Retirement Plan Blog

That's the message provided by a recent study released by the Center for Retirement Research (CRR) at Boston College. According to the study, 44% of Baby Booomers (people born between 1946 and 1964) and Generation Xers (people born between 1965 and 1974) are "at risk" of being unable to maintain their standard of living in retirement. That's the good news if you don't consider health care costs. Add in rising health care costs, and the "at risk" number jumps to 61%. Alicia Munnell, the CRR's Director, has been quoted as saying, "The most effective step is to plan on working a few years longer" because that "cuts the percent at risk by about 10 percentage points.

Or, consider the answer to the question posed in my recent post,  What's 1% Worth? Using an example provided by Alliance Bernstein, the global asset management firm, a 1% increase in returns, compounded over a lifetime, makes an enormous difference. In their example, it translates into about $220,000 extra at retirement—and an extra 10 years of spending - and maybe not having to continue to work as long.

Here is a link to the CRR's study online.

Hat tip to Dave Baker and his BenefitsLink.

The retirement market is in the trillions, but banks will have to play catch-up to acquire a significant share of those dollars. According to a recent survey, only 14% of “mass affluent consumers” cited their banks as primary providers of retirement services, compared to 53% for investment and brokerage firms. And in the past year, just 18% of 401(k) rollovers were captured by banks compared to 67% for investment and brokerage firms.

The survey was conducted by BIA Research, a professional organization focused on enhancing employee and organizational performance, and Mercatus LLC, a financial services with  strategy and investment firm. They surveyed 2,997 "mass affluent individuals"– those with investable assets between $50,000 and $2 million who are between 35 and 70 years old - to better understand how they prepare for retirement and to provide banks with insights to reestablish their footing in the retirement marketplace.

The study suggests that banks focus on three key opportunities:

1. Capture 401(k) rollovers
2. Capitalize on retirement asset consolidation
3. Establish a retirement dialogue with customers

Here is a link to BAI's press release about their study.

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If you’re confused about the various types of designations in the financial service marketplace, you’re not alone. Even the financial service industry and the regulators are having a hard time making sense of the alphabet soup of designations. The American College, a non-profit institution that provides financial services education, has been tracking this matter.

According to the data they have compiled, there are 173 known designations covering banking, accounting and insurance, an increase of 37% since 2000. In addition to the 173 known designations, there are 90 where the date that the designation came into existence is unknown.

There are now so many that it’s tough to tell which are legitimate and have substance and which are not. Some of the new designations are offered by for-profit organizations over a weekend. And many of which – surprise, surprise – are directed towards seniors. So until now, it’s been tough for investors to know the difference, and tough for the industry to do their due diligence to determine which ones to support and allow on business cards.

The American College has recently created a toolkit to assist financial advisers and regulators decide which designations they should consider valid. It includes a tool for companies to use in evaluating the quality of professional designations, and a tool for advisers regarding how to use professional designations with the public.

It will help.

Illustration above by Debbie Ridpath Ohi, a freelance writer and illustrator based in Toronto, whose weblog is Inky Girl: Daily Diversions for Writers.

While most investors these days are focusing on risk in terms of the market and its effect on their account balances, Tim Burns in his blog, Fiduciary Investor, says that they should pay attention to a larger risk. It’s longevity risk, or the risk of a retiree outliving his or her assets. Mr. Burns, in his post, Longevity Securitization, says that

The adoption rate of retirement annuities will however, be influenced by; investor perception, pricing, insurance industry risk retention models and the state of the structured investment markets.

Of all the factors that Mr. Burns mentions, investor perception will be the most difficult one with which to deal for two reasons.

First, most investors don't even think there is a longevity risk. According to a recent Fidelity Research Institute study, Structuring Income for Retirement: Addressing America's Emerging Retirement Income "Gap", retirees and pre-retirees are signicantly underestimating how long they need to make their retirement savings last.

Second, there is the annuity puzzle, the term given by the financial service industry to investor aversion to annuities. Some in the industry believe people say "no" to annuities because of:

• A desire to leave a legacy
• The complexity of annuities
• A lack of financial literacy
• An aversion to perceived loss
• A desire to maintain control

Wealth manager, Russ Bailyn, in his Financial Planning Blog asks employers to consider the benefits of a Roth 401(k). Russ looks at it from the standpoint of the employee. Ours is with the employer, and unfortunately, it's been slow  going with plan sponsors adding a Roth provision to their 401(k) plans available since 2006.

The big reason, we think, for employers to add Roth 401(k) is simply to allow employees to diversify. Just like allowing them to diversify their investments, a Roth 401(k) provides participants with an opportunity to diversify their future tax burden. Here is a link to our December 2006 Client Briefing, Roth 401(k): Giving Employees A Choice (PDF) that has FAQs on Roth.

And take a moment and check our Russ' recent book, Navigating the Financial Blogosphere: How to Benefit from Free Information on the Internet, available at a virtual bookstore near you. (Full disclosure: we're mentioned in the book but read the excellent reviews from others on Amazon).

That's Jack Webb who played Sergeant Joe Friday of the LAPD, arguably the most popular police character in television history in the 1951-1959 series Dragnet. (The 1987 movie spoof of Dragnet in which Dan Aykroyd played the Joe Friday character didn't do the original justice). Friday's catch phrase used in his investigations, "Just the facts, ma'am," remains indelibly etched in the minds of television fans.

It's also the basis of determining whether a worker is properly classified as either an independent contractor or an employee. It's a topic I've written about before in my posts, Who's your employee: inquiring minds and the IRS want to know in 2006 and The great debate: employee vs. independent contractor in 2007. And it's an issue that's just always there.

Brian Hall in his firm's (Porter Wright Morris & Arthur) blog, Employer Law Report, warns us about The Hidden Costs of "Independent Contractors". Brian discusses a recent case in which the court found that the workers were employees and not independent contractors. The court's decision was based on "just the facts".

The financial implications of such misclassification can be enormous. Penalties and interest involving payroll taxes can pile up if someone is incorrectly treated as an independent contractor. And in the case of a retirement plan, the employer would have to make up the benefits the individual would have received.

It's an issue we are particularly sensitive to with our clients at this time of year as we start to receive employee census data for 401(k) discrimination testing. One of the questions we ask is "Do you have any independent contractors?" A "yes" response initiates a discussion that the employer have a process in place that the independent contractor classification will hold up in the event of an audit.

I've written several articles about 401(k) loans in the past pointing out the negatives, and at one point I asked the question, Are 401(k) accounts piggy banks?  Well, excuse me for being so retro, because now through the combination of modern technology and consumer marketing comes the 401(k) Debit Card. An article in TheStreet.com by way of InsuranceNewsNet tells us that a 401(k) plan participant who wants a loan can say Just Put It on My 401(k) Debit Card.

But before I could even post about this, Jeremy at his Generation X Finance blog wrote, The 401k Debit Card: Probably One of the Worst Ideas Ever. No generation gap between me and Jeremy on this one!

HT to Dave Baker at BenefitsLink.

The other day I wrote about the duty of a fiduciary to monitor service providers in the context of 401(k) plan sponsors not being concerned about the consolidation service of providers. We also hear a lot about the duty of a fiduciary to not just select service providers prudently, but to also monitor them. And this advice is not just yadda yadda, because there is a real world aspect to it. And if you're wondering exactly where the rubber does hit the road, here's a real world situation to keep in mind.

An article in yesterday's on-line edition of the North Hampton,  Massachusetts Eagle-Tribune about a businessman who must repay $100,000 reports that an owner of a local  architectural firm agreed to pay $100,000 to his profit-sharing plan as part of a settlement with the U.S. Department of Labor (DOL). The DOL accused the owner of failing to monitor a financial company that stole over $500,000 from the 11 participants in the profit sharing plan. The settlement with the DOL also included the owner paying an additional $10,000 fine and agreeing never to manage any other retirement plan himself.

And how exactly did the investment adviser now serving a 11-year prison sentence for the embezzlement of the funds get nabbed? The Eagle Tribune's story said that according to a published report at the time the embezzlement scheme was only discovered after the adviser sent audiotape confessions to his wife, his mother, and the Exchange Commission, among others, before trying to kill himself.

Situations like this are fortunately rare, but stuff does happen. What should the business owner have done? I'm going to save that topic for another time in the very near future and discuss using procedural prudence in the selection and monitoring of retirement plan providers.

Picture above, in case you wondered exactly where the rubber meets the road..., by Fubuki via Flickr.

HT to Dave Baker at BenefitsLink for pointing me to this story.

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No, this isn't a post about the The Clash. It's about the on-going consolidation in the retirement plan industry of 401(k) providers. According to the Spectrem Group, a consulting firm specializing in the affluent and retirement markets, more than two dozen 401(k) providers have either sold or outsourced the recordkeeping portion of their business in the last five years. It's for reasons of lack of scale, e.g., Bank of California, or wanting to focus on their core business of investment management, e.g., Franklin Templeton.

Spectrem Group's recent survey indicated that Provider Consolidation Not A Concern for retirement plan sponsors. How many retirement plan sponsors? A whopping 83% of the sponsors surveyed. That's a lot of faith to have if you're a fiduciary who has an obligation to select and monitor service providers. And 6% of the surveyed plan sponsors believe that provider consolidation will have a positive impact on them. And the other 94%?

Picture above, SHOULD I STAY OR SHOULD I GO, by U.Linder Photography.

The Iowa caucus voting results are in, and so is the American Dialect Society's 18th annual words of the year vote (PDF), and "subprime" won by a large margin. The vote, of course, reflects the  preoccupation of the press and public for the past year with a deepening mortgage crisis. The American Dialect Society (ADS) is an 118-year-old organization whose members include include linguists, lexicographers, etymologists, grammarians, historians, researchers, writers, authors, editors, professors, university students, and independent scholars.

According to the ADS, the vote is the longest-running such vote anywhere, the only one not tied to commercial interests, and the word-of-the-year event up to which all others lead. It is fully informed by the members' expertise in the study of words, but it is far from a solemn occasion. 

Benjamin Zimmer writing about the award in his blog, Language Log, says that "Subprime"

has already been used in an extended sense to refer to the "subprime crisis" in the housing sector, and it could very well spawn other extensions as the crisis worsens. (One recent article claims that it is being used as a fanciful verb, as in "I subprimed my algebra test," but I haven't come across any evidence of that in the wild.)

Well, Ben, I'll let you know if I hear any of our clients' younger employees say that "my 401(k) was subprimed". Hopefully, not.

Picture credit: Part of a series called BEST IN SHOW: The best and worst tradeshow displays at Calgary’s HomExpo 2007 by elboroom design via Flickr.

Baseball fans and particularly Cub fans will recognize this picture of Hall of Famer Ernie Banks, "Mr. Cub". Banks became well known for his catch phrase of, "It's a beautiful day for a ballgame... Let's play two!" In retirement plan terms, it's the Pension Protection Act of 2006 (PPA) telling business owners that two retirement plans can be a beautiful thing. I know, I know that this is a stretch, but I'm trying to make tax stuff interesting.

The Pension Protection Act of 2006 (PPA) made some important changes in the funding of defined benefit pension plans. And for the business owner seeking to increase retirement plan contributions, these changes included increasing the deduction limits when maintaining both a defined benefit plan and a defined contribution plan, i.e., 401(k) and profit sharing.

Pre-PPA employers maintaining both types of plans were subject to a combined 25% plan deduction limit. But starting in 2006, these employers were still subject to that 25% limit but could make a profit sharing contribution of up to 6% of compensation without the amount being counted towards the 25% limit. And like prior law, if  401(k) plan contributions are limited to elective deferrals only, such a plan would be excluded from the deduction calculations. So using 2008 compensation and contribution limits, a business owner could make an additional contribution of up to $34,300 for 401(k) and profit sharing.

And it gets even better for plan years starting in 2008. For employers with defined benefit plans covered by the Pension Benefit Guaranty Corporation (PBGC), these plans are no longer subject to the 25% combined defined benefit/defined contribution deduction limit rules. This means that an employer with a PBGC-covered pension plan may take a deduction for the minimum funding amount even when it exceeds 25% of compensation, AND the employer may also take a deduction of up to 25% of compensation for the defined contribution plan.

And this opens the door for substantial contributions to cash balance pension plans by "professional service employers", (law firms, accounting firms, and medical practices) with more than 25 active participants which are subject to PBGC-coverage and premiums. But that's a topic for another day.

According to a recent survey (PDF) by Country Insurance & Financial Services, more people resolved to lose weight and exercise more (24%) or to spend more time with friends and family (23%) than plan to focus on improving money matters in 2008 (17%). Respondents also said that they’ll make better financial choices next year, although their actions may not be in line with their goals. While 75% said they are likely to make needed changes to their  finances in the year ahead, 40% claim they either do not have a financial plan (10%) or have not reviewed the one they have in the past year (30%).

Photo credit: ~~wv~~ via Flickr.

It's the New Year, and it's prediction time. So what's ahead for employers in 2008? Paul Secunda in his post in The Workplace Prof Blog, 2008 Workplace Trends, points us to Diane Stafford's predictions in the on-line edition of the Kansas City Star. Paul comments that

These all sound right to me, and I would add that there will be more ERISA class actions by 401(k) account holders, more use of Voluntary Employee Benefit Associations (VEBAs) to deal with the growing problem of retiree health care, and there will be more emphasis on helping employees returning from military service.

I agree, but let me add one more trend for 2008 that I consider an easy prediction to make: more employers adding auto-enrollment for 401(k) plans. The impetus for which is, of course, coming from the Pension Protection Act of 2006. Here are some of the early returns:

• Schwab reports that more than 20% of its Retirement Plan Services clients now automatically enroll employees into a 401(k) plan (a four-fold increase from two years ago).
• New York Life found that 32% of its 401(k) plan clients had adopted automatic enrollment as of September 30, 2007, up from 18% on January 1, 2007.
  
• A recent Spectrem Group survey suggests that within two years, automatic enrollment will be in place at more than 80% of plans with $10 million or more in assets.

Picture credit: The picture above is the album cover from George Benson's 1968 album, The Shape of Things to Come, the remastered version of which was recently released by Verve Records. This was Benson's debut album, and Verve says that "Shape of Things to Come is the true signal of Benson's arrival, not only as a major soloist, but as an artist who refuses to be pinned down four decades later".

"Taxman"

The producer of this video, WildCard Productions, calls it "a tribute to the greatest band's greatest album". It is, of course, the Revolver album released in 1966, often cited as one of the greatest albums in rock music history, The song on the video, “Taxman”, was written and performed by George Harrison.

Harrison performs the song in the role of a taxman in a tongue-in-cheek manner. He was inspired to write "Taxman" when he discovered how much he was earning after accounting for taxes. As Harrison said,

"'Taxman" was when I first realised that even though we had started earning money, we were actually giving most of it away in taxes.

At the time, the top tax brackets in the U.K. and the U.S. were extremely high, 95% and 70% respectively. But that was then and this is now when tax rates are lower.

And it’s about the low tax rates in this country that Paul Ferraresi says, Hold Onto Your Wallets, in his blog, Financial Planning for Smart People. He reminds us that the 2001 and 2003 tax cuts are set to expire December 31, 2010. And regardless of Presidential politics, taxes will go up in the future. Taxpayers, he says, should meet with their advisers immediately to take action on strategies in 2007 with lower rates and do similar planning to take action in 2008.

But what about the estate tax which was also part of that tax reduction legislation? The 2001 tax bill  increased exemption amounts and reduced tax rates through 2009 with a complete repeal of the estate tax coming in 2010. But that repeal is only effective if a person dies in 2010. Unless there is a change in the law before then, the tax law completely reverts in 2011 to what it was prior to the enactment of the 2001 tax act: lesser exemptions and higher rates.

Is it possible, then, for a taxpayer to follow Mr. Ferraresi's advice about tax planning under these circumstances? Would a taxpayer actually die to avoid taxes? Marc Abraham discusses exactly that in his article, Dying To Beat the Taxman on his Improbable Research Blog. He writes about a study by Joel Slemrod and Wojciech Kopczuk  that looked at what happened when the estate tax rate substantially increased on eight occasions. That occurred twice in 1917, and once each in 1924, 1932, 1934, 1935, 1940 and 1941. They also looked at what happened when the estate tax was decreased on five other occasions: in 1919, 1926, 1942, 1983 and 1984.

Their study, Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity, indicated, they said, that there is a small death elasticity. In other words, there is evidence that some people will themselves to survive a bit longer if their heirs will have a smaller estate tax liability. As to the obvious other reason for this evidence, they said "we cannot rule out that what we have uncovered is ex-post doctoring of the reported date of death".

So let me conclude this discussion where I began: with "Taxman". Here's George Harrison's last stanza:

Now my advice for those who die, (taxman)
Declare the pennies on your eyes. (taxman)
'Cause I’m the taxman,
Yeah, I’m the taxman.

And you're working for no one but me.

Taxman!

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It's that time of the year again. Yes, that time when tax advisers like Joe Kristen who writes the Tax Update Blog for Roth & Co., P.C., ask self-employed business people, Is A Qualified Plan a Good Move by Year End?.

So let’s assume that for personal financial and tax reasons the answer is yes. And further to keep it basic, let’s assume that only one individual is involved, and that person is “in business for himself or herself”. This means for retirement planning purposes, it’s someone who has self-employment income from a trade or business – so called “sweat of the brow” income rather than income received as dividends for example. And it can also include individuals with supplemental self-employment income such as:

• Independent members of corporate boards,
• University professors with consulting income,
• Writers or others with royalty or licensing income, or
• Anyone who otherwise receives any fees from sources other than his or her primary employment
  

T-shirt version of the picture above is available through MindSpeaker.

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 What's 1% worth? In terms of an increased retirement benefit - a lot of money! Paul Secunda over at the Workplace Prof Blog provides us with an Illustration of How 401(k) Management Fees Add Up, and shows us the effect on earnings of even one percentage point difference in annual fees on a 401(k) balance of $20,000 invested over 20 years.

That's during the accumulation phase. But what impact does a 1% increase in return have during the distribution phase. The chart above shows us that a 1% increase in returns, compounded over a lifetime, makes an enormous difference. In this example provided by Alliance Bernstein, it translates into about $220,000 extra at retirement—and an extra 10 years of spending. 

So whether it's during the accumulation phase or during the distribution phase, 401(k) fees really do matter.

For the mathematically inclined, following is the methodology Alliance Bernstein used to develop their chart:

Results are simulated. This is a hypothetical illustration only and its results are not indicative of any specific investment, including any AllianceBernstein mutual fund. The savings phase simulates a defined contribution participant salary of $45,000 at age 25, linearly increasing to $85,000 by age 65, making yearly contributions of 6% of salary at age 25 increasing by 0.5% per year to a maximum 10% with a 50% company matching contribution up to the first 6% of salary. In the spending phase, $63,750 (75% of final salary) is deducted at the beginning of each year. A yearly investment return of 9% is assumed at age 25, linearly decreasing to 6% at age 80 and remaining constant thereafter. In the “1% Greater Return Scenario” a yearly investment return of 10% is assumed at age 25, linearly decreasing to 7% at age 85 and remaining constant thereafter. Inflation is assumed to be a constant 3% and dollar values are expressed in real purchasing power terms.

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That's the question that retirement plan sponsors are asking their advisors. So exactly what is next for 401(k) plans? Last month I wrote that the 401(k) arms race is over, the proliferation of features that 401(k) providers have been doing over the last 25 years to stay competitive. Now, says the research done by Alliance Bernstein, the global asset management firm, leading plan sponsors are focusing on whether their plans are effectively meeting their goals. They're asking themselves five core questions:

• Are we getting the best value for our money?
• Are we meeting all of our fiduciary responsibilities?
• Do we have the right investment lineup?
• Do we provide a communication program that works?
• Are we receiving the type of service we need?

The answers are out there.

PIcture credit: "What's Next", acrylic on canvas, available from Art by Wicks.

Click to make bigger.

Inertia, in classical physics, is defined by Merriam-Webster's Collegiate Dictionary as: “a property of matter by which it remains at rest or in uniform motion in the same straight line unless acted upon by some external force.” In 401(k) plans, inertia can be defined as many eligible employees never signing up for the plan – even when the employer makes a matching contribution.

The Pension Protection Act of 2006 addressed the legal aspect of this issue by adding provisions for automatic enrollment and the Qualified Default Investment Arrangement (QDIA). But concepts like this just don’t pop into the law. It took almost ten years of advocacy in this case.

One of those advocates was Mark Iwry. While serving in the U.S. Treasury Department, overseeing the regulation of the nation’s private pension system, Mark led the government’s initiative to define, approve, and promote automatic 401(k)s beginning nearly a decade ago.

Mark, no longer in government, told me recently that

The automatic 401(k) is a disarmingly simple concept: it enrolls employees at specified contribution levels and in a specified investment, but they can always opt-out, contribute more or less, or invest differently. This enlists inertia in the cause of saving, helping workers—especially moderate- and lower-income and minorities—save more and start earlier.

Mark is now involved with helping make automatic enrollment happen and "simpler". He is the Managing Director of the Retirement Security Project (RSP) and Nonresident Senior Fellow at the Brookings Institution. The RSP is part of a coalition called Retirement Made Simpler which includes the American Association of Retired People (AARP) and the Financial Industry Regulatory Authority (FINRA). Their common mission is to encourage savings through automatic 401(k).

And Retirement Plan Simpler does exactly that by providing research and resources including a Auto 401(k) Toolkit with sample employee communication materials.

And to make it simpler for you, here is a link to the Toolkit (PDF) on their website, and if you look to your left on this page, I've also added a link to their website under "Other Resources".

Picture credit: Scientist Activity Badge on Bill Smith's Unofficial Cub Scout Roundtable

Tight credit and a slumping housing market that has reduced the use of home equity as a loan source is causing people to look in other directions to borrow money. And for those who are participants in 401(k) plans, there may be a loan provision in their plan to utilize. But there is a downside to consider.

• They’re losing the earnings on their accounts since there’s less money to invest.
• The tax shelter advantage is lost since the loan is paid back with after-tax dollars.
• The interest paid on the loan is not deductible since it’s considered regular consumer debt.
• If the participant terminates employement prior to paying off the loan, the loan has to be repaid or it’s considered a taxable distribution with a 10% penalty tax if the participant is under age 59 ½ .

By taking the loan:

• His balance at end of 5-year payback period would be $74,143, and
• His balance at age 65 would be $520,799.

• His balance at end of the 5-year payback period would be $93,891, and
• His balance at age 65 would be $618,095.
  

Something to consider.

A new and unpopular Michigan 6% service tax on business died on Saturday less than 17 hours after it had taken effect. The tax officially became law at 12:01 a..m. Saturday, but later in the day the Michigan legislature approved a bill repealing and replacing the tax which Governor Jennifer Granholm later signed that same day.

Here’s the back story, and how it relates to the financial world. This past October the Michigan legislature added a new 6% sales tax to financial advisory services and other occupations considered “non-essential" which included astrology reading, escort services and ski lift ticketing. This new tax along with an increase in the income tax rate to 4.35% from 3.9% was an effort to meet a projected $1.75 billion budget deficit.

The new tax quickly spawned the Coalition to Ax the Tax, a group of more than 70 business and taxpayer groups including the Small Business Association of Michigan. Public pressure from the Coalition and its members played a lead role in getting the Legislature to consider the tax's repeal.

The service tax will be replaced by a 21.99% surcharge on the taxes businesses will already pay under the new Michigan Business Tax, which takes effect January 1, 2008. Yes, politics is the art of the compromise.

Photo credit: redgoldfly on Flickr.

The retirement plan tax laws have never been better, automatic enrollment makes it easy for employees to contribute to a 401(k) plan, and the new Qualified Default Investment Arrangement (QDIA) gives participants access to professional investment managers. But first, there’s gotta be a retirement plan. And sadly, few small business owners consider it their responsibility to help their employees prepare for retirement.

A recent survey conducted by Harris Interactive on behalf of ShareBuilder 401(k) found that only 17% percent of small business owners responded that they felt a strong obligation to offer retirement benefits (a 401(k) or other retirement plan). In fact, 46 percent reported that they felt no obligation at all.

This isn’t a surprise to me since I’ve experienced the same thing working with 401(k) plans since their inception in the early 1980s. Here are some of the objectives I hear from business owners followed by my response:

• "Retirement plans are too expensive to set-up and administer.” – There are retirement plan service providers that are structured to provide cost-effective services to small businesses.
• "It still seems expensive to set-up and administer a plan." - Check with your accountant and see if your business qualifies for a tax credit for establishing a retirement plan.
• "I have to make a contribution every year.” – Retirement plans can be set up so that contributions are discretionary”.
  
• "I have to provide the same contribution to the employees as for me.”.– Not necessarily since there are allocation methods that can be used to provide larger contributions to the owners and still pass IRS compliance tests.

It seems like there is always an ERISA deadline. Here's one coming up on December 1. It's the due date for a calendar year plan to distribute a safe harbor notice for 2007. If the notice is timely provided and other conditions met (discussed below), a 401(k) plan is treated as satisfying the discrimination testing. The result, then, is to avoid returning excess contributions to the Highly Compensated Employees (HCEs).

An employer can satisfy the safe harbor requirement in one of two ways.

1. Contribute at least 3% or more of compensation to all eligible employees. Generally, the 3% contribution must be provided to all employees eligible to make elective deferrals to the plan even if they make no contributions themselves.
2. Contribute a matching contribution equal to 100% of the first 3% of elective contributions and 50% of the next 2%. Thus, if every employee contributes at least 5% of compensation, the maximum employer match is 4% of total compensation.

• No allocation requirement may be imposed, such as a 1,000 hour or last-day requirement.
• The contribution must be 100% vested.
• The 3% contribution can also be used to satisfy Top Heavy minimum contribution and can be used towards satisfying the cross-testing gateway for new comparability plans.
• The matching contribution can used to satisfy a Top Heavy minimum contribution.
• HCEs can also receive a safe harbor contribution.

Safe harbor plans are not for every employer. The decision to use the safe harbor method should be based on the employer's objections and plan demographics.

Vanguard and Fidelity were named the number one and number two "stars" in a recent survey by Cogent Research, a Cambridge, Massachusetts strategic marketing research firm. Cogent's survey, Investor Brandscape, measured customer loyalty, ownership, revenue and equity of brand among 38 fund companies to determine the strengths of the fund companies. Interesting research from a marketing and distribution standpoint, but how does investment performance impact on all of this?

Source: Investment News

That's a question many business owners ask as part of the tax planning process. That is, business owners who are also employees of their corporations. And the answer as to what "reasonable compensation"  - as determined by the IRS on audit - is based on the facts and circumstance based on IRS guidelines.

And what's "reasonable" depends on whether that owner is an employee of a C-corporation or an S-corporation. If the individual s a C-corporation employee, and their compensation is not “reasonable”, then there’s a double whammy. No deduction to the corporation, and a taxable dividend to the employee/shareholder. Mitchell Port in his article, Is Your Compensation Reasonable Or A Disguised Dividend?, on his California Tax Attorney Blog nicely covers what happens if a C-corporation owner has too much compensation.

But the flip side is not enough compensation which is a tax issue about which S-corporation owner-employees need to be careful. Distributions from an S Corp are not subject to FICA and Medicare taxes which is a potential savings of approximately 15%. Thus, some owners don’t take much salary in order to minimize payroll taxes on wages. However, on audit the IRS would look to see if compensation is too low, or not “reasonable”. Why is owner compensation an audit priority? The IRS can collect payroll taxes on owner compensation, and the penalty for failing to pay payroll taxes is 100% of the taxes owed.

But the tradeoff to paying more employment taxes is that only compensation that appears on the owner's W-2 counts as compensation for purposes of determining a contribution to a qualified retirement plan. The larger the salary, the larger the potential retirement plan contribution.

I recently wrote about the Alliance Bernstein 2006 research that indicated that plan sponsors want to "keep it simple".  What that translates to when plan sponsors are shopping for service providers is the ability to provide administrative services on-line.

New research by Spectrem Group confirms that automated plan administration functions, such as electronic payroll submission, electronic funds transfer and data downloads, are rapidly becoming must-have capabilities for plan sponsors of all sizes. And because of the competitive nature of the retirement plan market, "must-haves" are "can-haves" even for the smallest plan sponsor.

With much of the attention focused on the major provisions of the Pension Protection Act of 2006 (PPA), there is a tax benefit available to low to moderate-income taxpayers that shouldn't be overlooked. 

It's the Saver's Credit slated to expire after 2006 which the PPA made permanent., and it provides an added bonus to the increasing number of employees that are being automatically enrolled by their employers in employer sponsored retirement savings plans. It provides an income tax credit of up to $1,000, $2,000 for married couples for employee contributions to an employer plan or IRA contributions.

It's not too late for eligible employees to make retirement contributions and get the saver’s credit on their 2007 tax return. They have until April 15, 2008, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2007. However, elective deferrals must be made by the end of the year to a 401(k), 403(b), or 457 plan.   

 Here is a link to an IRS News Release that provides more detailed information.

Picture credit: Wikipedia.

The table below indicates the newly released 2008 retirement plan limits for 2008.

That's the expression that AllianceBernstein, the global asset management firm, uses to describe what 401(k) plan are all about now. Since the beginning of 401(k) plans over 25 years ago, 401(k) providers have escalated the number of plan features to stay competitive with other providers. We've seen the evolution of such features as:

• Daily valuation
• Loans
• Self-directed brokerage
• Web access
• Investment education tools
• Multi-share classes
• Co-fiduciary responsibility
• Advice tools

Employers want to "keep it simple”. They want 401(k) plans that focus on participant needs, are user friendly, and provide personal service.

Employees also want 401(k) plans that "just do it for me” Plans that require little work to join, little work to invest, and minimize tough decisions.

Now let's move forward!

Picture credit: The new New Economy Analyst Report – Oct 06, 2001, Juergen Daum.

It was a big media event a few weeks ago when the "first" Baby Boomer, a retired school teacher from New Jersey, born one second after midnight on January 1, 1946, applied for Social Security benefits. But working beyond the traditional age 65 will be the reality even for affluent Baby Boomers according to a recent study by Spectrem Group, a consulting firm specializing in the affluent and retirement markets. Their study indicates that Baby Boomers expect to retire much later in life than their parents did. Nearly half (48%) of the Baby Boom generation expect to work until they reach at least 65, an age at which 76% of their parents had already retired.

Now what about the generation that follows?

There's an important deadline on the horizon if an employer has a SIMPLE in 2007 but would like a 401(k) in 2008. It's November 1. The employer must provide notice to employees at least 60 days prior to the start of the next calendar year or no later than November 1, 2007 that the SIMPLE will not be maintained in 2008.

So why change from SIMPLE to 401(k)? A  SIMPLE retirement plan is called "simple" for obvious reasons. It’s easy to establish, relatively inexpensive, and also easy to maintain. But if an employer wants to:

• Not cover practically all employees
• Make larger contributions
• Favor owners and highly compensated employees
• Not have 100% vesting of employer contributions
• Maybe have better investment options
• Have the Roth option
• Allow for plan loans
• Be able to buy tax deductible life insurance
• Have better creditor protection

Then, the employer needs a profit sharing/401(k) plan. And yes, it is more complicated to maintain and accordingly more expensive. Retirement planning is a lot like life. It’s a series of trade offs.

Side Note: A SIMPLE can be rolled over to a 401(k) plan after a "2-year period" which begins on the date which the individual first participated in the SIMPLE.

That's what Social Security Commissioner Michael Astrue is calling the expected avalanche of applications from the post-World War II generation. The "first" Baby Boomer, a retired school teacher from New Jersey, born one second after midnight on January 1, 1946 ,applied for Social Security benefits Monday, signaling the start of an expected avalanche of applications from the post World War II generation. An estimated 10,000 people a day will become eligible for Social Security benefits over the next two decades, Commissioner Astrue said. The Social Security trust fund, if left alone, is projected to go broke in 2041.

And now it's up to the politicians.

Here is a link to the story carried by Yahoo with a hat tip to Mario Cinardi, World Financial Group.

A few days ago, I wrote about the Department of Labor's new interactive website called elaws-ERISA Fiduciary Advisor which provides an overview of the basic fiduciary responsibilities applicable to retirement plans under the law.

The Internal Revenue Service adds to the tools to help retirement plan sponsors deal with common 401(k) mistakes. It's a 43 page PDF document that includes hypertext links that take the reader from a particular item in a chart to a detailed discussion within the document about that item. In addition, the discussions include hypertext links that jump to other IRS documents on the web (if connected to the Internet), such as checklists and revenue rulings. The chart lists 11 common, potential mistakes in 401(k) plan operation and documentation.

Here is the link for you to download it.

The Department of Labor, the Federal agency responsible for overseeing the fiduciary aspects of ERISA, last week released an interactive website called elaws-ERISA Fiduciary Advisor. The website is designed to provide an overview of the basic fiduciary responsibilities applicable to retirement plans under the law. The intended audience is employers and third party service providers. Additional information for employees is listed in the Resource section. And it's extremely well done.

Here is the link to it.

CPA firms - we're aware - provide more than just traditional accounting and auditing services. And that includes providing investment and financial planning. So just how successful are they. In terms of money under management, pretty darn successful. You may be surprised to know that there are 11 firms that are have over $1 billion in assets under management and 41 more firms that have over $100 million in assets under management.

The October, 2007 issue of CPA Wealth Provider has its first ever ranking of CPA/financial firms by the amount of assets under their management. These are CPA firms that have financial planning practices and the financial planner in the office holds a CPA credential. Here those 11 members of The Billion Dollar Club:

1. Plante Moran Financial Advisors
2. Gilman Ciocia
3. RSM McGladrey
4. Wipfli Hewins Investment Advisors
5. Savant Capital Management
6. CBIZ/Mayer Hoffman McCann
7. Virchow, Krause & Company
8. HBK Sorce Financial
9. Moss Adams Wealth Advisors
10. Honkamp Krueger Financial Services
11. F&D Advisors

For the details, here is the link to the article that appears in the October issue of CPA Wealth Provider.

Back in the day - before the Boomers were called Boomers and before choice entererd the employee benefit lexicon- the standard retirement plan was a defined benefit pension plan. The employer was responsible for the investment of plan assets, and the employee received a monthly income at retirement.  Today the standard retirement plan is a 401(k) plan starting to embrace automatic enrollment, default funds, and an annuity distribution option. The more things change the more they look the same.

Asset protection now isn't just about walling off assets from legal assaults. It's now about walling off sensitive data from technological assaults. I've written about this issue several times before.  

• Identity theft made simple. Just leave employee retirement plan data on a laptop.
• The big data security question: Have we met the enemy and is it us? 

But what about hackers? Someone who has had to deal with hackers is Ara Trembly, an insurance tech guru. Literally so in the form of his new blog, The Insurance Tech Guru. Ara knows. In his day job, he's Senior Editor, Technology, of the National Underwriter, an insurance industry news hub.

Ara raises the question, Security Breaches: When Do You Tell The Public?. It's an interesting one with legal, ethical, and public relations implications for a financial service company whose security is breached. He cites a recent article from Computerworld that on-line broker TD Ameritrade may have been warned about a security breach a year or more before it publicly acknowledged the problem and warned those customers who might be affected - as many as 6.2 million. And it's now the basis of a class action suit which was filed in May. The lawyers will sort it out, of course.

But if you appreciate irony, then click here. It will take you to TD Ameritrade's home page where you will be greeted by the company's spokesman, Sam Waterston. Yes, that same Sam Waterston who plays Jack McCoy, recently elevated to District Attorney, on NBC's long-running TV series, Law and Order after Fred Dalton Thompson, former Senator from Tennessee who played D.A. Arthur Branch resigned to run for the GOP nomination for President.

Thompson is up against, among others, Rudy Giuliani, former mayor of New York City and a former real prosecutor, the U.S.  Attorney for the Southern District of New York. Perception is reality or reality is perception. Take your pick.

We've been here before. Back when employers were freezing or terminating retiree medical care plans, affected employees were suing based on conflicts between plan documents and employee communication materials.

Now, it seems that there's been a flurry of litigation involving conflicts between plan documents and Summary Plan Descriptions. Two blogging lawyers have picked up on this.  Suzanne Wynn tells us in her Pension Protection Act Blog that When the Plan Document and the SPD Conflict, No Good Can Follow, and Brian King in his ERISA Law Blog writes about Revisiting Conflicts Between Plan Documents & SPDs.  

Steve Rosenberg in his Boston ERISA Law Blog and I played ping-pong with this topic late last year - Steve writing about Summary Plan Descriptions and Grants of Discretion, and me writing Yes, but what does it mean? 

We can expect more of these conflict situations to arise as the aging workforce retires and take distributions. So what's the solution?  Here's a practical suggestion. Plan sponsors should consider having an experieced ERISA attorney review the plan documentation. In risk management terms, it's "travel accident insurance". And for those plan sponsors who are fee adverse, then consider the old English adage, "penny-wise and pound-foolish."

Now about those employee handbooks....

Picture credit: Ken Camp.

That's what Evelyn Venable who voiced the Blue Fairy told Pinocchio about liars getting caught. But that was in the Disney classic. Now it's a little more high tech. The newest method is Voice Stress Analysis (VSA), a technology with the same objective as the polygraph: to determine whether the subject being tested is lying. It's currently being used in the U.S. by law enforcement, and you may even have seen it on CSI (take your pick, Las Vegas, New York, or Miami).

But VSA is being used in the U.K., for a different purpose: to root out benefit cheats. There's a big media buzz about it in the U.K. The Deception Blog’s post, Using Voice Analysis to Detect Benefit Cheats, discusses the media coverage of a pilot project there to use VSA on benefit applicants. The buzz is not about whether benefit claimants should be forced to take lie detector tests, but about the claim that the pilot project is a success.

The technology is being tested on people claiming local housing or council tax benefits. An early review exposed 126 benefit cheats in just three months, saving one local authority £110,000 or approximately $221,000. The government claims the technology also improves services.

And, of course, there are two obvious questions:

First, does it work? It depends on who you ask, but like polygraph examinations, VSI is not admissable in court as evidence.

Second, is it coming to a call center here soon?

I'm not talking about my generation, but rather Gen X; and the nobody who doesn't want them are financial advisers. According to a study commissioned by Edward D. Jones & Co., as reported by Investment News, advisers prefer older and wealthier clients. This despite the fact that younger workers are ahead of other generations when it comes to saving for retirement. Aside from the fact that the Gen X investor has fewer assets than the older, affluent investor that is the target client for most advisers, the advisers themselves have painted this generation with a broad brush. Some of the advisers:

• Feel that the younger investors have "attitude problems",
• Are more comfortable working with clients their own ages,
• Are are uncomfortable with the technology they feel that younger clients would demand, and
• Feel that younger investor don’t appreciate the value of good advice.

Hmm, the more things change, the more they stay the same.

And my generation? Represented by My Generation, the title song on the The Who's first album pictured above which was released in the U.S. in 1965.  The song was inducted into the Grammy Hall of Fame in 1999 and remains one of The Who's best known songs and, indeed, one of the most acclaimed songs in rock and roll history. They don't make 'em like that anymore. (Sorry, I just had to say it).

TANSTAAFL is an acronym for the adage "There Ain't No Such Thing As A Free Lunch. It was popularized by the Nobel economist Milton Friedman, but the phrase, "free lunch", has its antecedents in American literature from about 1870 through 1920. The phrase refers to a tradition once common in saloons in many places in the United States. These establishments offered "free" lunches, varying from the basic to the quite extensive, but required the patron to buy at least one drink who usually went on to order more. In other words, free things often have hidden costs.

The SEC and other security regulators also think TANSTAAFL. They held a Seniors Summit yesterday at the Securities and Exchange Commission during which they released a joint report summarizing the results of their examinations of "free lunch" investment seminars.

A year-long examination was conducted by the SEC, the Financial Industry Regulatory Authority (FINRA) and state securities regulators (members of NASAA, the North American Securities Administrators Association). The regulators scrutinized 110 securities firms and branch offices that sponsor sales seminars and offer a free lunch to entice attendees. The report's key findings include:

• 100% of the "seminars" were instead sales presentations.
• 59% reflected weak supervisory practices by firms.
• 50% featured exaggerated or misleading advertising claims.
• 23% involved possibly unsuitable recommendations.
• 13% appeared to be fraudulent and have been referred to the most appropriate regulator for possible enforcement or disciplinary action.

The report recommends that financial services firms review their supervisory practices and take steps to supervise sales seminars more closely, and redouble their efforts to ensure that the investment recommendations they make to seniors are suitable in light of the particular customer's investment objectives. The report also includes a list of supervisory practices that appeared to be effective.

The report also recommends that ongoing investor education efforts for seniors should provide education with respect to "free lunch" sales seminars. Specifically, senior investors should understand that these are sales seminars that result in the sales of financial products, and they may be sponsored by an undisclosed company with a financial interest in product sales.

Here’s a link to the full Free Lunch Report (PDF).

Divorce, unfortunately, is a fact of life, and can affect an employee's benefits in a retirement plan. Jimmy Verner, who practices family law, illustrates why there must be a Qualified Domestic Relations Order (QDRO) to divide those retirement benefits in his newly launched North Texas Divorce and Family Law Blog. But a QDRO only comes into existance when the Plan Administrator of the retirement plan approves a domestic relations issued by a court.

Mr. Verner's perspective, of course, is that of the attorney representing one of the two parties in the divorce. So here's a QDRO viewed from the perspective of the Plan Administrator - the individual or individuals responsible for the administration of the retirement plan and a fiduciary. The Plan Administrator would look to see that the domestic relations order contains certain information to qualify as a QDRO under ERISA:

• The name and last known mailing address of the participant and each alternate payee.
• The name of each plan to which the order applies.
• The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee.
• The number of payments or time period to which the order applies.

• The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan.
• The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value).
• The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO.
• The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.

• The Internal Revenue Service directed by Congress to develop sample QDRO language did so in Notice 97-11 (PDF, 7 pages.).
  
• The Department of Labor which has jurisdiction to interpret QDRO provisions issued a comprehensive book, QDROs: The Division of Pensions Through Qualified Domestic Relations Orders (PDF, 100 pages).
• The Pension Benefit Guaranty Corporation responsible for the administration insolvent defined benefit pension plans issued the booklet, Qualified Domestic Relations Orders and the PBGC (PDF, 60 pages).

And from everyone's standpoint, it's best for the Plan Administrator to review a draft of the domestic relations before it gets filed with the court. Better to resolve issues before the order is filed than the Plan Adminstrator having to determine that the domestic relations order really isn't a QDRO.

"What was the number of mortgage foreclosures in July?"

As reported,by Investment News citing Realty Trac, a marketplace for foreclosure properties. Foreclosure filing in the country increased by 9% between June and July and rose precipitously by 93% compared to the same period last year.

I’ve written about retirement plan data security – or lack thereof – in the past, but always in the context of employee data on laptops that had been stolen. But as I read about a recent study cited by AccountingWeb.com, Pogo’s famous words came to mind, “We have met the enemy, and he is us.”

Are we our own worst enemy when it comes to protecting employee and benefit plan data? Consider the results of the study which was carried out at last spring's Infosecurity Exhibition Europe as part of an annual survey into "Trust, Security and Passwords”. It revealed the extent to which Information Technology (IT) employees snoop at the confidential information of other employees. By using the special administrative passwords that give IT workers privileged and anonymous access to virtually any system:

• One-third admitted to snooping through company systems and peeking at confidential information such as private files, wage data, personal e-mails, and HR background.
• More than 1/3 admitted they could still access their company's network once they'd left their current job, with no one to stop them.

The big security risk is not just hackers, but companies mismanaging the storage and access to administrative passwords.

And IT folks are just like everyone else. Post-It Notes are the favorate way of storing passwords.

Rush Nigot on his Rush on Business Blog provides valuable information for franchisees. But how do you finance it? There are a small number of trust companies that can help facilitate that process if you use self-directed IRA assets to invest in private equity, e.g., a franchise. It's not just publicly traded securities that IRAs can invest in. There's also real estate, secured loans, unsecured loans, and private placements. But caveat emptor twice. Failure to follow the tax rules can result in adverse tax consequences, and the investment may not pan out. Remember, these are retirement funds so consult with your advisors first. This is another one of those "kids don't try this at home" situations.