenefitsLink.

The Top Five 401(k) compliance matters that employers can’t delegate away

Harry S. Truman, the 33rd President of the United States, is pictured above with the sign he kept on his desk, “The buck stops here.” It meant that the President had to make the decisions and accept the ultimate responsibility for those decisions.

What does that have to do with a 401(k) plan? Everthing. It’s the plan sponsor who typically retains responsibility for overall plan operations as the “Plan Administrator.” So practically every 401(k) plan sponsor needs to deal with each of the following – sometimes without help from the plan’s current providers.

1. Fee Disclosures

Responsible plan fiduciaries need to evaluate service provider fees, the nature and quality of covered services, and compliance of provider fee disclosures with the applicable regulations.

Why This Matters

If the responsible plan fiduciary accepts a deficient service provider fee disclosure, the service provider’s agreement with the plan becomes a prohibited transaction with an associated excise tax and a requirement that the arrangement with the service provider be corrected. There also is a potential liability to plan participants who may be adversely affected by any excessive provider fees.

2. Investment Advice

Plans need to make investment decisions, including the designation of an array of investment funds for 401(k) participant selection and the designation of a default investment for participants who do not make their own investment decisions. Who makes that decision for your plan? Investment consultants and wealth managers who work for financial institutions do not work for your plan. They may even have personal incentives to have your plan select more expensive investment funds.

Why this matters

Only an investment advisor or investment manager acting in a fiduciary capacity is required to act in the best interests of your plan and its participants. Unless your company is in the financial services industry, or is otherwise qualified to make investment decisions for its 401(k) plan, the plan needs investment advice from an independent fiduciary who has no financial stake in your plan’s investment decisions. Selecting expensive or poor performing investment funds for your 401(k) plan is a basic mistake that can be avoided by having an investment professional work for your plan, not a financial institution.

3. Payroll Deductions

Participant 401(k) contributions made by payroll deductions need to be forwarded by the employer to the plan within certain time limits (as soon as reasonably possible for plans with 100 or more participants and within seven business days for smaller plans). DOL guidance suggests that a designated individual or “special trustee” should be assigned the specific responsibility for forwarding 401(k) contributions on a timely basis. Pre-approved 401(k) plan documents are now providing for the designation of such a special trustee, who typically would be an employee with control over the sponsor’s cash management.

Why This Matters

Late 401(k) contributions are a focus of DOL audits and frequently result in DOL recoveries. Late 401(k) contributions are subject to both a prohibited transaction excise tax and a civil penalty under Section 502(l) of ERISA.

4. Plan Audits

Plans subject to required annual audits by an independent CPA (generally plans with more than 100 participants) should pay attention to the audit results and resolve any compliance issues raised by the CPA. More important, make sure your CPA is experienced in auditing retirement plans and spends enough time with employees to understand how your plan operates.

Why This Matters

The Department of Labor (DOL) is likely to reject a deficient plan audit. Because the audit is included as part of the plan’s annual report on Form 5500, a deficient plan audit will, in turn, cause the annual report to be rejected. This can result in a late filing and penalties of up to $110 per day. Of course, the deficient plan audit will also have to be corrected – most likely at the employer’s expense.

5. Participant Releases

When 401(k) benefits are paid to a participant, the participant can be requested to sign a valid release of certain claims against the plan and its fiduciaries. Plan administrators should include a participant release along with their benefit distribution forms.

Why This Matters

Recent Supreme Court and related federal court decisions have expanded the remedies available to participants who are adversely impacted by the conduct of plan fiduciaries. Many of these claims can be released and waived by participants when they are paid their benefits. There’s no reason not to require such a release in the 401(k) plan document and summary plan description.


Plan service providers can help in their designated operational field. It is important to have good service providers but it also is important to understand those plan responsibilities that are not delegated to service providers. If your current service providers cannot fully assist with fee disclosure matters or protective plan provisions, get needed assistance from other consultants, investment advisors or legal counsel. Also bear in mind that communications with the employer’s corporate or benefits lawyers about 401(k) compliance issues may not be protected by attorney-client confidentiality. Consider addressing significant compliance concerns including fiduciary conduct matters with an independent benefits lawyer to preserve such confidentiality.

Editor’s Note:

The picture shown above is from the Truman Library. The expression itself, “The buck stops here”, is said to have originated from poker. Back in frontier days, a knife with a buckhorn handle  was used to indicate the person whose turn it was to deal. If that player didn’t want to deal, he would could pass the responsibility by passing the “buck”to the next player. Truman was an avid poker player and received the sign as a gift from a prison warden who was also an avid poker player.