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.

See full-size image.

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.

See full-size image

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!

See full size image.

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.

Click here to see larger image.

 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.

See full size image

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.

I recently wrote about retirees moving to Tibet, a metaphor for retirees moving from the “land of accumulation” to the “land of accumulation” and the new financial culture with which they will have to master. The “tour guides”, the financial industry, will have to solve the “annuity puzzle”, the investment industry term for the disconnect between the economic arguments of annuitizing and the investor’s aversion to annuitizing. It’s a difficult puzzle to solve according to a July 2007 Fidelity Research Institute study which indicated  that retirees and pre-retirees are signicantly underestimating how long they need to make their retirement savings last.

Retirees believe they will need to make their retirement savings last until an average of age 85; for pre-retirees, the average estimate is even younger at age 83. These estimates highlight how many pre-retirees underestimate their life spans, and therefore risk outliving their assets, given the likelihood of living to at least 90 for men (24%) and women (35%) who have reached age 65.

While there are a myriad of barriers to adoption of annuities – some based on emotion and some on logic – the study found that each is potentially solvable by improved investor education. Here is the link to the the Fidelity study, Structuring Income for Retirement: Addressing America’s Guaranteed Income “Gap” (24 pages, PDF).

It seems that there were these 2,500 traders surveyed by Traders Monthly who were asked whether they would parlay some insider information into a guaranteed $10 million trade. If they had a 50% chance of getting arrested, 93% said no; if they had only a 10% chance of getting arrested, 72% said no; and if they had no chance of getting arrested, 58% said yes. An anonymous trader was quoted as saying: "It can't be that wrong if I can't get caught."

If I remember my college physics course correctly, we used three space dimensions and one time dimension to describe the “real world”. Today's science uses the hypercube pictured here as the three dimensional cube extended in the direction of the fourth dimension. And so what does this have to do with retirement plans you ask.

It has everything to do with the retirement plans, particularly 401(k) being designed and managed for today's workforce. A workforce which also has four dimensions. But these are generational dimensions, the four generations of employees in the work force for the first time in our history. In purely demographic terms, they are:

• Veterans: 1922-1945
• Baby Boomers: 1946-1964
• Generation X: 1965-1980
• Generation Y: 1981-2000

And based on their generational backgrounds, each employee has different attitudes, behaviors, and expectations. If we’re interested in using the right motivational buttons in making our 401(k) plans more effective, then we have to communicate accordingly. Let’s not take the easy way out by simply using automatic enrollment and qualified default investments.

In volatile markets, investment managers go to cash. That's happening right now because of the prime mortgage meltdown. But not all money market funds are the same. Just as there are enhanced index funds, there are also enhanced money market funds.  "Enhanced" meaning the fund manager seeks higher returns by taking slightly more risk. And in the case of enhanced money market funds trying to get extra basis points, this may mean investing in asset-based securities like mortgage-linked bonds. According to HedgeWorld.com, some supposedly safe money market funds have shut down, while others are having problems meeting redemptions.

Do you know where your cash is?

They're called "vulture funds". They're financial organizations that specialize in buying securities in distressed environments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy.

Take for example, Argentina whose external public debt was  bought up in substantial measure by vulture funds at   very low prices. Or in this country, K-Mart,  where the real estate held by the company was the anticipated payout for investors who bought stock during their bankruptcy proceedings.

And now, reports Investment News, money managers are finding lots of opportunities in the subprime mortgage fallout. Investment managers are starting new funds to buy distressed securities tied to the subprime mortgage market or buy asset-based securities that been devalued by the ratings agencies.

The "blame game" has included predatory lending practices of subprime lenders and the lack of effective government oversight, mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the portfolios.

But regardless of fault, there have been a record number of foreclosures, and now I'm curious to see whether any of the retirement plans espousing socially responsible investments will be investing with the so-called vulture funds.

Baby boomers apparently are thinking about retiring to exotic locations. I saw an article about this in one of our trade publications in which an investment advisor was quoted as saying that retiring to Cancun was no different than retiring to Arizona. Well, not exactly. Hurricane Dean aside, what about cultural, political, and legal differences as well as access to medical care to which retirees have been accustomed.

While not many retirees will make the leap to Cancun, many retirees will be moving to Tibet. Tibet? Yes, Tibet. That’s the analogy that David Macchia uses to convey the challenge that most retirees will face: converting their accumulation of retirement assets into distributed retirement income. David is CEO of Wealth2k, a firm that is using communication technology to deal with the transition from the accumulation phase to the distribution phase.

Going from such concepts as asset allocation, dollar cost averaging, and the cost of waiting to new concepts as such dealing with the cost of medical care and not outliving one’s assets is - says David - like moving from middle class America to Tibet. And for those of us that are in the retirement plan industry, we'll need to become tour guides.

If you're interested in the shape of things to come, here is a link to David's movie that will give you a glimpse of retiring to Tibet.

Employee or independent contractor? Attorney Rush Nigot warns us about making the mistake of treating employees as independent contractors. It's an issue about which the IRS has sacked the NFL and caused Microsoft to reboot. Penalties and interest 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 as an employee. And it can be expensive.

But what if you do make a mistake, and that independent contractor is really an employee. How do you fix it? Here's how. There's two aspects to the fix. From the payroll tax standpoint, Accounting Web provides valuable tips for reporting misclassified employees (registration required). And from a retirement plan standpoint, you can use one of the correction programs offered by the Internal Revenue Service as part of their Employee Plans Compliance Resolution System (EPCRS). Better to get to them before they get to you.

Back in the day, I used to see Three-card Monte played on the Chicago "L". For the benefit of the uninitiated, Three-card Monte, also called Three-card shuffle, Follow the lady, Find the lady, or Follow the Bee, is a confidence game in which the victim, or mark, is tricked into betting a sum of money that he can find the money card, for example the queen of spades, among three face-down playing cards The hand is quicker than the eye and these guys are pros. You don't win.

In relative terms, what people lose playing Three-card Monte can be called "chump change" compared to the Securities and Exchange Commission's estimate that approximately 5 million seniors are victimized by some sort of financial fraud each year.  And there is no more tempting target than the huge amount of money in seniors' accounts in retirement plans and IRAs.

The enforcement agencies on both the state and federal level are ramping up to deal with the problem. The upcoming Senior Summit on September 10 sponsored by the SEC will bring together regulators, law enforcement officials, and community groups who have to deal with senior investment fraud to find some solutions - or better yet, help seniors avoid the Three-card Monte folks.

I started to think about that question after reading Jonah Leher’s post, Don’t Read the Business Page, on The Frontal Lobe Blog. Mr. Leher tells us to ignore the mass media coverage about the stock market and the growing liquidity coverage because it’s too much information.
He writes about the experiment that Harvard psychologist Paul Andreassen conducted on MIT business students in the late 1980s. After having the students select a stock portfolio, he divided them into two groups. The first group could only see the changes in the prices of their stocks. The second group had access to a continual flow of information from various sources.

You know what’s coming. The first group – the “less information” group did significantly better than the second group – the “high information” group. Exposure to too much information was distracting. Andreassen was surprised with the result when he did the experiment in the later '80s, but most of us shouldn’t be now. Back then, there was wasn’t the constant flow of information – good and bad - bombarding us 24/7/365 from a multitude of sources. 

So what does that have to do with 401(k) plans? The Pension Protection Act of 2006 mandates additional disclosures to 401(k) participants for such new provisions as automatic enrollments and qualified default investment funds. More is on the way in the form of required disclosures regarding plan fees either in the form of Department of Labor regulations or by legislation.

No one disputes that participants should be provided with sufficient information in order to make informed decisions about their retirement funds. The question is how much information is enough information? Let's not turn 401(k) participants into a "high information group".

One of the most commonly used expressions in articles about taxes is this one: "tax trap for the unwary". While I would like to be more creative than that, that expression effectively sums up a common situation we've seen involving compensation of shareholder-employees of S corporations. The objective of an S corporation is, of course, to avoid double taxation (once to the shareholder and again to the corporation). So where is the "tax trap for the unwary?' There's actually two.

The first "tax trap for the unwary" is where the owners of S corporations seek to reduce employment taxes due on amounts paid to them by their companies by characterizing compensation payments as dividends. I''ll leave the discussion to the tax professionals regarding whether the IRS would attempt to recharacterize dividends as salary if the amounts were in fact, paid to the shareholders for services rendered to the corporation.

The second "tax trap for the unwary" is in our neck of the woods; qualified retirement plans. Only  W-2 compensation counts as eligible compensation for detemining the contribution. No or low W-2 compensation means no contribution or a smaller than desired contribution can be made.

And then there could be the "cost-of-waiting" penalty. Adopting a 401(k) plan in the latter part of the year may not give the owner enough time to maximize his or her own contributions. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral.

Maybe 401(k) plan sponsors are on the wrong side of the generation gap - at least when it comes to communicating with their under 30 year-old employees - when I asked the question, Face it. Maybe we're not using the right medium to communicate 401(k)?. I suggested text messaging, and here's some supporting anecdotal evidence. Mark Liberman writing in his Language Log Blog tells a story about the conversation he overheard among several of the younger academics at the Google Faculty Summit -- 30- to 40-year-olds. They were complaining that their students think that email is for old people (a category that this group is not yet used to being part of).

So if we communicate 401(k) plans to employees for whom English is a second language, e.g., Spanish, maybe we should think about having our 401(k) plans being communicated by people who speak IM and SMS.

We are in the midst of a robust merger and acquisiton environment. Much of it is being fueled by private equity firms flush with cash. The other part of the equation has to do with demographics - those Boomer business owners looking to cash out. Two sets of issues can slow down or even derail a deal: environmental issues and employee benefit and compensation issues.

Rush Nigut nicely covers the former when he tells business owners contemplating a sale that they shouldn’t forget to address the environmental issues up front  on his blog Rush on Business. Employee benefit and compensation programs are also issues that should be addressed pre-deal. In both cases, the focus is on the liabilities - current and potential. Benefit and compensation programs can include, of course, retirement plans, welfare benefit plans, and non-qualiified deferred compensation plans. Some of the questions buyers will ask include:

• Is the retirement plan “qualified” for purposes of receiving tax favored treatment under the Internal Revenue Code?
• If the seller maintains a defined benefit plan, what is its funded status?
• If the seller contributes to a multi-employer, collectively bargained retirement plan, is there a withdrawal liability?
• Are there any welfare benefit liabilities, e..g, post-retirement medical benefits.

That's the metaphorical objective of any regulatory agency whose responsibility is to interpret and administer laws passed by Congress- to translate those laws into regulations, rules, and produres. Mitchell Port on his California Tax Attorney Blog gives us an initiation to understanding IRS guidance, excellent background for anyone who is involved with retirement plans, and especially  the Pension Protection Act (PPA) passed on August 17, 2006. It’s not just the IRS that will be involved with the “translation”. The burden will also be on the Department of Labor (DOL). And both of the agencies will have a full plate with the different effective dates for the new law’s provisions. 

Take a look at what's in store for the IRS and DOL - and us - for just the defined contribution plan provisions:

• Provisions effective retroactively: 2
• Provisions effective on enactment date: 8
• Provisions effective for plan year beginning on or after January 1, 2007: 12
• Provisions effective for plan years beginning on or after January 1, 2008: 6
• Provisions effective for plan years beginning on or after January 1, 2009: plan amendments
• Provisions effective for plan years beginning on or after January 1, 2010: defined benefit/401(k) combined plan 

The above list is from McKay Hochman's Status of Defined Contribution Provisions One Year After PPA which provides the details. 

 Hat tip to Joe Kristen for his Tax Update on the Roth & Company, P.C. Blog Roundup.

The marshmallow experiment is a famous test conducted by social psychologist Walter Mishchel at Stanford in the 1960s. Mishcel, now at Columbia, put marshmallows in front of a room full of 4-year olds, and told them that they could have one marsh mallow now, but if they could wait several minutes, they could have two. The children who waited longer went on to get higher SAT scores. They got into college and had, on average, better academic outcomes.

I wonder if they also had better 401(k) participation rates.

Attorney Rush Nigot blogging about Document Retention and Electronic Discovery on his new Blog, Rush on Business, tells us that in today’s business environment, organizations need to respond to an increasing number of document requests, from regulatory compliance issues to internal investigations to full-scale litigation.

And there’s certainly an ERISA component to that. So in a brief Q and A format, here is some basic information about document retention for ERISA plans.

What are the legal requirements?

In the addition to the reporting and disclosure obligations that fiduciaries have, ERISA also requires that plan sponsors retain the records that support the information included in the 5500 filing and other reports.

The short answer is that all plan-related materials should be kept for a period of at least six years after the date of filing of an ERISA-related return or report, and the materials should be preserved in a manner and format (electronic or otherwise) that permits ready retrieval. All records that support the plan’s annual reporting and disclosure should be retained.

Who is responsible for retaining plan records?

While it is fairly common for a plan sponsor to contract with outside service providers, such as our firm, who provide certain reports and prepare the 5500 filing, the plan administrator remains ultimately responsible for retaining adequate records that support these reports and filings. In addition, the Department of Labor (DOL) requires employers to maintain records sufficient to determine the amount of benefits accrued by each employee participant.

What are best practices?

As noted above, generally, these documents should be kept for a period of six years after the date of the filing to which they relate. However, best practices would be to keep certain records for the life of the plan. This would include all plan documents dating from the plan’s inception. The thicker the paper trail, the easier it will be for the plan to respond to an inquiry from a governmental agency or a request for information from a plan participant. Most recently, the Internal Revenue Service (IRS) requested specific employee records from a client going back 10 years during a plan termination process. Fortunately, the employer was able to provide it.

But don't consider this a boring subject. The IRS or the DOL can require the plan administrator to recreate plan records.

Pardon me if my generation gap is showing, but Marshall McLuhan was right, "The medium is the message."  Investment News reports that some of the major investment banks, Citigroup, Goldman Sachs, Lehman Brothers, Bear Stearns, and UBS, have put firewalls in place to bar staffers from using Facebook. Citigroup leads the list with almost 8,500 employees in its Facebook network followed by Goldman Sachs with approximately 5,600 and Lehman Brothers with approximately 3,000. So if these employees are representative of the rest of the younger workforce, how should we get them the 401(k) message? How about text messaging.

If you're generationally challenged and don't know about Facebook, click here.

401(k) fees showed up on the political radar screen in March when U.S. Rep. George Miller (D-CA), the chairman of the House Education and Labor Committee, held hearing. The blips got louder last Thursday when Congressman Miller formally introduced legislation calling for better disclosure of 401(k) fees. The legislation, called the 401(k) Fair Disclosure for Retirement Security Act of 2007, would:

• Require plan administrators to disclose, in clear and simple terms, all fees charged to plan participants each year;
• Help workers better understand their investment options by providing more detailed information on investment strategies, risks, and returns when they sign up for their company’s 401(k);
• Require 401(k)-style plans to include at least one lower-cost, balanced index fund in its investment line-up;
• Ensure that all fees and conflicts of interest are disclosed annually to employers who sponsor 401(k) plans; and
• Enhance the Department of Labor’s oversight of 401(k) plans.
  

The legislation’s introduction followed closely on the heels of the end of the Department of Labor’s comment period on how to better deliver information on administrative and investment fees to 401(k) participants. regulations the DOL will be adopting.  The 401(k) industry is asking for time to let the DOL come out with regulations. Whether that will happen or not is now part of the Washington political process.

So buckle up. We may be in for a bumpy ride.

If dealing with pension and fiduciary issues are getting you down, then you've got the Pension Tension Blues. Dr. Susan Mangiero, founder and President of Pension Governance, and Steve Zelin, the Singing CPA, have co-written a satirical song on the current state of affairs for retirement plan sponsors and participants. I'll never see them on stage at Buddy Guy's Legend's, but pretty good for a Ph.d. and a CPA.  Take a listen here.

Earlier this month in my article, It ain't over till it's over, I discussed the insurance industry's objection to stable value funds not being part of the Department of Labor (DOL) regulation for default funds. The Pension Protection Act of 2006 directed the DOL to designate “default” investment elections that employers could select to meet their fiduciary responsibilities when an employee does not make an an investment election.

The historical selection by most employers has been a fixed income fund - money market fund or stable value. The proposed DOL regulation, however, includes only options having equity exposure, i.e., asset allocation funds, target-maturity funds, or managed accounts.  And with over $300 billion at the end of 2005 in stable value funds according to the Investment Company Institute, most of which is managed by insurance companies, the insurance industry went to work in Washington to get stable value funds added as a fourth option. But it looks like it's over. Investment News reports that the DOL's final regulation to be issued next month will continue to reject stable value funds as too conservative and will not include this asset class as a default option.

If, indeed, this is the case, it will be interesting to see how it will play out after the regulation is finalized. Will some employers continue to include stable value funds as their default fund? And what will the reaction be if there is a market turndown and participants in default funds lose money? So, it's really not over - particularly if the insurance industry convinces Congress to get involved.

No, it's not a David Letterman list. It's more akin to the FBI's Ten Most Wanted List. The list that "investment seminars" made for the first time is the annual  list of Top 10 Traps for Investors put out by the North American Securities Administrators Association (NASAA), the oldest international  organization devoted to investor protection. The NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico. Here's what NASAA had to say about investment seminars:

Promoters of unsuitable investments are increasingly seeking potential investors, particularly seniors, by offering seminars, many of them promising a free meal along with “higher returns and little or no risk.” Unfortunately, in many of the cases that securities regulators see, it’s just the opposite: high risk and no returns, just disastrous losses. Remember: There’s no such thing as a free lunch.

The vast majority of advisors are, of course, honest. But with 77 million Americans reaching age 55 between now and 2020, the amount of money available for investment is staggering. And promoters do follow the money. Whether the regulators can keep up will be the challenge.

Here's a link to NASAA's press release which has the entire list in alphabetical order.

Yesterday, I discussed the first of two big changes ahead for 403(b) plans that would make 403(b) plans resemble 401(k) plans, proposed IRS regulations that would be effective in 2008. Here is the second big change, the IRS Universal Availability Project. The IRS is sending out letters and questionnaires to public school districts regarding their 403(b) arrangements to determine their compliance with the Universal Availability requirement for 403(b) plans. The project was initially directed to districts in three states but has now been expanded to cover all 50 states and slated to last through 2008.

The Universal Availability requirement is similar to the eligibility requirement for 401(k) plans under which all eligible employees must be given the opportunity to make elective salary deferrals. The Director of the IRS Employee Plans division has indicated that the data collected so far has revealed "fairly widespread noncompliance by schools with the universal availability requirement for 403(b) plans."

Responding to the inquiry is voluntary, but the IRS has indicated that a failure to respond could lead to an IRS audit. If a school district's plan does meet the requirement, it could result in loss of 403(b) tax-favored status, i.e., employee contributions to the 403(b) plan and earnings could be immediately subject to income tax. The IRS does, however, provide at least two methods of self-correction which are more favorable than using the other voluntary correction programs.

Regardless of whether school districts receive an IRS letter, all school districts should be concerned about whether they satisfy the Universal Availability requirement in their 403(b) plans and the proposed 403(b) regulations slated to be effective at the end of the year . Accordingly, it may be prudent for a school district to conduct an internal compliance review to determine the level of compliance of its plan... and to get ready for the regulations.

Major changes are on the way for 403(b) plans. Named after Section 403(b) of the Internal Revenue Code enacted in 1958, 403(b) plans are retirement annuity contracts, mutual fund custodial accounts for employees of certain tax-exempt organizations, public educational organizations, and retirement income accounts established by churches or church-affiliated organizations.

The Internal Revenue Service is now putting these plans under the most scrutiny in over 40 years. And there are a lot of dollars in these plans. According to Cerulli Associates, a Boston-based consulting firm, there are approximately $650 billion in 403(b) plans.

The IRS' objective? To have 403(b) plans look like, sound like, and act like 401(k) plans. In other words, 403(b) plan sponsors will now have to take responsibility for plan monitoring in contrast to the current practice of letting the employees interact directly with the mutual fund or insurance company. The increased IRS involvement is coming in two areas.

1. Proposed regulations scheduled to be effective in 2008.
2. An outreach program to ensure public schools comply with the Universal Availability rule, i.e., offering the plan to all eligible employees.

• A new requirement that there be a written plan document.
• Rules that govern the return of excess employee deferrals.
• New required employer communication and transfer rules.
• Rules governing the timing of depositing employee contributions.
• Coordination of catch-up limits.
• Availability of Roth contributions
• Restrictions on life insurance.
• Ability to terminate the plan.

Tomorrow, I'll discuss the IRS compliance initiative.

The quotation above is one of the best-known Yogiisms, and it neatly describes the battle that is shaping up before the Department of Labor (DoL) finalizes its proposed regulation on default funds. On one side are the mutual fund companies and on the other are the insurance companies. And here’s what it’s all about. The Pension Protection Act of 2006 (PPA) provided fiduciary relief to employers by designating a “default fund” if the employee failed to make an investment election. It’s an especially important part of the now fully sanctioned automatic enrollment since a default fund would be where the funds of an automatically enrolled employees would be invested.

The PPA also directed the DoL to designate “default” investment elections that employers could select to meet their fiduciary responsibilities which could include a mix of asset classes other than a money market fund which has been the historical selection. And so the proposed regulation that the DoL prepared included balanced funds, target-maturity funds, or managed accounts. No money market fund and no stable value fund which the DoL considered too conservative.

With approximately $400 billion in stable value assets in 401(k) plans and an estimated 14 million more workers that will be brought into the system with automatic enrollment, it’s a real big issue for the insurance industry. And now the lobbyists for the insurance industry are gearing for a major campaign that would result in the DoL including stable value as a default option in the final regulation.

We'll see who's scores the winning run.

In a recent email, American Express pointed me to some good stuff about protecting against identity theft. What plan sponsors can't protect against, however, is employee personal and financial information stolen from 401(k) providers. I've written about this in the past. Take for instance the 401(k) provider that had personal data on 160,000 current and former employees of Neiman Marcus stolen, or the accounting firm that had personal data on 40,000 current and former Chicago Public School Teachers stolen. Or my nomination for the Chutzpah of the Year Award: the thieves that robbed Scotland Yard of the names and personal data on 15,000 Met police officers.

What do all of these situations have in common? The service provider in question was carrying around confidential employee data on a lap top. Not exactly state-of-the-art computer security. I'm now convinced that one of the questions that plan sponsors should ask their provider is "exactly how do you protect our data?"  The answer may surprise - and concern - you!

In a June 20 memorandum dismissing a lawsuit against John Deere, Inc. and two subsidiaries of Fidelity Investments, the U.S. District Court for the Western District of Wisconsin ruled that ERISA does not require plan sponsors or service providers to disclose revenue sharing information to 401(k) plan participants. For those of you that don't know what revenue sharing is, it's the common practice of mutual funds and their investment managers to make payments to other service providers.

It's been included in most of the class action litigation, and I'll leave it to the lawyers like Thelen Reid Brown Raysman & Steiner to comment on the legal aspects of this decision.

But don't count on non-disclosure of revenue sharing being an acceptable practice for much longer. The Department of Labor's proposed changes to the 2009 Form 5500 calls for reporting the dollar amount of revenue sharing and who receives it. A copy of the Form 5500 must be provided, of course, to a participant upon request, and is also available on several on-line Form 5500 data bases.

401(k) plan focus is shifting from the accumulation phase to the distribution phase. The why is obvious. The first wave of Baby Boomers are reaching age 60 who have significant concerns about running out of money. The how is being provided by 401(k) providers - insurance companies and mutual funds - who are beginning to address the need by adding lifetime annuities as 401(k) distribution options. That it’s now an industry is evidenced by the activities of the Retirement Income Industry Association, a trade group formed to deal with retirement income challenges.

The regulators are not unaware of the potential for abuse. The NASD and a group of state insurance commissioners are calling for uniform regulation of annuities by having the states add a suitability requirement for all annuity products. Not unlike, the suitability requirement that the NASD imposes on broker/dealers.

To make it work, retirement plan sponsors will have to decide whether to allow advisors into the workplace. The Pension Protection Act provides fiduciary relief to plan sponsors in this regard, but it remains to be seen if that will actually happen.

Gone scrambling. Back in two weeks.

It’s not just the environmental groups that are actively participating in the debate - and politics - of climate change. Now the institutional investors that are entering the arena. This past Earth Day I wrote about institutional investors in the U.S. becoming vocal.

Now as leaders of G8 most industrialized nations are to meet in Germany, a U.K. based organization, the Institutional Investors Group on Climate Change in an open letter called for greater clarity from key industrialized nations on policies addressing climate change. The organization is a forum for collaboration between pension funds and other institutional investors on issues related to climate change. Primarily comprised of U.K. institutional investors, the 17 signatories hold 3 trillion euros in assets (approximately $3.95 U.S.). The investor group said it wanted the G8 event to decide upon major aspects for a new Kyoto agreement, in advance of a UN meeting in Indonesia in December.

What does this have to do with participants in retirement plans? Simple. The institutions that manage the investments in these plans need to be able to rely on an effective long-term climate change policy for investment decision-making. Now getting the G8 to agree on a common policy is a little more complicated.

The 401(k) fee issue continues to percolate. This time it’s 12b-1 fees, those fees charged by mutual funds to compensate underwriters and brokers for sales. And last year, it was $11 billion according to Securities and Exchange Commission estimates. It's time for review said the SEC, and it announced last week  that it will hold a roundtable on June 19 to discuss so-called 12b-1 fees, which are also used to cover advertising and promotion and for mailing fund prospectuses.

This would be the first look by the SEC at 12b-1 fees since their inception in 1980. At that time, the mutual fund industry was still limping along from bear markets of the mid-1970s. The SEC provided a boost in the form of the 12b-1 fee to help mutual funds pay for marketing and distribution expenses justified on the basis that the fund operating expenses would be less if more investors could be attracted.SEC Chairman Christopher Cox said,

Today's uses of 12b-1 fees have strayed from the original purposes underlying the rule, and it is time for a thorough re-evaluation.

The SEC could take one of a number of approaches ranging from better disclosure to outright repeal. And 401(k) plans will be part of the mix with over 40 million investors owning mutual fund shares through 401(k) plans.

If you are still not convinced that 401(k) participants need investment advice, then check out the results of a recent survey as reported by Investment News, 43% of investors are suckers. The survey was conducted by Money-Track, a public-television series, and Investor Protection Trust. Most of the survey results I would have expected. I'm not surprised that:

• Only 1% of the people surveyed understood eight basic investing principles, e.g., diversification.
• 66% of the respondents would meet with a financial professional without first doing a background check.
• 40% of those surveyed said that they expected Social Security to make up a major part of their retirement income.
• 50% said they had not created a financial plan.

Or maybe just call me be naive and maybe "there's a sucker born every minute".

The phrase, "There's a sucker born every minute", often credited to P.T. Barnum, the famous showman, may actually have been said by someone else. Here's the history of it.

There was a lot of media coverage recently that the financial holdings of Presidential candidates Rudy Giuliani (R) and John Edwards (D) who have spoken out about genocide in Darfur, included investments in companies that do business in Sudan. But let's cut these guys some slack. These investments were in companies that were part of mutual fund holdings about which they were unaware. Information on what securities mutual funds hold are difficult to obtain, let alone information on the companies themselves. 

But not for large institutional investors who can have their nvestments in individual securities screened - sometimes for an additional management fee, e.g., .25%. So what can the average 401(k) investor do. One option is to check out the screening tool offered by the Sudan Divestment Task Force. But note the caveat that this screening tool uses historical mutual fund data which is at a minimum 3 months in arrears. 
 

Diehard Cubs fans will know who this is. It’s Pat Pieper, the legendary Cubs' field announcer, who for 59 years started each game with the announcement above. But that was back in the day when you could look at the number on the back of the uniform and know who that was and what position he was playing. Now let’s fast forward today to the “players” involved with retirement plans, that is, the individuals and firms that provide investment services to plan sponsors and employees. It's a little more difficult and got more so recently.

The Consumer Federation of America provided some  help in  its publication, Cutting Through the Confusion, where to Turn for Help with your Investments (PDF). It explains the differences between:

• Investment advisors who are regulated by the Securities and Exchange Commission, and are subject to a fiduciary duty;

• Brokers who are regulated by the NASD and the New York Stock Exchange, and are subject to a suitability requirement; and

• Financial planners who are not separately regulated as planners but are regulated depending on the services they provide, e.g., investment advice or sale of securities.

• Insurance brokers who are regulated by the individual State Insurance Commissioners, and are subject to those rules and regulations.

The brokerage firms are now figuring out how to handle the 1,000,000 investors who have approximately $300 billion in fee-based brokerage accounts particularly if investors don't make a choice between available investment accounts.

Understand now?

The picture above is that of Pat Pieper gathering straw hats showered by fans on September 1, 1932. This was before the Wrigley field bleachers were built. He started his career in the first Wrigley season in 1916, and announced the lineups with a megaphone until the public address system was used starting in 1932. Let's treasure these pictures of Wrigley field since as a result of the Tribune ESOP transaction, the team will be sold and not the ballpark which may wind-up as a real estate development.

On May 3, 2007, the House of Representative's Education and Labor Subcommittee on Health Employment, Labor, and Pension held a hearing to consider technical corrections to the Pension Protection Act of 2006 (PPA). Technical corrections are designed to fix mistakes and inconsistencies that were inadvertently included in original legislation. Subcommittee Chairman Rob Andrews (D-NJ) indicated that the hearing was to be the first of a series, and invited other groups and individuals to identify other technical corrections that Congress should make to the PPA. In the past, it hasn't been unusual for substantive tax changes to be included in technical corrections acts - particularly for those special interest groups that didn't get their legislative objectives accomplished the first time around. We'll see what happens here.

Choice, or rather, too many. General Motors has picked up on recent academic research that indicates that having too many investment choices in a 401(k) plan can lead some participants to pick the most conservative investment option and discourage others from participating at all. GM will be paring the number of 401(k) fund options from over 80 to less than 40.

The academic research goes back to 2000 when social psychologists Sheena Iyengar, PhD, a management professor at Columbia University Business School, and Mark Lepper, PhD, a psychology professor at Stanford University, were the first to empirically demonstrate the downside of excessive choice.

Their research showed that when shoppers were given the option of choosing among smaller and larger assortments of jam, they showed more interest in the larger assortment. But when it came time to pick just one, they were 10 times more likely to make a purchase if they choose among six rather than among 24 flavors of jam.

Dr. Iyengar then sought to examine consumer choices with higher stakes. Would a greater investment in the outcome mean people would make different or better choices? To do that, she and Wei Jiang, PhD, a finance professor at Columbia Business School, analyzed the number of fund options in 401(k) plans. They found that more options led people to act like the jam buyers: the greater the number of options, the more cautious people were with their investment strategies, or didn’t participate at all.

And so what’s a plan sponsor to do then. Barry Schwartz, a professor at Swarthmore College, may provide some help. In his book, The Paradox of Choice: Why More Is Less, Professor Schwartz says that "satisficing" is the best option. In layman’s terms, that’s the first choice that fits our preference as opposed to exhaustively scanning all options until finding the perfect, or "maximizing" one.

Whether the new offshoots of the Pension Protection Acto of 2006 - target maturity funds, automatic enrollment, and investment advice - will help accomplish that remains to be seen.

Call me old fashioned but I couldn’t wait to declare my independence from my parents. But this is a different day and a different generation. The term “helicopter parent” is now being used with more and more frequency in the media to describe parents who hover around their children who are part of the so-called millennial generation, now ages 8 to 29. This group is made up of 80 million people in the United States born between 1978 and 1999.

And now as this generation is entering the workforce so are their parents. Sue Shellenger in The Wall Street Journal Online tells us that Helicopter Parents Now Hover at the Office. The millennial generation brings new challenges to the workplace and presents challenges for HR professionals integrating them into the workforce as Kathryn Tyler tell us about The Tethered Generation in the May, 2007 issue of HR Magazine.

So what does this have to do with 401(k) plans? Everything, if we want them to understand the importance of saving and investing, and to participate in our benefit programs. They have been using email, instant messaging (IM) and cell phones since childhood and adolescence, and we had better start rethinking the dynamics of communicating benefits.

All too often we hear about another laptop stolen with sensitive information on it. And all too often it's personal data about employees. The latest is the retailing giant Neiman Marcus. The Company recently announced that a notebook computer containing personal information on 160,000 current and former employees was stolen. The stolen notebook belonged to a pension benefit firm hired by the Company. The personal information included individuals' names, addresses, Social Security numbers, birth dates and salaries.

Neiman Marcus declined to identify the consultant whose laptop was stolen. The Company said it was not the company's regular pension benefits administrator, Fidelity Investments. The stolen computer contained detailed personal information on employees and former employees who were in the pension plan as of  Aug. 30, 2005. Neiman Marcus promptly notified their employees and offered to provide one-year of credit monitoring services.

Since last October, I've written about 3 laptop thefts involving employee personal and benefit plan data:

The British equivalent of Chutzpah: 3 laptops stolen from London Metropolitan Police with payroll and retirement plan data on over 150,000 Met police officers.

Identity theft made simple. Just leave employee retirement plan data on a laptop: 2 laptops stolen with information on 40,000 current and former Chicago public school employees left unattended in conference room.

In all these casess, the common response was that it was no problem since the data was  encrypted. But a key question went unanswered. Why was so much private data allowed to be on laptops in the first place? And Plan Sponsors, you better start asking your service providers how they protect your data. It's the prudent thing to do.

Here is another example about the importance of properly classifying your employees. Frank Steinberg in his New Jersey Law Blog tells us that the NFL Loses to IRS regarding how the League had been treating their 70-plus Drug Program Agents [DPA's], who collect urine samples for the drug testing program. The IRS recently ruled that the DPA's are league employees, not independent contractors as previously treated by the NFL. Mr. Steinberg also links us to the story as reported by the New York Daily News. The ruling could cost the NFL millions in employment taxes and benefits.

Here are links to two posts I did on this topic:

Who's your employee: inquiring minds and the IRS want to know

What to do when an independent contractor is really an employee

Last month a group of more than 60 institutional investors and asset managers with collective assets totaling more than $4 trillion, and leading publicly traded corporations, issued a climate policy call to action requesting Congress and the Federal government to take prompt action on global climate change. The coalition, called Investors and Business for U.S. Climate Action, is the first group of leading U.S. investors to issue a statement of this kind, and the first to outline the business and economic rationale for climate action.

It calls for U.S. government actions that are needed to enable the business and investment communities to reduce climate-related business uncertainty and risks and capture climate-related opportunities. The four-page statement, coordinated by Ceres and the Investor Network on Climate Risk (INCR), differs in several key ways from similar statements issued earlier this year by the U.S. Climate Action Partnership (USCAP) and the Global Roundtable on Climate Change (GroCC).

And the response to date? Not much. Ceres reports that to date there has been no response from any of the letters concerning the climate Policy Call to Action sent to President Bush, and the SEC. Against overwhelming evidence, the current government has yet to substantively address climate change risks. Every member of Congress also received a letter and so far only one has made a formal response. Massachusetts Rep. Edward Markey, Chairman of the House Select Committee on Energy Independence and Global Warming, released a press release applauding the Climate Policy Call to Action. 

Here is a link to Ceres' press release.

Keller Rohrback, a Seattle-based law firm and one of the leaders in 401(k) class action law suits, has now turned its attention to 403(b) plans. The firm, whose website is named ERISAfraud,com, announced its investigation into ithe National Education Association (“NEA”) Valuebuilder 403(b) variable annuity plan. As background, the NEA has 3.2 million members who work in public education, and it sponsors a 403(b) plan for them. 403(b) plans are named for that section of the Internal Revenue Code which permits employees of tax-exempt organizations under Section 501(c)(3) of the Code and certain educational insitutions to set aside money for retirement on a pre-tax basis - much like 401(k) plans.

The law firm is investigating whether the NEA is endorsing the program limited only to one vendor because of the revenue it receives, or whether it made a prudent decision to endorse the product because it was in the best interest of its members. While there is no certainty that a class action law suit will be filed, don't expect the fee issue involving the underlying funding method of 403(b) plans, variable annuities, to go away soon.

Accounting Web's story, Unpaid Trust Fund Taxes Are Serious Business, was about how some business engage in “pyramiding”, the practice of repeatedly withholding trust fund taxes from employees but intentionally failing to send them to the IRS. They're called ‘trust fund’ taxes because it's the obligation of employers to hold the employee’s money in trust until they deposit it with the government. Failure to do so in a timely manner can subject the business and the individuals involved to penalties and interest.

Now substitute "plan assets" for "trust fund taxes" and "Department of Labor" for "Internal Revenue Service" and it's about the same thing: an employer "borrowing" employee money to run the business. Some employers pay it back, others go out of business. And like the Internal Revenue Service, the Department of Labor takes this matter seriously.

But while employees usually have no way of confirming payroll tax deposits, the magic of technology makes it easy to go online with a daily valuation plan to check to see when their 401(k) contributions hit their accounts. Consistently late 401(k) deposits can be a red flag for an employer having financial problems.

It's ERISA audit time again. The regular tax season is winding down, and accountants will soon be turning their attention to ERISA plan audits. And if you’re a plan sponsor whose plan is subject to an ERISA audit, selecting a plan auditor is a fiduciary function. So here are a few mistakes to avoid when selecting an auditor:

• Don’t go through a competitive bidding process, but automatically go with your corporate auditor. Employee benefit plan auditing is a specialized field, and many otherwise capable accounting firms don’t have the necessary experience.
  

• Always select the one with the lowest price. While cost is an important factor, it should not be the only reason an auditor is hired. Sometimes the old adage is true, “you get what you pay for.”
  

• Don’t ask what training your auditors receive and what continuing education they get. Consider whether they are involved with the Employee Benefit Plan Audit Quality Center at the American Institute of Certified Public Accountants (AICPA).
  

• Don’t be concerned about continuity of your audit team. Accounting firms, like all firms, have employee turnover. You don’t want to be charged for “training” a new plan auditor every year.

It's now a common event to learn that yet another healthy large company has frozen its defined benefit pension plan. The most recent of which in the news was Fidelity. In many cases, these employers are beefing up other benefits such as an increased match or profit sharing contribution. But very few seem to be increasing their employee investment education programs to help them be better prepared for the increased responsibility they will be assuming for saving for retirement.

IBM, however, is stepping up to the plate to the tune of $50 million over 5 years for a financial education and coaching program for its 127,000 U.S. employees. Whether it's because IBM wants to burnish its image among employees disgruntled about retirement plan changes, or just because it's IBM considered to be one of this country's best employers, it doesn't really matter. The program will go beyond the usual financial education and will teach basic financial skills and offer one-on-one counseling. Seminars will be free to employees, spouses or domestic partners.

Will this be the new benchmark?

Here is a link to a recent guest column I wrote, New Law Good News for 401(k) Sponsors (PDF) that appeared in the Enterprise Forum, the on-line publication for executives of privately-held companies published by WWJ•950 NEWSRADIO, CBS Radio in Detroit, Michigan. It's published weekly. Present company excluded, there is good information here for private companies. You can check it out using this link.

Steve Rosenberg in his Boston ERISA  Law Blog recently asked the question, When is a Plan Admininstrator a Fiduciary? Steve then goes on to answer the question in writiing about a recent court decision in the which the decision's main analysis was whether one of the plaintiffs, the plan administrator, qualified as a fiduciary. ERISA requires that the Plan Adminstrator be named in the plan document. The Plan Administrator is a fiduciary because of discretionary responsibility for making the key decisions in the retirement plan such as:

• Determing eligibility for someone to participate in the plan;
• Determining the amount of benefits payable under the plan; and
• Approving or denying claims for benefits.

If it is, the Board of Directors and officers can be held liable as plan fiduciaries even if they know little about the day to day operations of the plan. The plan document would then provide that an administrative committee designated by the employer would be the Plan Administrator. The employer, of course, still has the duty to monitor the committee’s activities.

But you’re an employee who is asked - and willing to serve - as a member of your plan’s administrative committee, make sure that your employer will indemnify you from fiduciary liability -  except in cases of an intentional breach of fiduciary responsibility. How? Appropriate language in the plan document and fiduciary liability coverage.

Trade sanctions against Iran are already in place for U.S. companies with more punitive measures being proposed by Congress. Now legislators on both the federal and state level are pushing legislation that would require public employee retirement plans to divest themselves of investments in foreign companies doing business with Iran. Missouri already has had such legislation in place since last June which required public employee retirement plans to sell shares of companies with commercial interests in Iran, North Korea, Syria and Sudan. All four countries are accused by the State Department of sponsoring terrorism. Similar measures are now being considered by Georgia, California and Florida.  

And over in the private sector, Nationwide, one of the largest 401(k) providers, intends to add a "terror-free" mutual fund option to its approximately 25,000 401(k) plans. The fund is the Roosevelt Anti-Terror  Multi-Cap Fund The Fund's objective is to seek long term capital appreciation, and it invests primarily in common stock of U.S. companies of all capitalization ranges. It will not invest in companies that have ongoing business relationships with countries that sponsor terrorism. which will screen out companies with ties to Iran and others on the U.S. terrorism list. Will the other major 401(k) providers follow suit?

There's been a rash of stories lately about how we're saving too much for retirement carried by such publications as The New York Times, USA Today, MarketWatch. They cite studies by contrarian economists that tell us we're all being tricked by the on-line calculators put there by the fund providers to get us to invest more. Yesterday, a panel of academics and analysts at the National Aging Conference in Chicago took issue with this growing coverage that many people - including the boomers - will have enough at retirement.

But what about the unknown and the unexpected? Can we predict with certainty future investment performance, tax rates, health care costs, or a major emergency or family crisis? Of course not. And since we can't, we'll continue to pound out the same message to 401(k) participants as we have been since the beginning: save as much as you can!

Maybe the best response to these stories was made by Harry Rick Moody, director of academic affairs for AARP who was quoted at the National Aging Conference, "“Next we’re going to be told we’re eating too little.”

It started late last year with the beginning of the class action suits involving 401(k) fees (More storm clouding forming over 401(k) fees). Then followed by the publication of the General Accounting Office 401(k) Report commissioned by Rep. George Miller, D-Cal. Th e Congressman announced that the House Education and the Workforce Committee that he was in line to chair under the new Democratic-controlled Congress should hold hearings next year to examine the “fee issue” (Shoot fired across 401(k) industry bow).

And now, it’s official. 401(k) fees have become part of the political debate. Yesterday, the House Committee which Congressman Miller now chairs held hearings on 401(k) fees. The Democrats using verbiage such as “hidden fees erode retirement savings”, and the Republicans saying more information is confusing. What’s like to emerge under the new political alignment of Congress is legislation requiring less fees and more transparency - whatever that means.

What it means will be determined, of course, by the Department of Labor (DoL) who is working on regulations for reporting of fees, expenses, and revenue sharing on Form 5500; point-of-sale disclosures; a model notice under the fiduciary provisions of the Pension Protection Act, and what's "reasonable compensation." 

It's something that all of us - plan sponsors and service providers - will be focused on more than ever before.

We used to call them “rehires” back in the day: those employees who quit and were hired back. And it didn’t happen all that often. Many companies had policies not to. But now it’s different. Different times, different economy. Employees who left the nest decide they want to come back, and employers desperate for qualified, talented workers are happy to have them back.

They’re now called “boomerang workers”, and according to Benefit News they comprise about one-third of the workforce Steve Jobs at Apple Computing is one of them, and they’re not just confined to the tech companies.

We’ve seen a number of these boomerang employees return to clients who have to deal with 401(k) issues such as eligibility, vesting, and forfeitures. It means picking up the plan document and reviewing those complicated rules to determine how to handle such ERISA matters as break-in-service, eligibility computation period, forfeiture, hour of service, vesting computation period, rule of parity, and year of service.

If you’re an employer rehiring former employees, here are some things to keep in mind:

• Make sure that your plan and your Summary Plan Description clearly spell out how returning workers are treated. It’s ERISA, and everyone has to be treated the same.
• Review how their vesting and forfeitures were handled when they left. Those same ERISA rules govern how non-vested benefits should be treated when an employee returns.
• Use the appropriate eligibility rules to bring these employees back into your 401(k) plan. Those ERISA rules referenced above may - or may not - allow them to come in immediately.
• Keep the recent changes to the Pension Protection Act in mind. The Act made changes to vesting schedules that may affect these employees.

Recently I wrote about being careful to properly classify your workers: independent contractor or employee. But what if you make a mistake, and that independent contractor is really an employee. How do you fix it? Here's how. There's two aspects to the fix. From the retirement plan standpoint, you can use one of the correction programs offered by the Internal Revenue Service as part of their Employee Plans Compliance Resolution System (EPCRS). From the payroll tax standpoint, Accounting Web provides valuable Tips For Reporting Misclassified Employees. Not fixing it can be extremely expensive.

Steve Rosenberg writing today in his Boston ERISA and Insurance Litigation Blog ends his post, Insurance Brokers As ERISA Defendents, by commenting that "... it might be something for any entity playing a role in an ERISA governed plan to consider at the outset of their retention: should they put themselves in a position to be a fiduciary subject to ERISA, or should they avoid that like the plague?"

Until recently, one type of entity, wire house brokerage firms, did exactly that by not allowing their brokers to act as fiduciaries. For years they required their reps to act under rules which required them only to recommend “suitable investments”. This suitability requirement differs markedly from that of the fiduciary requirement imposed on registered investment advisors (RIAs) and CFPs. Not surprisingly, there has been an ongoing battle between this difference in legal responsibilities.

But now, Lisa Shidler writing for Investment News, Wirehouses warm to fiduciary status, tells us that the times are indeed a-changin’. Wachovia, Smith Barney, and UBS have all confirmed that they have begun allowing the top brokers to act as fiduciaries for 401(k) plans under certain conditions. And while Merrill Lynch declined to comment on the matter, she reports that industry sources say that some Merrill reps are also being allowed to act as fiduciaries.

Why? To be competitive with the RIAs and CFPs and to respond to plan sponsors who want them to accept fiduciary responsibility.

How long do we have to keep retirement plan records is one of those questions that plan sponsors ask when they start to run out of file cabinet drawers. They’re familiar with their reporting and disclosure obligations that they have under ERISA, but ERISA also requires that plan sponsors retain the records that support the information included in the 5500 filing and other reports for a specific period of time. So exactly how long should plan sponsors retain plan records? As with all things ERISA, there is the legal part and the practical part. Here’s both.

The legal part of the answer is that all plan-related materials should be kept for a period of at least six years after the date of filing of an ERISA-related return or report. The records should also be preserved in a manner and format (electronic or otherwise) that permits ready retrieval. All records that support the plan’s annual reporting and disclosure should be retained.

While many plan sponsors retain firms like ours to provide certain reports and prepare the 5500 filing, the plan administrator remains ultimately responsible for retaining adequate records that support these reports and filings.

And now here’s the practical part of the answer. While plan documents and records should be kept for a period of six years after the date of the filing to which they relate as discussed above, best practices would be to keep certain records for the life of the plan. If a plan sponsor has to respond to an inquiry from a government agency or a request for information from a plan participant, a thick paper trail makes it easier to respond.

And with the new tax laws, retirement plans are not only getting older, they can get better.

In the world of ERISA, there are three parties to a divorce: the retirement plan participant, the ex- (called the alternative payee), and the plan administrator. Or, in the proper order: the participant, the administrator, and the ex-. Because the plan administrator is the person in the middle since he or she has to decide whether a domestic relations order that provides for child support or recognizes marital property rights in the participant’s retirement benefits meets the requirement of a qualified domestic relations order (QDRO) under ERISA.

If, in the determination of the administrator, the order is not a QDRO or if there are competing claims, then the order issued by a state court can’t be honored. And that’s where it gets complicated. Steve Rosenberg in his Boston ERISA and Insurance Litigation blog writes about competing claims in his post, ERISA, Interpleader and Qualified Domestic Relations Orders. In the case he discusses, the ex-wife and the girl friend of a deceased participant are both claiming insurance proceeds under an ERISA plan. So what happens now. Steve writes:

And then what happens next of course, is that the plan administrator, quite rightly, files an interpleader action asking the court to figure out which one of the two should get the proceeds. A plan administrator would err if it did anything else, as ERISA preemption and the plan’s terms would suggest that the girlfriend should get the proceeds, but this would be in direct contradiction of a probate court order; there is no reason for the plan and its administrator to be stuck between the rock of the plan and the hard place of the probate court order. And avoiding being stuck in this type of position is exactly why federal law allows interpleader in this situation.

Steve’s post is a reminder that plan administrators must have QDRO procedures in place to determine the qualified status of domestic relations orders and to administer distributions pursuant to qualified orders. Administrators are required to follow the plan's procedures for making QDRO determinations.

Translated into practical terms, plan administrators should have the phone number handy of a qualified ERISA attorney.

Last month with ERISA class action suits in the news, I blogged about a recent ERISA class action suit in which the Fifth Circuit Court of Appeals vacated a lower court's decision certifying the case as a case action. Plan participants of the EDS 401(k) plan claimed that the fiduciaries of the plan improperly required them to purchase Company stock even after the stock became an "imprudent investment".

I said that I would leave  it to the attorneys to comment on the implications of this case on the current class action suit lineup. Alston & Bird did exactly that today in their ERiSA Litigation Advisory, Fifth Circuit Panel Reverses Class Certification in 401(k) Stock Drop Litigation: 

Several district courts have recently grappled with issues similar to the ones before the Fifth Circuit in Langbecker, and some have also determined certification to be inappropriate, at least in part. As the first circuit court to address these issues, the Fifth Circuit’s decision is of notable consequence and it provides defendants with authority to support their effort in defending against class certification. Given the importance of the issues and the forcefulness of the dissent, however, this decision may be headed for further review by an en banc Fifth Circuit.

Note: In referring to the U.S. Court of Appeals for the Fifth Circuit  in my prior post, I said that it has jurisdiction for the U.S. District Courts in Louisiana and Texas. I neglected to include Mississippi. Paul Secunda, assistant law professor at the University of Mississippi School of Law and a co-editor of the Workplace Prof Blog  kindly pointed out the oversight. Thanks for the correction, Paul.

It happens. An employee meets the 401(k) plan eligibility requirements, and the employer unintentionally does not offer enrollment at what should be the employee’s entry date. Roy Harmon in his Health Plan Law blog writes about a similar situation involving a group insurance benefit. The title of his post, “Instatement” In LTD Plan Appropriate Remedy Where Employer Fails To Enroll Employee, says it nicely. However, it required the employee having to sue the employer in order to receive benefits. The court, writes Mr. Harmon, opined that the employer acted as a fiduciary in its responsibility for benefit enrollment, and breached its fiduciary duty in the exercise of this responsibility.

Now having established that even an inadvertent mistake such as failure to a enroll an employee can be a serious matter, how does a 401(k) plan sponsor deal with a similar issue. “Serious”, by the way, in a 401(k) environment could mean the ultimate sanction, disqualification of the plan. Fortunately, it doesn’t usually require a law suit to make it right. The IRS has introduced a number of compliance programs starting in 1991 without them having to resort to disqualification.

These programs have been consolidated into the Employee Plans Compliance System (EPCRS), and IRS Revenue Procedure 2006-27, the most recent update of the EPCRS program, addresses the issue that started this discussion - an employer’s failure to offer 401(k) to an employee. The mechanics are beyond the scope of this discussion. The important consideration, however, is once found, employers should correct it as soon as possible. Out of sight, out of mind can have serious consequences.

A partial termination of a retirement plan is one of those things that you know  now what you didn’t know then. If it happens, then all plan participants must be fully vested. But there is no clear objective test as to when it happens. What got me thinking about this subject was yesterday’s article by Jon McLaughlin, Extinguishing Pension Plans By Partial Termination & Aggregation, that appeared in the The Business Law Society, a publication of students of the University of Illinois College of Law. Mr. McLaughlin writes:

This article explores the question of when successive reductions in plan participants should be aggregated for purposes of determining whether a partial termination occurred. The best guidance that the case law can currently render is that multiple reductions in force are aggregated, for purposes of determining whether a partial termination occurred, when they are related, meaning that they have spawned from the same “major corporate event”.

And non-lawyer that I am, I put the issue in the context of retirement plan administration. That is, if the partial termination occurs as a result of aggregation as written about by Mr. McLaughlin (rather than by a single event), then prior non-vested amounts of terminated employees may have been forfeited and reallocated to current employees or used to pay plan expenses. The result of which will require the plan sponsor to contribute money to restore the forfeitures which could be a sizeable amount.

So what’s a plan sponsor to do? Two things come to mind:

• Consider the partial termination rule in the context of planning for a sale of part of the company, downsizing that will affect participation in the plan - and plan accordingly.
• Determine whether it would make sense to submit the plan to the IRS for a ruling as to whether a partial termination occurred.
  

Target-maturity funds, a/k/a life cycle-funds, have made significant inroads into 401(k) plans, They're now a common sight on the fund menus of many 401(k) platforms. The recent Department of Labor regulation on default funds in which target-maturity funds are one of the fund types that can provide fiduciary relief has further spurred their growth.

Target-maturity funds are not the same as asset allocations funds. Both provide the convenience of diversification using only one fund. But they differ. Asset allocation funds, a/k/a life-style funds, are based on risk tolerance, e.g., conservative, moderate, or aggressive. Target-maturity funds, on the other hand, are constructed to offer 401(k) participants a fund that matches their retirement date. The asset allocation changes over the years and becomes more conservative, i.e., less equity exposure, as retirement nears.

While much has been written about target-maturity funds from the plan sponsor's standpoint, there has been little information available to 401(k) participants to help them decide whether to invest in these types of funds. Pamela Yip's article in the Dallas Morning News, "Are life-cycle funds right for you?" provides an excellent guide that 401(k) participants can use to make that decision:

• Pay close attention to fees.
• Evaluate the performance of the fund over at least five years.
• Evaluate the fund's managers and their tenure.
• Decide whether you're willing to put all your eggs in one basket and let the fund handle your asset allocation.
• Decide if a life-cycle fund complements your employer-provided benefits.
• Choose a fund that will provide enough of a return to fight the ravages of inflation at retirement.

Business Week reports on a new study by consulting firm Cerulli Associates that large Wall Street firms are likely to capture a sizeable share of the $300 billion expected to roll out of 401(k) plans this year. Much of this money will come from the Baby Boomers, the first of whom reached age 60 last year. And this will be just be the start as they begin to retire over the next 10 to 20 years.

Cerulli predicts that it’s the ability of these brokerge firms to provide advice through their large network of financial advisors combined with their brand recognition, products, and marketing expertise that will cause many Boomers to move their retirement funds from their employers to IRAs with these firms.

But on the other hand, an independent survey commissioned by Retirement Corporation of America in May, 2006 indicated that more Americans rely on themselves and their friends for making critical investment decisions than financial advisors. According to the survey, the majority of investors:

• Believe "you've got to have money to make money" because top quality advice is reserved for the wealthy,
• Prefer to trust themselves, friends or family for good advice ahead of the experts, and
  
• Have a low opinion of commission-driven financial advisors

The industry has some PR work to do.

While my main focus is qualified retirement plans, I try and stay up to date on what is happening in the world of welfare benefits, i.e., health plans, etc. After all, both types of benefit plans are subject to ERISA's reporting, disclosure, and fiduciary rules. And both types, of course, are regulated in these areas by the Department of Labor (DoL). And so I found Roy Harmon's post today on his Health Plan Law blog, EBSA "Targeting Criteria" Enhancements Lead to Large Enforcement Gains, of great relevance to my world of qualified retirement plans. EBSA is the Employee Benefit Security Administration which is that part of the DoL that is responsible for ERISA regulation and enforcement.

One of the targeting criteria that Mr. Harmon mentions is information received as a result of complaints from participants, fiduciaries, informants, or other sources in the community. The most common source of complaints is, I have observed, participants. The reason?  Their 401(k) contributions have not been timely deposited. Easily discovered in a 401(k) environment of daily recordkeeping with internet access.
 
The DoL takes the same view of late 401(k) deposits as the IRS does of late payroll tax deposits. Dim. "Timely" according to DoL regs requires that employee contributions be deposited in the 401(k) plan on the earliest date that they can reasonably be segregated from the employer’s general assets, but not later than the 15th business day of the month following withholding or receipt by employer. This has come to be known as the "15-day rule".

But there is no such rule. The DoL has taken the view in its audits that the deadline under the timely standard almost always occurs prior to the 15th day of the month following withholding. The deadline in almost every case has turned out to no more than one to two weeks following withholding and, in many cases, to be no more than a few days following withholding depending on the employer’s individual facts and circumstances, i.e., the manner in which payroll taxes are withheld.

And there is nothing that causes employee morale to fall through the floor quicker than late 401(k) deposits.

Back in the day, pre-ERISA day, many retirement plans had “bad boy” clauses. That is, a provision in the plan under which a participant could forfeit all benefits for being a “bad boy.” That usually meant among other misdeeds criminal conduct. Well, they’re back - at least as far as Congress is concerned. Last November, a diverse coalition of 23 citizen groups led by the 350,000-member National Taxpayers Union (NTU) sent a letter to House Speaker-Elect Nancy Pelosi and Senate Majority Leader-Elect Harry Reid urging them to support a bill that would eliminate the practice of allowing convicted lawmakers to draw taxpayer-subsidized retirement benefits.

At that time, no member of Congress was required to forfeit a pension unless convicted of crimes related to treason and espionage. The NTU noted that as a result, over the past 25 years at least 20 lawmakers guilty of other serious offenses have enjoyed Congressional retirement payments. The NTU also noted that congressional pension benefits are two to three times more generous than those normally offered to similarly paid private-sector workers, and even exceed the standard for most federal executives. There is also a lucrative, supplemental 401(k)-style plan.

The bill never passed. Now new Congress, new politics. Today by a vote of 431-0 the House of Representatives passed a bill that lawmakers convicted of crimes such as bribery, fraud and perjury will be stripped of their congressional pensions. The bill must be reconciled with the Senate bill approved last week as part of larger ethics and lobbying reform before the measure can be signed into law. Only minor differences exist between the House and Senate versions.

And what about those 20 lawmakers referred to above who were convicted of crimes and may be collecting benefits? They’re exempt because both versions of the bill are not retroactive. Surprised?

As the retirement plan industry matures (along with the participants), it seems to me as a non-attorney that the scope of ERISA-related litigation has expanded. Yesterday, I wrote about a U.S. Court of Appeals that vacated a lower court decision that certified a case as a class action. Timely, in the context of other law suits being filed as class action and those in the hopper.

Now today, both Rich Bales at Workplace Prof Blog and Steve Rosenberg in his Boston ERISA and Insurance Litigation Blog report that the U.S. Supreme Court has agreed to hear a case that will decide the extent to which, if at all, fiduciary responsibilities attach to the decision to terminate a retirement plan and the implementation of that decision. Again timely-and very important-in a business environment in which employers are terminating and freezing defined benefit pension plans. I expect that we will see more ERISA-related litigation involving significant issues such as these that will impact a large number of both plan sponsors and participants.

With the spotlight on ERISA class action law suits, I found this interesting and timely post on Barry Barnett's Blawgletter. He points us to last Thursday's decision by the U.S. Court of Appeals for the Fifth Circuit (U.S. District Courts in Louisiana and Texas) on a recent ERISA class action suit. In this case involving employer  stock, plan participants claimed that the fiduciaries of the EDS 401(k) plan improperly required them to purchase Company stock. Even after the stock became an "imprudent investment". The Court vacated a lower court's decision certifiying the case as a class action. Mr. Barnett's post includes a link to the Court's decision. I'll leave it to the attorneys out there to comment on what implications this case could have on the current class action law suit line-up.

That's a picture of the Golden Globe award given each year by the Hollywood Foreign Press Association (HFPA). The "no goody bag now going untaxed" is the announcement today by the Internal Revenue Service that it reached an agreement with the HFPA  resolving outstanding tax responsibilities with respect to Golden Globe Awards presenter gift baskets. And these aren't just baskets. They include luxury trips, jewelry, and consumer electronic products that were estimated to be worth up to $100,000 at last year's Oscar awards.

The agreement is part of a continuing outreach by the IRS to the entertainment industry regarding their income tax liabilities. An outreach that began last year with the Academy of Motion Picture Arts & Sciences resolving outstanding tax responsibilities with respect to Academy Awards gift baskets.

Now this story doesn't have a whole lot to do with retirement plans - actually nothing at all to do with retirement plans. But I like it because it is a good example of the Two Part Theory of Political Economics ascribed to Nobel winning economist Milton Friedman.

• Part One: “Them what has gets”.
• Part Two: “Ain’t no free lunch”.

The Economics of Providing 401(k) Plans: Services, Fees, and Expenses

The Investment Company Institute, November 2006

Executive Summary

• 401(k) plans are a complex employee benefit to maintain and administer and are subject to an array of rules and regulations. Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services.

• Employers and employees generally share the costs of operating 401(k) plans. As with any employee benefit, the employer generally determines how the costs will be shared.

• About half of the $2.4 trillion in 401(k) assets at year-end 2005 was invested in mutual funds, primarily in stock funds. Mutual funds are required by law to disclose a large amount of information, including information about fees and expenses and portfolio turnover.
  

• 401(k) investors in mutual funds tend to hold low-cost funds with below-average portfolio turnover. Both characteristics help to keep down the costs of investing in mutual funds through 401(k) plans.
  

401(k) Resource Guide - Plan Sponsors - General Distribution Rules

Executive Summary

Distributions from 401(k) plans can be complicated and confusing. The IRS has just made available a this resource guide that covers the basics of 401(k) distributions. Each topic has a link to the applicable Internal Revenue Service publication.

Rick Bales over at Workplace Prof Blog points us to a joint Vanguard/Wharton study of over a million 401(k) participants that indicates what works and what doesn’t in maximizing long-term investment returns. Not surprising:

• High-turnover trading hurts long-term returns.
• Periodic re-balancing helps long-term returns.
• Holding balanced or lifecycle funds is the best "trading" strategy of all.

But the real question is, the answer to which we will have to wait: will the new investment advice provision effective this year make a difference?

Last minute tax planning is like cramming for a final exam. You don’t always get the best results. Starting now to do 2007 retirement planning can make a big difference. Here are some of the situations we saw in late December, 2006:

• Not enough compensation for a shareholder-employee of an S corporation. Many owners will minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.

• Not enough time to maximize 401(k) contributions. Adopting a 401(k) in the latter part of the year may not give an employee enough time to maximize his or her own contributions. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral.

• Timely notice not give to employees. Tax planning is a time-sensitive activity, and sometimes notices to employees must be made in order to achieve desired results. For example, an employer sponsoring a SIMPLE must give its employees notice of the plan provisions and employer contribution levels, including any plan changes, at least 60 days prior to the start of the next calendar year. An employer who did not give the requisite termination notice by November 1, 2006 meant no profit sharing/401(k) plan for 2007. An employer with a SIMPLE should keep November 1, 2007 in mind if a different plan type is intended in 2008.
  

• Employer contributions made early in the year. While it can be advantageous from an investment standpoint to get the money working as soon as possible, this can sometimes cause problems. For example, if an employer has already made its profit sharing contributions for the current plan year, those contributions may practically preclude a defined benefit plan from being adopted for the year. It may also eliminate the adoption of a profit sharing plan whose allocation method might better favor a Highly Compensated Employee if contributions to a SEP have already been made.
  

The Pension Protection Act of 2006 makes significant changes affecting 401(k) plans - for the most part favorable to plan sponsors and participants.

Here is a summary of those changes effective in 2007:

• Increased 401(k) Limits. For 2007, the annual limit for 401(k) contribution increases to $15,500. The catch-up for age 50 and older remains at $5,000.
  

• Default Investments. Beginning after January 1, 2007, the Act permits the use of default investment choices beyond money market and stable value funds that plan sponsors can use for employees who do not make investment elections. The Department of Labor issued proposed regulations late last year which will be finalized soon.

• Investment Advice. Beginning after January 1, 2007 the Act encourages plan sponsors to make investment advice available to 401(k participants. There will be much to comment upon later this year.
  

• Faster Vesting of Employer Non-Elective Contributions. Effective in 2007, employer non-elective contributions, i.e., profit sharing, must vest according to rules applicable to matching contributions: no less favorable than either 3-year cliff vesting (100% vested after 3 years of service), or 6-year graded vesting (20% after two years, 20% a year thereafter, 100% after six or more years).
  

• More Frequent Benefit Statements. Effective in 2007, the new law requires that Plan Administrators must provide a benefit statement: 1) at least once a quarter to participants in plans in which they can self-direct their accounts, 2) at least once a year to participants in plans in which they cannot self-direct the investment of their accounts, and 3)upon request to any beneficiary.
  

• Diversification of Investments in Employer Stock.  Effective in 2007, participants must be given the right to diversify their investments in employer stock. Exceptions to the new law are provided for certain privately-held companies and Employee Stock Ownership Plans.
  

President Ford signing the Employee Retirement Income Security Act (ERISA) on September 2, 1974.

Just like Sergio Leone's classic 1966 movie, 2006 will indeed be memorable.

And so with apologies to Mr. Leone and Clint Eastwood, here are my 2006 choices for the Good, the Bad, and the Ugly in Pensionland:

• The Good: The passage of the Pension Protection Act of 2006 (PPA). The new law makes significant changes to practically every retirement plan in which approximately 44 million people are participants. The 900 page bill affects all types of retirement plans including defined benefit plans, profit sharing and 401(k) plans, cash balance plans, and employee stock ownership plans (ESOPs). Most of the changes are effective in 2007 and 2008 but some are retroactive or delayed. The PPA significantly enhances 401(k) plans - now the retirement plan of choice by corporate America.

• The Bad: The decline of the defined benefit plan system. While defined benefit pension plans were on the rocks prior to 2006, there was a “perfect storm” this year. A combination of new accounting regulations, rising interest rates, uncertainty in the financial markets and escalating premiums to the Pension Benefit Guaranty Corporation is causing an acceleration of defined benefit pension plans being terminated and frozen. Will 401(k) plans fill the void?

• The Ugly: the increasing number of scams and outright thefts from retirement plans. Sizeable account balances and the Boomers starting to retire have become targets. While the numbers are relatively small, they can have a profound impact on plan participants and retirees. The regulatory agencies - the National Association of Security Dealers, the New York Stock Exchange, and the Department of Labor - are ramping up their enforcement activities to deal with this growing problem. 

Chutzpah, derived from the Yiddish, is the quality of audacity for good or for bad.  For the bad in the case at hand. And "case" it is. Someone stole 3 laptops from the London Metropolitan Police with payroll and pension data on 15,000 Met police officers. And if it could happen to Scotland Yard, one of the world's preeminent law enforcement agencies, it could also happen to your retirement plan's data.

I covered this problem several months ago, and it bears repeating, It's 10:00 in the evening. Do you know where your 401(k) plan is? I included a link to Tom Fragala's article on his Truston Identity Theft Blog on Top 10 Ways To Protect Yourself From Laptop Theft. Here they are in brief:

1. Lock it.
2. Be careful at home.
3. Hide it.
4. Don't leave it unattended.
5. Password protect it.
6. Make it easy to return.
7. Personalize it.
8. Write down your computer info.
9. Back up your data.
10. Protect your backups.
11. Bonus tip 1. Install laptop trace software.
12. Bonus tip 2. Install remote locking software.

You can call them independent contractors and pay them as such, but they may actually be employees.

This matter is especially timely now as many retirement plans (and health insurance plans) have January 1st employee enrollments. It’s critical that workers be treated correctly for tax compliance purposes.

If someone is an employee, then the employer must withhold income tax, withhold and pay Social Security and Medicare taxes, and pay unemployment tax. In addition, he or she may be eligible and have to be included in benefit plans. However, the employer generally does not have any of these obligations for an independent contractor.

Penalties and interest 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 as an employee. And it can be expensive as Microsoft found out.

If in doubt, any doubt, seek guidance from your CPA or attorney. This is one of those "kids, don't try this at home" situations.

Roth 401(k): Giving Employees A Choice

Executive Summary:

With the uncertainty now removed about the Roth 401(k)’s fate, many retirement plan sponsors are now adding this option to their 401(k) plans. Those plan sponsors that haven’t should consider adding it in order to:

• Provide participants with the opportunity to diversify their future tax burden, and
  
• Keep their plans competitive with other employers.
  

If you are a small business owner who has established a retirement plan this year, you may be eligible to receive a tax credit for the cost of implementing a plan. And a tax credit can be better than a tax deduction. The same legislation that Congress passed in 2001 that increased benefit and contribution limits - which the Pension Protection Act of 2006 extended - provided a tax credit to encourage small businesses to establish retirement plans. This tax credit is in addition to the tax deduction you may receive for the contributions to the plan. The tax credit may be claimed for a maximum period of three years for retirement plans established for the 2002 plan year or later.

Here are some questions and answers  about the tax credit:

Who is an eligible employer?
The tax credit is available to employers with no more than 100 employees who earned at least $5,000 in the previous year.

How much is the tax credit?
The credit is limited to 50% of the first $1,000 in expenses; therefore, the credit cannot exceed $500. The credit is nonrefundable, i.e, you may not generate an income tax refund for the credit.

What expenses are eligible?
Expenses eligible for the tax credit include those defined as the plan's start-up costs, which are ordinary or necessary for the establishment of the plan. These include expenses incurred to establish the plan, administrative fees and costs incurred to educate employees about the plan.

What plans are eligible for the tax credit?
Eligible plans include SEP IRAs, SIMPLE IRAs and qualified plans, such as 401(k) plans, profit-sharing plans, and defined benefit plans. The plan must cover at least one employee who is not classified as a highly compensated employee.

How do you claim the tax credit?
You must file IRS Form 8881 - Credit for Small Employer Pension Plan Startup Costs.

Check the fine print with your tax adviser to see if you are eligible to take advantage of the tax credit.

Impact of Pension Protection Act of 2006 on Profit Sharing and 401(k) Plans

Executive Summary:

Called the most significant retirement plan legislation since ERISA, the Pension Protection Act of 2006 (PPA) signed into law on August 17, 2006 makes important changes affecting both defined benefit and defined contribution plans.

While much of the attention in the popular press has been focused on the defined benefit funding aspects of the new law, we believe that the most far reaching impact will be on profit sharing and 401(k) plans. And for the most part highly favorable to plan sponsors and participants.

Future Briefings will provide you with details of the Act’s provisions affecting such areas as:

• Safe harbor default investments
• Investment advice for participants
• New fiduciary liability relief
• Tax planning opportunities

Will there be a hedge fund in your 401(k) plan anytime soon?

USA Today reporter, Adam Shell reports, in his Friday story, Investors add a bit of hedge fund to investment mix, that hedge funds are going retail.

Mr. Shell reports that:

Since the start of 2003, the number of mutual funds that utilize hedge fund strategies has more than doubled, to 49 from 21, Lipper says. And 12 of these funds — dubbed "equity-market neutral" and "long/short equity" — were born this year alone, a 32% jump from 2005.

He also tells us that:

The rising popularity of these funds prompted fund expert Morningstar to create its first "long-short" category in March. Assets have surged 42% to $16.1 billion from $11.3 billion in nine months. Major fund companies such as Janus, American Century, Rydex, Dreyfus and Charles Schwab now offer these so-called alternative funds.

Not quite the $50 billion that Lipper tells us is in target-maturity funds, the newest kid on the 401(k) block, but my guess is that hedge funds will start to move in soon.

I’m not an art critic, and I don’t play one on the Internet.

So I understand this picture, (Untitled by Jackson Pollack, incidentally), as much as perhaps ... say the average 401(k) participant understands his or her plan’s summary plan description (SPD). Which is to say, in many cases, not much.

And it’s quite obvious why not. Despite the regulatory requirement that SPDs should be written to be understood by the average plan participant, they are written by attorneys for attorneys. And why that is so should also be obvious. Despite such disclaimer clauses in an SPD as

This Summary Plan Description is a brief description of your Plan and your rights and benefits under the Plan. This Summary Plan Description is not meant to interpret or change the provisions of your Plan. A copy of your Plan is on file at your Employer’s office and may be read by you, your Beneficiaries, or your legal representatives at any reasonable time. If you have questions regarding your Plan or this Summary Plan Description, you should ask your Plan Administrator. If any discrepancies exist between this Summary Plan Description and the actual provisions of the Plan, the Plan shall govern.

attorneys have told me that courts often permit employees to rely on the SPD when it conflicts with the terms of the plan document.

And so what’s a plan sponsor to do?

Steve Rosenberg makes a very sensible suggestion in a recent post in his Boston ERISA & Insurance Litigation Blog, Summary Plan Descriptions and Grants of Discretion:  

And some of this goes back to a fundamental issue, of whether participants really understand - or even read - the summary plan description, or whether it is instead simply something that gets pulled out by a participant’s lawyer after a claim for benefits has been denied. The summaries exist because we need to mandate disclosure, and certainly the more the better - but I don’t think it is realistic to structure a legal rule and indeed an entire regime around the myth that participants actually do read them, rely on them and understand them. When we do that, we move into simply creating traps that make the administration of plans more difficult and create loopholes to be exploited in litigation; while this may be good for lawyers’ wallets, I think we are all better served by legal rules that fit comfortably with how non-lawyers actually conduct themselves in their day to day lives.

Could this ever happen?

If you don't think that 401(k) fees aren't going to become a hot issue next year, then consider how local newpapers picked up on last Thursday's Government Accounting Office Report on 401(k) fees commissioned by Congressman George Miller (D, Ca) and his comments about having Congressional hearings.

Here is just a sampling from newspapers across the country:

• The Columbus Dispatch, Feds Press for Better Fee Disclosure
• Honolulu Advertiser, Congress to probe 401(k) charges
• The Motley Fool, Frightening Fine Print
• The Buffalo News, 401(k) fees seen taking big piece of retirement savings
• Kansas City Star, Greater 401(k) clarity is urged
• Tennessean, U.S. says 401(k) fees hurt millions
• Florida Today, Congress to push for improved 401(k) fee information
• The Nashua Telegraph, Sponsor fees may be chipping away at your 401(k) savings
• San Francisco Chronicle, Dems set to take on pension/health care industries
• Seattle Times, Participants in 401(k) plans left mostly in the dark about fees
• Courier Post (Camden, NJ), Mystery surrounds fees charged for 401(k) funds
  

If you’ve been wondering how the results of last month’s mid-term elections are going to affect the 401(k) industry, then wonder no more.

401(k) fees now in court have just moved into the political arena.

Yesterday’s article in the San Francisco Chronicle, Dems set to take on pension, health industries, reported that Rep. George Miller, D-Cal., said the House Education and the Workforce Committee that he is in line to chair under the new Democratic-controlled Congress should hold hearings next year to examine the fee issue.

A just released Government Accounting Office report, Changes Needed To Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees (43 pages, PDF), that was commissioned by Congressman Miller, said:

• Congress should consider amending ERISA to require sponsors to disclose fee information in a way that allows investors to compare options.

• The Department of Labor should require plan sponsors to report a summary of all fees paid out of plan assets or by participants.

• Conflict of interest problems arise when pension consultants are not required to disclose that they are being paid by investment companies that they are recommending to plan sponsors.

It's critical that workers' hard-earned savings not be wasted on excessive fees. Workers need complete, accurate and clear information about the total cost of different investment options so they can choose the ones that are best for them.

Buckle up your seat belts!

One of those year-end retirement plan housekeeping matters is for plan sponsors to review the adequacy of the plan's fidelity bond required by Department of Labor (DoL) regulations. Here is a summary of the fidelity bond rules.

Overview

A fidelity bond is required to protect the assets in a retirement plan from misuse or misappropriation by the plan fiduciaries. In other words, intentional acts of fraud or dishonesty by a fiduciary who is a trustee and  any person who has:

• Physical contact with cash, checks or other Plan property.
• Power to transfer or negotiate Plan property for a price.
• Power to disburse funds, sign checks or produce negotiable instruments from the Plan assets.
• Decision making authority over any individual described above.

1. Maximum Amount. The new Pension Protection Act of 2006 increases the maximum bond amount to $1 million for retirement plans that hold employer stock or other employer securities. A retirement plan would not generally be considered to hold employer stock or other employer securities if these assets are part of a broadly diversified group of assets such as mutual funds. The new bonding provision is effective for plan years beginning on and after January 1, 2007.
2.  Non-Qualifying Assets. If more than 5% of the plan assets are in limited partnerships, artwork, collectibles, mortgages, real estate or securities of "closely-held" companies and are held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code Section 408, the plan sponsors need to do one of two things: a) make certain that the bond amount is equal to 100% of the value of these "non-qualified" assets or b) arrange for an annual full-scope audit, where the CPA physically confirms the existence of the assets at the start and end of the plan year.

There can be serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond.

1. It can be a red flag to the DoL that they need to take a closer look at the plan.
   
2. In cases where a retirement plan has more than 5% in non-qualified assets, a serious underwriting risk may arise if the non-qualified assets are not properly listed on the bond application. This is because non-qualifying assets carry a higher level of risk for loss. If the non-qualified assets are not listed on the bond, the underwriter would have cause to deny coverage if there was a loss due to misuse or misappropriation by a plan fiduciary. Under those circumstances, the loss may be denied and the trustees could be liable for the losses to the plan.

Last Wednesday, Keller Rohrback L.L.P., the lead counsel in numerous ERISA class actions, announced that it was investigating whether several 401(k) providers breached their fiduciary responsibilities by entering into improper fee arrangements with mutual fund companies they selected.

The service providers mentioned were Hartford Financial Services Group, Inc., Lincoln National Corp., and Principal Life Insurance Co.

Keller Rohrback’s investigation closely follows class action suits filled against eight of the country’s largest employers in which the issues common to all involved “excessive fees”. In writing about these law suits last month, I asked, Are newly filed 401(k) class action law suits the wave of the future?

It’s starting to look like the answer is “yes”.

Some employers just don’t get it.

Management-Issues blog reports on a new survey that indicates the employers are out of sync with their employees on the role that compensation and benefits play in attracting, retaining, and motivating employees. The result is that employers are losing top talent.

The survey of 262 large U.S. companies and 1,100 workers carried out by consultants Watson Wyatt Worldwide and WorldatWork, the association for human resources professionals, indicates that

• While none of the companies surveyed think health care coverage is a key reason that staff quit, almost a quarter (22%) of top employees cite it as an important reason; and
• 17% of employees see retirement benefits as a factor in retention compared to only 2% of employers.

According to Laura Sejen, director of strategic rewards consulting at Watson Wyatt:

Those employers that understand what drives commitment — particularly among top performers — and act on it will be best positioned for success.

Here is the link to the article, Disconnects see talent heading for the door.

It seems like there is always a deadline to meet in Pensionland.

The next one of which is the December 1 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 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.

A few months ago, I wrote about promoters fishing for retirement plan dollars. I talked about the call of early retirement for the Boomers and retirement plan provisions that permit in-service distributions - all factors that are apparently attracting promoters to get at that cash. The NASD concerned about this danger to retirement plan participants issued an Investor Alert. 

Along a similar line, Sandra Block in last Friday's USA TODAY reports that rolled-over cash might not be secure. She discusses the recent memo that the NYSE's enforcement arm posted on its website reminding member firms that they are required to recommend investments appropriate for investors rolling over retirement  benefits.

So here is something to keep in mind. All of this takes place in a non-ERISA environment which means that brokers are not fiduciaries. Their obligation is only to recommend "suitable investments" while meeting certain disclosure and sales rules.

Well, maybe two out of three in New Jersey.

A think tank in that state, New Jersey Policy Perspective, recommends in a recent report eliminating the state income tax deduction for 401(k) contribution.

The report, IF IT AIN'T BROKE...New Jersey's Income Tax Makes Dollars and Sense  says that New Jersey’s problems can be solved by increasing the state’s income tax by approximately $1 billion. Half of that increase, or $500 million, would come from eliminating the deduction for 401(k) contributions. This would also, says the report, eliminate an inequity in the way the state treats retirement savings. Here is their reasoning:

The few deductions and exclusions allowed by New Jersey's income tax code create a more equitable system because more income is taxed and special preferences are minimized. The state's treatment of retirement income is one of the few exceptions. Those making contributions to 401(k) retirement plans in New Jersey can exclude the amount from their taxable wages, but no deduction from taxable wages is allowed for contributions made to SEP IRAs, Simple IRAs, ROTH IRAs, Federal 457 plans, 403(b) plans, Traditional IRAs, Keoghs and 414(h) plans.

Equity in taxation requires that all taxpayers in similar circumstances be treated alike. Taxpayers would continue to get a federal deduction so there is still incentive to save for retirement.

What’s next? The mortgage interest deduction?

Hat Tip to Randy Bergmann's Blog.

“It” refers to the Pension Protection Act of 2006 which provides fiduciary relief in several areas. This relief includes:

• Investment Advice. Many plan sponsors were previously reluctant to add an investment advice component to their 401(k) plans. The Act specifically permits qualified fiduciary advisers to deliver personally-tailored investment advice to participants in 401(k) plans and other tax-advantaged savings vehicles. This is effective after December 31, 2006.

• Default Investments. If a participant failed to make an investment election, most 401(k) plans used a money market or stable value fund as a default fund because of fiduciary liability concerns. The Act provides for a safe harbor subject to Department of Labor (DoL) regulation. The DoL’s recently issued proposed regulation permits the default fund to be either an asset allocation fund, target-maturity fund, or professionally managed fund.

• Blackout Periods and Mapping. The Act provides fiduciary relief during a “blackout period” including fund “mapping” if DoL prescribed conditions are met. A blackout period occurs when fund investments are changed, and a participant has limited or no ability to make fund changes. Mapping is that process in which a participant’s funds are transferred to similar mutual funds as determined by asset category, class and investment style. This is effective for plan years beginning after December 31, 2007.

That’s Larry Brown, recently fired head coach of the New York Knicks, possibly thinking ahead after the just revealed $18.5 million settlement of his employment contact.

Revealed because under the terms of the settlement arbitrated by NBA Commission David Stern there was a non-disclosure clause. Instead, the media was scooped by the Cablevision (owner of the Knicks) Form 10Q filed with the SEC on November 8, 2006.

Coincidentally, Commissioner Stern’s decision about Coach Brown’s severance pay comes at a time when our retirement plan clients are going through a year end amendment process. The process includes that part of the IRS proposed Section 415 regulations that provide plan sponsors the first formal guidance on an employee’s deferral of severance pay.

It’s sometimes difficult to explain - and for clients to understand - technical and arcane “pension-speak” so being able to point to a “for example” helps.

The new guidance says that employees are eligible to contribute post severance compensation to their 401(k), 403(b) or 457 accounts under certain conditions. Post severance payments include sick, vacation and other leave as well as regular pay, commissions, overtime, shift differential pay, and bonuses.

 In order for an employee to defer post severance compensation, the regulations require that:

• The post severance deferral must represent pay that employees would have received, or leave that could have been taken, if they had continued to work.
• The agreement to defer must be initiated prior to the month this compensation would otherwise be paid or made available.
• Post severance pay deferrals must be made within 2½ months after termination of employment or retirement.
• The total amount deferred for the calendar year (normal payroll deferrals plus post severance deferral) cannot exceed the annual maximum limit that is in effect for the calendar year the deferral is made into the plan.
• FICA tax, if applicable, must be deducted from these amounts before deferring into the plan.

Plan sponsors considering whether to permit such deferrals should also consider whether their payroll systems need to be modified to distinguish between pre- and post-severance compensation.

NBA fans may enjoy reading Henry Abbott's TrueHoop blog. Henry, like me, is also coached by Kevin O'Keefe and his lexBlog assistant coaches.

A recent study by implication supports the use of asset allocation and lifestyle funds as default funds which were those designated in the Department of Labor's recent proposed regulation.

The study by Tekeshi Yamaguchi, Olivia S. Mitchell, Gary Mottola, and Stephen P. Utkus, "Winners and Losers: 401(k) Trading and Portfolio Performance" (October 2006) for the Pension Research Council  found that::

... in aggregate, the risk-adjusted returns of traders are no different than those of nontraders. Yet certain types of trading such as periodic rebalancing are beneficial, while high-turnover trading is costly. Interestingly, those who hold only balanced or lifecycle funds, whom we call passive rebalancers, earn the highest risk-adjusted returns  (emphasis supplied).

Hat tip to Barry Barnitz' Financial page blog which links through to the entire article.

From its humble beginning in 1974 as part of the Employee Retirement Income Security Act of (ERISA), the Individual Retirement Account along with cousins Roth, SEP, and SIMPLE, has grown up. It's now an increasingly important investment vehicle for retirement savings and tax planning. And it will become even more so as the Boomers start retiring.

In just 5 short years since the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, we have seen some significant - and positive - changes in the tax laws that affect IRAs with more to take effect between now and 2010. These include:

• Portability between IRAs and qualified retirement plans.
• Increased IRA contribution limits including the addition of a catch-up.
• Roth 401(k) option starting in 2006.
• IRA distribution to charity for donors over age 70½ for 2006 and 2007.
• Rollover to an IRA from a qualified retirement plan by a non-spouse beneficiary beginning in 2007.
• Direct transfer of tax refund to an IRA starting in 2007.
• Direct rollover to a Roth IRA from a qualified retirement plan beginning in 2008.
• Elimination of the Roth IRA income restriction for converting a traditional IRA to a Roth IRA starting in 2010.

For an excellent history of the IRA, download a copy of The Individual Retirement Account at Age 30: A Retrospective (24 pages PDF) published in 2005 by the Investment Company Institute, the national association of the U.S. investment company industry, i.e, mutual fund companies.

Most of the retirement plan coverage in the mass media is about bad things happening to employees or some aspect of the Pension Protection Act of 2006. So it's always good when a writer points out to plan sponsors that they have certain obligations in managing their retirement plans and the problems to avoid.

Marc Miller does exactly that in his article, Business Owners Beware of Retirement Plan Pitfalls, that appeared recently in the Oroville California Mercury Register.  Mr. Miller cautions business owners to:

• Retain plan records
• Distribute employee notices
• Make prudent investment choices
• Make timely salary deferral deposits

The Department of Labor which oversees fiduciary, reporting, and disclosure aspects of retirement plans has a special focus on these two areas:

• Timely salary deferral deposits. No, not a word processing glitch, but to emphasize again the importance of remitting employee contributions to 401(k) providers as soon as possible.
• Fees paid by a retirement plan.
  

• Discrimination testing.
• Plan loans.
• Vesting.
• Military leave issues.

It could be on someone's laptop computer.

And it could have been your 401(k) plan's employee information and financial data as it was for one company whose 401(k) information was on a laptop owned by a Savannah accounting firm that was stolen earlier this month.

In fact, more than 600,000 laptops are stolen every year, totaling about $720 million in hardware losses, according to 2003 figures from computer insurer Safeware, The Insurance Agency Inc. And the FBI says that 97% of stolen laptops are never recovered.

But the damage is not just the hardware losses. It's the potential for identity theft. 401(k) records generally have it all: employee names, addresses, dates of birth, dates of hire, Social Security number, and account balances.

And who has access to those records? It could be anyone at the plan sponsor or the service providers that "touch" the 401(k) plan.

Plan sponsors and other fiduciaries have a lot to be concerned about these days. Add one more item to the list.

Tom Fragala's article on his Truston Identity Theft Blog, "Top 10 Ways To Protect Yourself From Laptop Theft" may help. 

Maybe yes, maybe not quite yet.

On the yes side, Joseph Kenney in a post makes a compelling argument for recent college grads to immediately start contributing to their employers' 401(k) plans on their first job.

On the not quite yet side, Liz Pulliam Weston, a columnist for MSN Money, says first things first. Pay off that student loan and any outstanding credit card debt.

Obviously, there is no one right answer. It just depends.

Here are the links to the two articles.

Joseph Kenney on Retirement Planning for Recent College Grads.

Liz Pulliam Weston on How to Blitz Your College Debts.

The IRS today announced 2007 cost-of-living adjustments to dollar limitations for qualified retirement plans. Here are the highlights:

Walter Updegrave, a financial columnist, for CNN Money.com writes about the Solo 401(k) for self-employed individuals. Combined with a profit sharing component, this type of defined contribution plan can produce the largest contribution compared to other defined contribution plans. Mr. Updegrave makes this point by comparing the Solo 401(k) to a SEP using the example of a self-employed individual, age 50, who has $50,000 in earned income.

A $20,000 difference as shown below:

The NASD has an easy to understand vendor-neutral website that beginning 401(k) participants can use to learn 401(k) investment basics.

Here is a link to their site, Smart 401(k) Investing.

As we know, the recently issued proposed 401(k) default investment regulations by the Department of Labor (DoL) allows 401(k) plan sponsors to select default investments funds that strive to achieve long-term capital appreciation as opposed to mere preservation of capital.

But what was the DoL's basis for permitting the use of investments other than the historically selected money market and stability of principal funds?

The DoL used  a simulation model to estimate the impact of the proposed 401(k) default investment regulations on retirement savings in the U.S. The model, called PENSIM, was developed by the firm Policy Simulation Group that specializes in the use of computer simulation models to estimate the implications of private sector and public sector policies in the areas of portfolio management, health insurance and pensions.

For you policy wonks - and actuaries - in the crowd, here is a link to the 231 page PDF Overview of PENSIM.

Hat tip to Prudence Mann's Fiduciary Investor blog.

The picture shown above is a screenshot of a title screen from The Investment Simulation Spreadsheet developed and copyrighted by Tom O'Haver, University of Maryland. It is believed that the use of a limited number of web-resolution screenshots qualifies as fair use under United States copyright law, as such display does not significantly impede the right of the copyright holder to sell the copyrighted material, is not being used to turn a profit in this context, and presents ideas that cannot be exhibited otherwise.

One of the tenets of the law of physics is that for every action there is a reaction.

So too in Pensionland. The increasing amount of dollars in retirement plans raises the stakes for fiduciaries who have now been discovered by class action plaintiff lawyers. Steven Rosenberg in his Boston ERISA Law Blog points us to a story about Travelers' new insurance policy that will provide investment advisors and other fiduciaries with expanded coverage for the risks associated with providing investment services.

The policy will cover claims for things such as breaches of fiduciary duties owed to pension plan participants. Important coverage for advisors who will be offering investment advice to participants after the January 1, 2007 effective date under the Pension Protection Act.

Here is the link to Steve Rosenberg's post which provides a link to the full story in the Insurance Journal.

A lot if Vanguard's experience with providing on-line financial plans for individual investors is a guide. According to Investment News, Vanguard is now providing 4,000 new plans a month - up from 15,000 for all of last year.

Here is the link to the Investment News article.

That’s the title of a special report just published by Judy Diamond Associates, Inc. and written by Keith Clark of DWC Consultants which discusses the basics of the qualified plan industry and the strategies firms use to provide services to plan sponsors and participants.

Among the trends that the report highlights are two types of qualified retirement plans.

One of which is the Cash Balance Plan which says the report is

desirable for employers without a current defined benefit plan wanting to contribute additional amounts (in excess of the annual defined contribution limits) on behalf of one or more highly compensated employees.

The other of which is the one-person defined benefit plan (solo DB) of which says the report

DB Boomer plans are hot because they allow business owners to put away far more each year as compared to a defined contribution plans. Solo 401(k)'s, 412(i)'s and the like are here to stay.

More about both types at a later date.

Here is the link to the report (PDF).

Judy Diamond Associates, Inc., a pioneer publisher of health, welfare, pension and executive compensation data for the financial services and corporate markets which includes the website  freeerisa.com on which Form 5500s that can be accessed. 

The Department of Labor just released its Five Year Strategic Plan for Fiscal Years 2006-2011. One of the DoL's four strategic goals is to strengthen economic protections for workers which includes enhancing pension and health benefit security.

Here are the DoL's national projects for that goal in 2006:

• The Employee Contributions Project is aimed at ensuring the timely deposit of participant contributions to 401(k) plans and health care plans.

• The Employee Stock-Ownership Plans (ESOP) project focuses on the unique violations arising from ESOPs, the most serious of which generally involve the incorrect valuation of employer securities.

• The Health Fraud/Multiple Employer Welfare Arrangements (MEWAs) project, through which EBSA investigates abusive and fraudulent MEWAs created by unscrupulous promoters who sell the promise of inexpensive health insurance, but default on their obligations.

• The Rapid ERISA Action Team (REACT) project responds in an expedited manner to protect the rights and benefits of plan participants when the plan sponsor faces severe financial hardship or bankruptcy, which may put the assets of the employee benefit plan in jeopardy.

• The Consultant/Advisor Project (CAP) focuses on the receipt of improper, undisclosed compensation by pension consultants and other investment advisers.

Hat tip to Workplace Prof Blog.

It was bound to happen - class action law suits against 401(k) fiduciaries.

The October 2006 Client Advisory Bulletin published by the law firm of KattenMuchinRosenman LLP nicely summarizes several class action suites recently filed against the fiduciaries of several large employer 401(k) plans.

All of the law suits, report Katten, involve participant direction of investments and the expenses paid by the participants directly or indirectly.

What's the lesson for today? Katten says:

Therefore, for every plan, fresh attention should be paid to the plan’s governance structure, specifically, who the fiduciaries responsible for selection and monitoring of plan investments are. Next, the procedures to identify and benchmark plan expenses and returns, as set out in the plans investment policy statement or elsewhere, should be reviewed, and expanded or updated as appropriate. The plan should also provide for oversight to ensure that these structures and policies are being carried out.

Here are two more:

1. Small employers have the same issues.
2. The expense issue can be further exacerbated in 2007 if careful attention is not paid to the selection of investment advisory services for plan participants.
   

Here is the link to the Client Advisory Bulletin on the Katten website.

Investment News reports that investment advisors are not altogether happy about the Pension Protection Act (PPA) provision that provides fiduciary relief for providing investment advice to 401(k) participants.

The reason? The PPA's fee restrictions on face-to-face advice. Their lobbyists, says Investment News, are trying to convince Congress that the restrictions in the Act were a mistake and should be fixed in a follow up technical corrections  bill before Congress adjourns for the year - and before the January 1, 2007 effective date.

But critics of the move see the price cap as a deliberate component of a legislative compromise - one that should remain in effect.

To be continued.

Here is the  link to the Investment  News article.

That's the subject of a recent study by Vanguard Retirement Research, the results of which were that nearly two-thirds of participants adopting a managed account advisory service saw a sharp increase in their equity exposure. Expected returns rose by 82 basis points (after fund expenses but before any managed account fee), while Sharpe ratios improved by 22%.

The January 1, 2007 effective data is fast approaching for the Pension Protection Act provision that provides fiduciary relief to plan sponsors who make investment advice available to 401(k) plan participants. Whether plan sponsors should, however, is a blog post for another day.

In the meantime, here is the link to Vanguard's study (PDF).

Hat tip to Barry Barnitz' Financial page.

One thing we can say for sure about new ERISA legislation. It does create more acronyms. Like for instance QDIA which is Pensionland shorthand for Qualified Default Investment Account.

So attorney B. Janelle Grenier will be adding one more to her 160 plus and counting Benefits Acronym Lexicon.

More to follow.

The Department of Labor (DoL) issued the first regulation under the Pension Protection Act of 2006 (PPA) which deals with what is a permissible default fund.

The PPA provides a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. The regulation provides fiduciary relief if the fund is a qualified default investment account (QDIA) as defined in the proposed regulation. As expected, the default fund could have equity exposure as in a:

• Targeted-retirement-date fund;
• Balanced fund; or
• Professionally managed account

Plan fiduciaries still have responsibility for the selection and monitoring of the QDIA.

Here is the link to the DoL's Fact Sheet that summarizes the proposed regulation.

Automatic enrollment with a balanced default fund isn’t by itself going to solve the retirement savings issues that many employee will be facing. It will help, but the real answer is for plan sponsors is improve the communication effort.

In an earlier post, I discussed in a general way that employee benefit communication should have
functionally oriented communication objectives:

• How to communicate flexible benefit plans
• How to communicate savings and investment concepts for 401(k) plans
• How to relate profit sharing plans to productivity and profitability
• How to make employees better health care consumers and how to integrate wellness into health care plans to impact upon costs

Melissa points out that many of these employees have strong and negative erroneous benefits about the U.S. financial system. In order to change their thinking and persuade them that retirement plans are, in fact, in their best interests, these beliefs must be addressed and clarified. In addition, Melissa says, there are strategies that can be used for conducting successful enrollment meetings.

Here is the link to the website for Melissa’s company, Futuro Solido USA which has videos you can view that help bring down the cultural and language barriers to successful communication.

If you’re thinking about establishing a SIMPLE in 2006 for your small business, then you don't have much time. It must be place by October 1.

No doubt you’ve been told that it’s easy to establish - and relatively inexpensive - and also easy to maintain - and also relatively inexpensive. That’s true, or course. It’s called SIMPLE for those reasons. But don’t let being able to maintain a "hand-off" retirement plan at a relatively low cost drive your decision. Consider a 401(k) plan if you want to

• Not cover practically all employees
• Make larger contributions
• Not have 100% vesting of employer contributions
• Have the Roth option
• Allow for plan loans
• Etc.

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.

One more deadline. If you currently have a SIMPLE in 2006 but would like a 401(k) in 2007, you must make that decision and provide notice to employees at least 60 days prior to the start of the calendar year, November 1, 2006.

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.

Click here for a chart (PDF) that compares a SIMPLE with a 401(k) plan.

Sizeable participant retirement accounts, the call of early retirement for the Baby Boomers, and retirement plan provisions that permit in-service distributions - all factors that are apparently attracting promoters to get at that cash.

The NASD concerned about this danger to retirement plan participants issued an Investor Alert yesterday, Look Before You Leave: Don't Be Mislead By Early Retirement Pitches That Promise Too Much. The Alert warned plan participants that

When faced with a pitch that promises that you can cash in your company retirement savings in your 50s, reinvest the money, and live comfortably off the proceeds for the rest of your life, many simply can't say no. But usually they should. NASD is issuing this Investor Alert because we are aware of instances in which employees who had built up sizeable retirement savings have been misled, and financially harmed, by flawed, even fraudulent, early-retirement investment schemes.

The Alert uses as an example a recent enforcement action. The NASD fined the broker/dealer $2.5 million for failing to adequately supervise a broker who the NASD alleged lured long-term employees of a company through free seminars into retiring prematurely with unreasonable and exaggerated promises of high returns from reinvested funds from their company retirement plans.

The B/D also had to pay $13.8 million in restitution to 32 former employees. The B/D also agreed to hire a consultant who will conduct a comprehensive review of the firm's seminar presentations, advertising, and systems and procedures relating to retirement planning and investment recommendations for retirees. In settling these matters, the B/D neither admitted or denied the charges, but consented to the entry of NASD's finding. And what about the broker? He has been charged with securities fraud.

So here is today's lesson -  beyond the obvious that there is no such thing as a free lunch. Plan sponsors should be careful, very very careful, about selecting an individual or firm to provide investment advice to 401(k) plan participants after the January 1, 2007 Pension Protection Act effective date. Plan sponsors will still have a fiduciary obligation to select and monitor these service providers.

Here is the link to the NASD's Investor Alert.

That 's the title of a just published study by The Center for Retirement Research (CRR) at Boston College. The study compared defined benefit pension plan investment returns with 401(k) plan investment returns. Using data from 1988-2004, the study reports that:

• Defined benefit plans outperformed 401(k) plans by one percentage point.
• Part of the explanation may be because of higher fees in 401(k) plans.
• Another part of explanation may be that more than half of the participants do not follow the prudent investment strategy of diversifying their holdings.
• The available data suggests that IRAs produce even lower returns than 401(k) plans.

That's history. The study I would like to see? One done 3-5 years from now reporting whether the advent of investment advice to 401(k) participants really made a difference. Let's all hope so.

Here is the link to the study authored by Alice H. Munnell, Maurico Soto, Jerilyn Libby, and John Prinzivalli of the CRR.

Hat tip to Barry Barnitz's Financial page.

The picture above certainly does not represent today’s accountant. And in a similar vein the Department of Labor (DoL) wants to know whether its Interpretative Bulletin 75-9 published over 30 years ago relating to the independence of accountants who audit ERISA plans is still relevant. The DoL published a notice yesterday in the Federal Register asking for comments on this matter.

Background

Generally, Federal law requires that Plan Administrators of certain employee benefit plans, e.g., retirement plans that file Form 5500 (100 or more participants) are required to attach an independent qualified public accountant’s opinion.

The independent qualified public accountant must examine the plan’s financial statements and other records to determine whether the financial statements and schedules required to be included with Form 5500 are presented fairly and in conformity with generally accepted accounted principles. Retirement plan service providers like our firm often refer to the accountant’s report and financial statements collectively as the "audit report".

The auditor auditor engaged for the employee benefit plan audit must be licensed or certified as a public accountant by a State regulatory agency and should not have any should not have any financial interests in the plan or the plan sponsor.

DoL Guidelines

It is this last requirement that the DoL wants to reevaluate in light of the significant changes that have taken place in the business environment in general and the accounting profession in particular.

The 1975 DoL Interpretative Bulletin describes three types of relationships in which the Agency would not consider the accountant to be independent: That is, during the audit engagement and during the period covered by the audit, the accountant, his or her firm, or any member of the firm cannot:

(1) Have or be committed to acquire any direct financial interest or any material indirect financial interest in the plan or the plan sponsor;

(2) Have a connection to the plan or plan sponsor as a promoter, underwriter, investment advisor, voting trustee, director, officer or employee of the plan or plan sponsor; and

(3 Maintain financial records for the employee benefit plan.

At a later date, I'll discuss some practical matters that a plan sponsor should consider in retaining the auditor and preparing for the audit. In the meantime, here are the relevant links:

DoL Interpretative Bulletin 75-9 (PDF)

DoL Announcement in Federal Register (PDF)

And a hat tip to Steven Taub at CFO.com.
 

In a recent post about the challenges in communicating employee benefits to employees, I included a Department of Labor stat: the average 34-year old has already worked for nine different companies in his or her brief career.

So I got to thinking: what are these employees doing with their 401(k) account balances when they leave? Based on what I see with our clients, most take the money and run. Two studies done last year support my anecdotal evidence.

The first study by the Congressional Research Service (CRS), Pension Issues: Lump Sum Distributions and Retirement Income Security, pointed out that most recipients of lump sum distributions were more than 20 years away from retirement.

The second done by Hewitt provided additional insight. Not surprisingly, Hewitt found a direct correlation between age and tenure and employees' decisions to cash out of their 401(k)plans as well as the size of the account balance. The younger the employee the more frequent lump sum distributions were taken. But even a high percentage of older employees took lump sum distributions, i.e., more than 42% of employees age 40-49 took lump sums when leaving their jobs.

This decion despite favorable tax laws that promote portability of benefits by tax free rollovers or transfers to other tax favored retirement plans. The favorable distribution rules, by the way, were expanded by the new Pension Protection Act of 2006 (to be discussed at a later date):

• Direct rollover to Roth IRA

• Rollover by non-spouse beneficiary
  

One more example of why financial education needs to be available.

Here are the links (PDF) to both the Congressional Research Service report and the Hewit release on their study.

The answer to this question like answers to every question in Pensionland starts with, tell me more first.

Here is how a financial columnist recently responded to this question. Paraphrasing the Q & A:

Asked the reader: I'm going to remarry and how can I have my children inherit the money in my 401(k) account and not my soon to be new spouse?

Answered the columnist: It's very simple, Just go to whoever is managing your 401(k) money and complete a new beneficiary form.

Maybe the columnist is right. Maybe it is that simple. But one thing I've learned over the years is that nothing is simple in Pensionland. Some retirement plans require by law that the spouse is the automatic beneficiary unless he or she consents otherwise in writing. Let jump ahead and assume that this is the case here but that there was no spousal consent obtained. You can take it from here.

This is why disclaimers are good things.

Max Goldman in his blog, The Performance & Talent Management Blog, writes about a recent survey by McKinsey that indicates HR executives overwhelmingly see employee benefits as being important in order to compete effectively. Particularly to be able to attract and retain top talent. However, says the study, most companies don't understand what benefits employees prefer.

Then these companies better figure it out quickly because there is a whole different workforce than ever before with a war for talent going on. A new workforce that is characterized by:

• Mobility. The average 34-year old has already worked for nine different companies in his or her brief career.
• Distance. Approximately 10 million people work away from their corporate office at least 3 days a month.
• Aging. There will be a growing group of retirees as the workforce shrinks.
• Diversity. Most of the net increase in the workplace are women, minorities and immigrants.

First, in this competitive market for talent, employees' top consideration when trying to decide whether to join with/or remain with an employer is the "quality of coworker and/or customer relationships. The other two main criteria are the opportunity for work/life balance, and working for an organization whose purpose they agree with.

Second, life-stages matter. While workers experience many trigger events through out their careers, most of them admit they have trouble understanding which employee benefits are most appropriate. for them.

So maybe "what we got here is a failure to communicate." Communication that now has functionally oriented communication objectives:

• How to communicate flexible benefit plans
• How to communicate investment concepts for 401(k) plans
• How to relate profit sharing plans to productivity and profitability
• How to make employees better health care consumers and how to integrate wellness into  health care plans to impact upon costs

Click here for the link to Mr. Goldman's article and click here for the MetLife Survey (52 pages PDF).

They may already have arrived.

Lost in the investment advice to 401(k) plan participant discussion has been the rapid growth of target maturity funds to 401(k) plan investment menus. According to Lipper Inc. approximately 55 fund families offer these types of funds with assets in excess of $50 billion.

Don’t confuse target maturity funds with asset allocation funds. While both provide the convenience of diversified investing in a single mutual fund, asset allocation funds, also called lifestyle funds, are based on risk tolerance, e.g., conservative, moderate, or aggressive. Target maturity funds, on the other hand, are constructed to offer 401(k) participants a fund that matches their retirement date. These funds target the year of retirement and the asset allocations change over the years toward conservative as retirement nears.

But how do you make sense of them? Al Otto, Vice President of White Horse Advisors, writing in the August 2006 issue of The McHenry Group’s The Inside Edition suggests a process which includes:

• How to choose them from the perspective of the plan sponsor and the participant
• Evaluating their performance
• Understanding their risk
• Understanding asset allocation within the funds themselves
• Analyzing their cost
• Evaluating the fund family that is offering target funds
  

The sun will not be setting after all on the favorable retirement plan tax provisions that were part of the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA).

For budget scoring purposes, the more than three dozen rules which included increases to contribution and benefit limits for IRAs and qualified retirement plans had “sunset” provisions which were set to expire on December 31, 2010. (Budget scoring is the process of calculating the budgetary effects of pending and enacted legislation and assessing their impact on the targets or limits in the budget resolution).

The new Pension Protection Act of 2006 (PPA) now makes permanent the EGTRRA rules. One result of which is to allow participants in defined contribution plans to make larger contributions in the future. Such as:

• 401(k) limit now $15,000 in 2006 would have been reduced to $13,500 in 2011.
• 401(k) catch-up (age 50+) now $5,000 in 2006 would have been totally eliminated in 2011.
• IRA limit now $4,000 in 2006 would have been reduced to $2,000 in 2011.
• IRA catch-up (age 50+) now $1,000 in 2006 would have been totally eliminated in 2011.
• SIMPLE IRA limit now $10,000 in 2006 would have been $8,000 in 2011.
• SIMPLE IRA catch-up (age 50+) now $2,500 in 2006 would have been totally eliminated in 2011.

In a earlier post, I asked the question whether 401(k) loans were easy money and discussed both sides of the questions.  Yesterday, Walter Updegrave, MONEY Magazine senior editor, in his Ask the Expert column responds to a reader who asks whether it's a good idea to borrow money from your 401(k) account.

Mr. Updegrave says that treating your 401(k) account like a piggy bank is dangerous for the following reasons:

• Easy access to the funds can cause some people to overspend.
• It's not risk free because it usually has to be repaid when a participant terminates employment, and if not, it becomes a taxable distribution with perhaps a 10% penalty.
• It's really not a great deal paying the interest to yourself, and you are probably better off taking a home equity loan.

Interesting post today in the Picking up Nickels blog about American kids lacking basic money management skills. Should we be surprised then that these same kids becoming like  the college students at Wharton and Harvard about whom I recently wrote who can't pick the lowest cost index fund. These same kids who grow up to be participants in 401(k) plans who don't save enough and can't manage their accounts well.

The education system is starting to pay more attention to teaching the necessary life skill of personal finance. In the meantime I guess we'll have to be satisfied with the three prong emphasis on savings and investing in the new Pension Protection Act  of 2006 which:

• Boosts enrollment through automatic 401(k) enrollment
• Allows default investment choices beyond money market and stable value funds that plan sponsors can use for employees who don't make investment elections
• Encourages plan sponsor to make investment  advice available to 401(k participants
  

I was feeling pretty good about that part of the Pension Protection Act of 2006 that will make investment advice more available to 401(k) plan participants. Even about that part that will allow 401(k) providers to offer advice since the Department of Labor will be providing regulations to avoid self-dealing.

Feeling good that is until my FeedDemon led me to a post that Barry Barnitz had on his blog, Financial page. He posted a study, The Adequacy of Investment Choices Offered By 401K Plans, by Edwin J. Elton of New York University’s Department of Finance, Martin J. Gruber, also of New York University’s Department of Finance, and Christopher R. Blake of Fordham University’s Graduate School of Business Administration.

These researchers examined the adequacy and characteristics of the investment choices offered to 401(k) plan participants in over 400 plans. Claiming to be the first such study, they reported that:

• 62% of the plans surveyed have inadequate fund choices, and that over a 20-year period this makes a difference in terminal wealth of over 300%.
• The funds included in the plans are riskier than the general population of funds in the same categories.
• Index funds chosen by 401(k) plan administrators are on average inferior to the S&P 500 index funds selected by the aggregate of investors.
• There was weak evidence that the use of consultants or sophisticated strategies leads to better results.

Former President Bill Clinton, whose birthday was yesterday, was heard last week lamenting the fact that he was about to turn age 60. Don’t feel bad, Mr. President, there are another 3 million who will join you this year - part of the first entrants of the baby boom generation. While few of them have retired, they are certainly considering it.

While the financial industry is getting ready to capture those retirement dollars, the new Pension Protection Act of 2006 liberalized distribution and payment options. Some of which are:

• Direct Rollover to Roth IRA. Distributions from a qualified retirement plan generally can not be rolled over to a Roth IRA. The rollover had to be a 2-step process. First, from the qualified retirement plan to a traditional IRA and then to the Roth IRA. Beginning in 2008 a distribution from a qualified retirement plan can be rolled over directly to a Roth IRA provided the current Roth conversion rules are met.
  

• IRA Distribution to Charity. Amounts distributed from IRAs are generally taxed as ordinary income with charitable contributions deductible under special rules. For 2006 and 2007, a tax free distribution of up to $100,000 per year can be made from an IRA directly to charity if three conditions are met: 1) the donor is over age 70 ½ , 2) the distribution would otherwise have been taxable, and 3) the donation cannot be used to increase the allowable deduction for charitable contributions on an individual’s tax return.

• Hardship Rules. Hardship distributions from qualified retirement plans can only be made on account of a financial hardship of the participant. Under the new law hardship distributions from qualified retirement plans can be also be made on account of hardship of the participant’s spouse or dependent. The new law directs the Treasury Department to effectuate this change 180 days after the enactment of the law.

• In-Service Distribution. Pension plans cannot generally make distributions unless the participant terminates employment or reaches the plan’s normal retirement age which is usually age 65. Beginning in 2007, in-service distributions can be made to a participant who attains age 62 and continues to work.

• Rollover by Non-Spouse Beneficiary. Prior law did not permit a non-spouse beneficiary to rollover the participant’s benefit into an IRA. Beginning January 1, 2007, a non-spouse beneficiary can transfer inherited qualified retirement plan benefits into an inherited IRA and adopt tax treatment of the inherited IRA.

The U.S. and Canada are alike in many ways, but according to a recent study, Mutual Fund Fees Around the World, mutual fund fees in the two countries vary widely. The study indicates that the U.S. is among the lowest cost countries and Canada is the highest fee country by far: 79 basis points versus 200 basis points.

The authors, Ajay Khorana from the Georgia Institute of Technology, Henri Servacs from the London School of Economics, and Peter Tufano from the Harvard Business School, studied fees charged by 46,799 mutual funds offered for sale in 18 countries, which together account for about 86% of the world fund industry. Fees vary substantially from country to country. They found that larger funds and fund complexes charge lower fees, as do funds selling cross-nationally, while fees are higher for funds distributed in more countries and funds domiciled in so-called offshore locations. In addition, fund fees are lower in countries with stronger investor protection.

This should make 401(k) participants feel better.

Click here to download a copy of the study (PDF 52 pages). 

That's the amount of new money that  Bloomberg estimates will go into 401(k) plans as a result of the Pension Protection Act of 2006 because the new law:

• Permits automatic enrollment of employees in 401(k) plans
• Allows small employers to establish combined defined benefit and automatic enrollment 401(k) plans
• Makes permanent higher contribution limits for 401(k) plans and IRAs

We’re talking big money. For example, Fidelity alone is expected to see fees for advice increase from $200 million annually to as much as $1 billion.  Bloomberg cites Jim Lowell, editor of the independent trade newsletter Fidelity Investor, as making this estimate.

Potential for conflict of interest? You bet! Let's hope that the regulatory agencies are able to meet the challenge and that plan sponsors learn how to buy - and not be sold - 401(k) services.

The new Pension Protection Act of 2006 opens the door for ERISA fiduciaries - a registered investment advisor, bank, insurance company or broker/dealer - to be compensated for giving investment advice to retirement plan participants. The Act creates a prohibited transaction exemption to these fiduciaries subject to certain safeguards to protect participants from abuse. More on the details at a later date.

With January 1, 2007, the effective date of the prohibited transaction exemption, the marketing process has already started. The investment advice provider will hopefully take the plan's demographics into account. And those demographics, suggests a 2006 study conducted by The Pension Research Council at the Wharton School, are not socio-economic factors but rather “money attitudes” which include:

• Successful Planners  who have a strong, goal-oriented vision of a successful retirement
• Up and Coming Planners who are similar to Successful Planners but don’t have as much confidence about their plans
• Secure Doers who have a strong interest in savings, particularly out of a sense of responsibility or duty towards themselves or others
• Stressed Avoiders who find financial matters to be a source of stress, anxiety and confusion
• Live-for-Today Avoiders who are uninterested in the future

On Thursday, August 3, the Senate passed significant pension reform legislation by a wide margin (93 to 5). The bill enacted by the Senate is identical to the one passed by the House of Representatives last week. The President is expected to sign the bill into law.

The legislation, called the “Pension Protection Act of 2006", makes significant changes to practically every retirement plan in which approximately 44 million people are participants. The 900 page bill affects all types of retirement plans including defined benefit plans, profit sharing and 401(k) plans, cash balance plans, and employee stock ownership plans (ESOPs). Most of the changes are effective in 2007 and 2008 but some are retroactive or delayed.

The Act includes the following provisions:

Defined Contribution Plans

• Encourages automatic enrollment in 401(k) plans
• Permits employees to diversify their company stock accounts among other investments
• Removes the scheduled expiration of increased contribution limits, Roth contributions, and the saver’s credit
• Requires faster vesting of employer profit sharing contributions
• Allows non-spouse beneficiaries to rollover their distributions to IRAs
• Adds new requirements for notice to participants
• Changes the rules for 401(k) providers to provide investment advice to participants
• Resolves major controversies surrounding cash balance plans on a prospective basis

• Requires faster funding of pension obligations
• Allows larger tax deductions based on funded status of the plan
• Changes the method of calculating the lump sum equivalent of annuity benefits
• Requires additional survivor option
• Changes the basis of calculating PBGC premiums
• Allows participants age 62 and older to take in-service distributions
• Permits certain small employers to have defined benefit pension plans with 401(k) provisions

That old joke is actually not a joke these days when it comes to government resources for small business retirement plans.

The two agencies with oversight responsibility for qualified plans, the Internal Revenue Service (IRS)  for tax aspects and the Department of Labor (DOL) for reporting, disclosure, and fiduciary matters both provide excellent resources for small businesses. In an earlier post, I provided a link to an IRS video workshop for small business. Now it's the DOL's turn.

Yesterday the DOL held a Small Business Employee Benefits Seminar in Chicago on both Retirement Plan Options in the morning and Health Plan Compliance in the afternoon. The morning session which was the only part I attended provided an excellent overview of:

• IRA based plans: Payroll Deduction IRAs, SEPs, and SIMPLE IRAs
• Defined contribution plans: safe harbor 401(k), 401(k), and profit sharing
• Defined benefit plans

Maybe so.

Morningstar columnist Russel Kinnel reports that payouts from settlements from the mutual fund scandal of 2003 could be coming in December or in the first quarter of 2007. Remember the mutual fund scandal of 2003? This may refresh your memory:

Several name brand mutual fund families were implicated in facilitating late trading and market timing activities for favored clients. Many of the investors were 401(k) fund participants which resulted in a renewed emphasis on procedural prudence by plan sponsors, a removal of the offending funds from the fund lineup, and trading restrictions placed on plan participants.

By mid-2005 practically all of the fund families had settled with New York Attorney General Eliot Spitzer who initiated the investigations and the Security and Exchange Commission. However, settlement payments have yet to be made to fund holders.

What should 401(k) plans be doing? Checking with their 401(k) providers and mutual funds after the SEC approves the settlements.

Click here to read the Wikipedia article on the mutual fund scandal, and click here to read Mr. Kinnel's story on the settlement.

Sure, a 401(k) loan is a quick and easy way to borrow money, and likely to increase among 401(k) participants.

Dan Lamaute of Lamaute Capital, Inc. tells us that the slumping housing market has reduced the use of home equity as a source of personal loans. The Fed reports that home equity loans fell by $900 million the week ending June 28, and Dan says that individuals looking for money are increasingly pursuing other options such as 401(k) loans.  

If you are a 401(k) participant considering this, is this a smart financial move for you to make? It's not a simple decision. Here are some factors for you to consider:

• Interest on a home equity loan is deductible while interest on a 401(k) loan is not.
• If the funds are retained in the 401(k) plan, the account may earn more as a tax deferred investment than the after-tax cost of the home equity loan.
• If you change jobs, you must repay the loan or could suffer a taxable distribution with a 10% penalty.
  

Yesterday's post on missing the 60-day rollover deadline should have included an IRS provided one-page rollover chart (pdf) summarizing the rules with the usual caveat that it is not a substitute for professional tax advice. Sorry for the omission.

This chart illustrates the portability of benefits that has resulted from recent tax law changes. While the rollover focus is usually on the "roll from" side, individuals now participating in a new employer's qualified retirement plan should consider the "roll to" possibilities. Specifically, a direct rollover to the new employer's plan from a prior IRA, SEP IRA, SIMPLE IRA (after two years), 457(b) plan, 403(b), or qualified plan.

Depending on the provisions of the new employer's qualified retirement plan and, if permitted, it may be beneficial to do a direct rollover from a prior plan if:

• It could be the basis for a loan.
  
• It could be used to purchase life insurance in the case of a profit sharing plan.
• The new employer's plan has a better investment program.
• In-kind assets, e.g., individual securities, could be transferred to a directed brokerage account.

Recent rulings by the Internal Revenue Service make it easier for individuals who have missed the 60-day tax-free rollover deadline for individual retirement accounts and other tax-advantaged retirement plans to obtain a waiver and successfully complete the rollover.

Generally, there are two conditions under which the IRS may grant a waiver:

• An automatic extension due to error by the financial institution, or
• A request for a waiver based on taxpayer circumstances.

Here is today's Chicago Tribune article on the ordinance that passed the Chicago City Council today requiring "big box" retailers, i.e., Target and Wal-Mart, to pay workers more than the minimum wage including benefits.

Time to move on.

Pardon me for being a Homer but as a Chicago resident and business owner, I have a vested interest in the proposed "living wage" city ordinace I mentioned in my last post. The ordinance, of course, is being compared, correctly or incorrectly, with the recently struck down Maryland law that attempted to impose health care requirements on large retailers, i.e., Wal-Mart.

In that post, I linked to a Chicago Tribune editorial that was in opposition. Now here is the other side. Two legal scholars from the University of Illinois and New York University have concluded in their two analyses that the proposed ordinance was legal and likely to be upheld by state and federal courts.

Click here to read the press release issued by the Brennan Center for Justice that provides an overview of the two studies.

While I don't cover health care benefits in this blog (not even a topic listed on the left side of the masthead), here's a health care benefit issue I can't let pass by.

This Wednesday our Chicago City Council is expected to vote on an ordinance that would require large retailers in the city to pay a "living wage" that would rise to at least $13 an hour in salary and benefits in 2010. This follows in the wake of last week's decision by a federal judge that struck down Maryland's effort to force Wal-Mart to to pay more for health care benefits for its employees in the state.

Today's editorial in the Chicago Tribune says, Chicago, take a look at Maryland.

Roger, that!

Picking an index fund is easy, right? It’s generally considered to be a commodity, and so the one with the lowest cost is it.

Apparently, it’s not even close to easy for the subjects of a recent study conducted by professors at Yale. In the best case scenario, 80% of the subjects failed to pick the lowest cost index fund. The subjects of the study? Wharton MBA and Harvard College students.

If you are a proud parent of a son or daughter at Wharton or Harvard, don’t feel pessimistic about their ability to manage their future 401(k) and 403(b) accounts. Help is supposed to be on the way. The new "pension protection" bill that could pass as early as next week may include a provision that allows 401(k) plan service providers to provide investment advise to plan participants. Good deal or bad deal for plan participants? The devil, as they say, is in the details. Let’s wait and read the fine print.

For more about the Yale study, here is a link to The Capital Spectator’s post which describes the study in more detail and includes a click through to a copy of it.

A recent article about late 401(k) deposits in the on-line edition of the Los Angeles Times reports, or rather editorializes, that “investment losses from late deposits can add up, but the rules are vague and enforcement is lax.”

The first part is correct. Investment losses can add up, but the rules are not vague, and enforcement is not lax.

Under Department of Labor (DOL) regulations, 401(k) contributions must be deposited by the earliest date on which those contributions can reasonably be segregated from the employer's general assets, but no later than the 15th day of the month following the month of withholding.

The DOL does, in fact, continue to pay significant attention to the enforcement of this deadline, and has taken the position in their audits that the deadline under this standard almost always occurs prior to the 15th day of the month following withholding. The deadline in almost every case has turned out to no more than one to two weeks following withholding and, in many cases, to be no more than a few days following withholding depending on the employer’s individual facts and circumstances, i.e., the manner in which payroll taxes are withheld.

Form 5500 asks if the employer failed to transmit to the plan any participant contributions within the required time period. If the employer has answered "no" , then it should not be surprised if there is a knock on the door.

Click here to read the article.

In recent years financially troubled companies have begot financially troubled retirement plans which have begot ERISA lawsuits. The resolution of these lawsuits teaches important lessons for plan fiduciaries. The law firm of Gardner Carton & Douglas comments on these lessons in their July 2006 HR  Law/Employee Benefits Client Memorandum and reminds plan fiduciaries that:

• Executives can also be fiduciaries.
• Oversight responsibility means monitoring and, if necessary, replacing service providers.
• There must be proper and adequate communications with participants.
• There is a duty to disclose potential plan changes.
• Procedure prudence is the key.

Here are two Roth 401(k) calculators that may help:

The Roth 401(k) Estimator from Smart Money, and

Roth 401(k) Comparison from Your Money Page.

Today’s on-line edition of the Bellevue News Democrat (Belleville, Illinois) carried a story that the verdict was split on Roth 401(k) and cited a Hewitt survey that employers were taking a cautious approach in adopting Roth.

Like the large companies surveyed by Hewitt, very few small employer have added Roth to their plans. And not out of caution, but for a different reason. Most business owners have heard about Roth 401(k) but very few realize the extent of significant retirement and estate planning opportunities.

For example, the Roth 401(k) will appeal to those business owners and highly compensated employees who are more likely than most to not outlive their pensions. They expect to rollover a Roth 401(k) distribution to Roth IRA and avoid required minimum distributions.

Why is it important for small businesses to add Roth 401(k) to their plans now ? The clock is ticking. Earnings in the Roth 401(k) are tax-free if the contribution remains for five years after the first contribution and certain conditions are satisfied. The five year clock begins with the first year for which the first Roth 401(k) contribution is made. And without congressional extension the Roth 401(k) provision will end December 31, 2010.

The IRS has just released, A Virtual Small Business Tax Workshop (Publication 1066C), which helps small business owners and self-employed understand and meet their federal tax obligations. Lesson 5 deals with how to set up a retirement plan.

While the IRS focuses strictly on SEPs and SIMPLE IRAs, the lesson does effectively communicate why new or younger small business owners should start a retirement plan now. The Workshop can be ordered directly from the IRS in DVD format or click here  to access the Online Classroom to download Lesson 5's 18-minute video or printed transcript.

No one doubts that 401(k) plans have far surpassed defined benefit plans as the retirement plan of choice for corporate America (employers, that is, but not necessarily employees). But seeing this chart from Google Trends really puts it into focus. Thanks  to Fred Wilson's A VC Blog for the reference.

The recently passed tax law, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA),  eliminates the $100,000 modified adjusted gross income ceiling and the joint filing requirement for married individuals for converting a traditional IRA to a Roth IRA for tax years after 2009.

While a conversion is treated as a taxable distribution, it is not subject to the 10% early distribution penalty. Taxpayers converting in 2010 can recognize the conversion income in that year or average it over the following two years. Why might this change be attractive to high income taxpayers? Earnings are distributed tax free, and there are no required distributions at age70 ½.  Click here to access MSN Money's Roth conversion calculator. 

Those of us that live in ERISA Land tend to speak in acronyms. Sometimes to the total incomprehension of our clients. The recently passed  tax bill, The Tax  Increase Prevention and Reconciliation Act, will also engender one. The resulting acronym will, no doubt, appear on attorney B. Janelle Grenier's Benefit Acronym Lexicon, another addition to the 160 currently on her list. 

More importantly, there are two benefit provisions as part of TIPRA (or whatever). One involves changes to the income limitations on Roth IRAs, and the  the other imposes an excise tax on retirement plans that are parties to prohibited tax shelter transactions. More about both after reading the fine print.

I'm active providing continuing education seminars, a number of which are sponsored by The Lanny D. Levin Agency, a Guardian General Agency, for its brokers. Here is an abbrevated version of my recent Roth 401(k) presentation (PDF download) requested by a number of brokers unable to attend.

Thanks again to Lanny Levin, the Agency's owner, for the opportunity to present.

With alternative investments, e.g., hedge funds now becoming more prevalent in the ERISA environment as a retirement plan asset, it's important that fiduciaries understand the issues involved. Susan Mangiero discusses hedge fund valuation issues in her Pension Risk Matters blog .

Once again the subject of possible Federal Estate Tax repeal is in the news, and many retirement plan participants are waiting or putting off reviewing or even doing their estate plan. Whether or not repeal happens, participants should periodically review their beneficiary designations – especially with 401(k) balances being significant personal assets for many people. Personal circumstances do change (as do spouses). Don D. Carlson and Leslie J. Anderson of the Dorsey & Whitney law firm provide guidance in avoiding the Law of Unintended Consequences – and expensive litigation.