Retirement Plan Blog

10 | 21 | 2011 Posted By Jerry Kalish

Each year the Internal Revenue Service announces the cost-of-living adjustments applicable to qualified retirement plans for the following year. Unlike 2001 in which most limits did not change from the prior year, most limits increased:

Following are the key retirement plan limits announced yesterday by the IRS:

• The 401(k) and 403(b) limit for employee contributions increases to $17,000 from $16,500.
• The catch-up contribution limit for participants age 50 and older remains the same at $5,500.
• The maximum allocation to a defined contribution plan increases to $50,000 from $49,000.
• The maximum annual benefit payable from a defined benefit pension plan increases to $200,000 from $195,000.
• The maximum annual compensation that can be recognized for retirement plan purposes increases to $250,000 from $245,000.
• The threshold compensation for Highly Compensated Employee increases to $115,000 form $110,000.

Here is a link to our chart listing all the retirement plan limits for 2012 compared to 2011.

10 | 10 | 2011 Posted By Jerry Kalish

My blogging buddy security lawyer Bill Singer on his blog, Broke and Broker, An Irreverent Wall Street Blog (always a good read), posts frequently about investment scams and scoundrels. In one of his latest, Bill writes that Feds Bust Bank Guarantee Scam.

But the Feds don’t have the manpower and resources to get to all of the $40 billion a year that the FBI says investors lose to fraud. In other words, watch out, you’re on your own.

So how do you go about protecting yourself?  Educate yourself, and here's an excellent starting point.

It's Pat Huddleston's recently published book pictured above, THE VIGILANT INVESTOR: A Former SEC Enforcer Reveals How To Fraud Proof-Your Investments.

Intriguing title, eh? But before I tell you about the book itself, let me tell you a little about Pat and how this book came to be written.

After leaving the U.S. Securities and Exchange Commission where he was an Enforcement Branch Chief, Pat was a private attorney for ten years representing defrauded investors. As Pat tells it in the Introduction, he closed his law practice in July 2006 after meeting with a 70-year old man who lost his entire savings in a Ponzi scheme. But since the con man had no assets to go after, chances for recovery were slim.

So says Pat, that was when he launched Investor's Watchdog, LLC, a firm providing investment protection services to investors and subsequently acting as court-appointed receivers in SEC fraud cases.

Pat's experience and writing style has resulted in a book from which investors can learn how to better protect themselves. He uses real stories and provides checklists in his book organized in two easily readable sections:

• PART 1: The Wide World of Fraud: First Steps and Advanced Tactics on the Path to Vigilant Investing
• PART 2: The Securities Industry: Hunting the Wolf with the Million-Dollar Smile

It's not just seniors that are vulnerable, of course. Retirement plans can be at risk also. In fact, Pat estimates that approximately 20% of investment fraud is perpetrated against retirement plans including small plans.

Attorney and Susan Wynn wrote about that very subject in February 2009 in her post, Madoff Victims Include Small Pension Plans. Note her comment about the efficacy of the enforcement agencies:

One of the interesting points of the Madoff story when it comes to retirement and pension plans is that none of the 4 governmental agencies which regulate and audit retirement and pension plans saw Madoff coming.

So if you're a fiduciary of a retirement plan, in addition to Pat's book, there are other resources available. Here's an excellent one, the webcast, Fiduciary Lessons Learned from Scoundrels and Thieves presented in 2009 by Blaine Aikin and Rich Lynch, CEO and COO respectively of fi360.

10 | 3 | 2011 Posted By Jerry Kalish

Let me introduce you to the “ERISA Account”, a relative newcomer to the small 401(k) plan market. It’s been part of the large and medium plan market for some time. Only recently has it migrated down stream because of (yes, you guessed it) the increased regulatory emphasis and fiduciary attention to fee disclosure.

Overview

ERISA Accounts are sometimes referred to as “ERISA Budget Accounts”, “ERISA Expense Accounts, “Expense Recapture Account”, or “Revenue Sharing Account”. We use the term ERISA Account because it succinctly describes the essence of what it is:

A plan level account that captures excess income collected by the recordkeeper that can be used to pay eligible plan expenses or even allocated to participants.

Let’s separate this discussion into its elements: 1) where the income comes from, and 2) how it can be used.

Where the Income Comes From

A mutual fund charges a fee that encompasses all the various fees that a participant is charged to invest in the particular fund. It's usually referred to as the Expense Ratio. In addition to the management fee charged by the fund manager to manage the fund assets, the Expense Ratio may include:

• 12(b)(1) Fee: the fee paid by the mutual fund to a 401(k) provider or broker for including in it in the plan and servicing it after the sale.
• Sub Transfer Agent (Sub-TA) Fees: the fee paid by the fund when it subcontracts the participant accounting to transfer agents, e.g., bank or trust company, to execute, clear, and settle trades, and maintain shareholder ownership records. These organizations are called Sub-Transfer Agents.
• Provider Compensation: the fee paid by the fund to the service provider, sometimes referred to as Revenue Sharing, for administrative or contract owner or participant services provided on behalf of the fund.

The Expense Ration is usually stated as a percentage of assets under management, and is netted from mutual fund performance rather than being paid directly by the plan.

How the Income Can Be Used

At some point, the income received by the recordkeeper becomes excessive, i.e., more revenue that is needed to run the plan, and can be used to pay plan level expenses or reallocated to participants.

Plan Expenses

The expenses that can be paid by the plan are part of that ERISA basic: a fiduciary must “act for the exclusive purpose of providing benefits to plan participants and defraying reasonable expenses of administering the plan.”

The Department of Labor says that reasonable administrative expenses could include:

• Plan amendments required by change in law
• Plan amendments necessary to maintain tax qualified status
• Nondiscrimination testing
• Recordkeeping
• Plan accounting
• Preparation of Form 5500

Plan assets, however, cannot be used for “Settlor Functions”, i.e., those expenses that are for the benefit of the employer. Settlor Expense could include:

• Studies of options for amending plan to maintain tax qualified status or for meeting new legal requirements
• Terminating plan
• Testing to explore plan design
• Union negotiations about plan provisions

The Department of Labor also permits participants to be charged for the reasonable cost of transactions attributable to individual participants, e.g., loans, QDROs, hardship withdrawals, calculations to determine benefits under various distribution alternatives, and benefit distributions.

Allocation to Participants

In addition to paying for reasonable plan expenses, funds in an ERISA Account may be reallocated to participant accounts pro-rata based on their account balances at the end of the year, or on a per capita basis. Note, however, that funds must be used by the end of the plan year. They cannot be rolled over to another plan year, or returned to the employer.

Plan Documentation

As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.

Conclusion

Not all 401(k) plans will see excess income that can be used in an ERISA Account. However, as we move more into the “Age of Transparency”, expect to see ERISA Accounts more prevalent in the small plan market. And what’s a “small plan’? We’ve seen $1 million plans with ERISA Accounts. 

08 | 11 | 2011 Posted By Jerry Kalish

If you’re a Bon Jovi fan, you’ll recognize the expression in the headline, “The More Things Change, The More They Stay The Same”. It's Track 12 on Disc 2 of their album, Bon Jovi Greatest Hits - The Ultimate Collection. 

But, of course, that’s not Jon pictured here. It’s Jean-Baptiste Alphonse Karr (November 24, 1808 – September 29, 1890), a French critic, journalist, and novelist, to who was attributed the epigram, "plus ça change, plus c'est la même chose" which usually translates to "the more things change, the more they stay the same”.

Never heard of Monsieur Karr? Well, he's actually got a Facebook page.

So you’re asking, what this has to do with balance forward plans? You may also be asking what exactly is a balance forward plan? 

Let me fast forward to the bottom line (literally and figuratively).

If you’re a plan sponsor or a 401(k) plan participant, today’s investment climate is not a good time to be part of one.

Let me explain why.

Balance Forward is an industry term given to those original participant directed 401(k) and profit sharing plans, many of which are still around. Unlike the more common daily valuation plans, participants’ accounts are valued monthly, quarterly or annually. After all the balance forward plan accounting takes place, it can be 4-8 weeks after the valuation date before participants receive statements.

What’s the problem you might ask? Let’s hearken back to November, 2008 at which time I blogged, Balance Forward 401(K) Plans: Someone's Gotta Win, Someone's Gotta Lose and Balance Forward Plans Revisited.

Now consider these two alternative scenarios of a participant in a balance forward plan with a $50,000 account balance as of September 30, 2008. The participant receives a distribution for $50,000 on November 1, 2008, but between September 30 and the distribution date, the plan lost 20%. Thus, the plan - which is to say - all the remaining participants had to eat the $10,000 loss.

But say, instead of October, 2008 being October 2008, the plan's assets increased by 20%. That  participant receives the same $50,000 distribution, but only the remaining participants share in the $10,000 gain.

See the problem.

So now here we are again today (“the more things change, the more they stay the same”), when there could be a decided difference between the June 30, 2011 valuation and September 30, 2011 valuation.

What’s the solution? Maybe balance forward plans should provide for interim valuations. But with all matters ERISA, there are complicated legal, tax, fiduciary and human resource issues involved. No easy answers, but definitely a situation that should be discussed with advisors. In the meantime, here is an excellent discussion of the issues involved by Sungard Relias, Interim Valuations in a Falling Market – It’s déjà vu all over again.

Now daily valuation isn't perfect either, but …… 

Photograph above: Woodburytype circa 1870s. Photo by Antoine Samuel Adam-Salomon.

07 | 22 | 2011 Posted By Jerry Kalish

That’s the album cover of the original Broadway cast recording of the 1965 musical, On a Clear Day You Can See Forever (which subsequently went on to become a movie starring Barbara Streisand in 1970 and which will be returning to Broadway starring Harry Connick, Jr. this Fall).

It’s the story of clairvoyant Daisy Gamble who attends a class taught by a psychiatrist for help in kicking her smoking habit. While undergoing hypnosis, it is discovered she had a past life in late 18th century England. And until the recent Appellate Court decision in Brown v. Continental, she might have had a future as a Plan Administrator dealing with QDROs.

That’s the acronym for Qualified Domestic Relations Orders which is a court order that creates a right for an alternative payee to receive some or all of a participant’s benefits in a qualified retirement plan. It’s one of those exceptions to the Internal Revenue Code’s general rule that prohibits benefits in a qualified retirement from being assigned or alienated.

And it’s up to the Plan Administrator to determine whether a DRO (another one of those acronyms) or Domestic Relations Order issued by a judge pursuant to a state domestic relations law is, in fact, a QDRO.

Maybe Daisy could have helped two years ago when Continental Airlines claimed that nine pilots used sham divorces to collect their pensions early, a situation about which I blogged, QDROs:The View From 30,000 Feet.

Continental went on to sue those pilots alleging that the pilots filed divorce papers but continued to live with their spouses and didn’t tell anyone – including their children. Once the divorces were final, the former spouses received rights to the pilots’ pensions and applied for lump-sum distributions, which Continental said were worth as much as $900,000 apiece. Continental also alleged that after they got the money, the couples remarried.

Continental claimed that the pilots were concerned about losing significant parts of their pensions because of the financial difficulties the airline industry was encountering, and that the maximum annual pension guaranteed by the Pension Benefit Guaranty Corp. (PBGC) was less than a typical airline pilot pension.

But now, in the aforementioned Brown v. Continental case, The United States Court of Appeals for the Fifth Circuit agreed with the District Court (Southern District of Texas) decision that ERISA does not does not authorize a Plan Administrator to investigate or even consider the good faith, or lack thereof, underlying a divorce.

So what are the takeaways here.

From a legal standpoint, William McMahon, an attorney with Constangy Brooks and Smith, LLP writing in his firm’s blog, Employee Benefits Unplugged, says

... the Court is promoting simplicity for administrators. Look at the court order, confirm that it complies with the criteria for a QDRO set forth in Section 206(d)(3)(D), and then stop. Don’t out-think yourself.

From a moral standpoint, you're on your own.

06 | 18 | 2011 Posted By Jerry Kalish

One thing you can say for sure about the 401(k) business, it’s responsive to the needs of the marketplace.

Since the beginning of 401(k) plans in the early 1980s, 401(k) service providers have introduced an increasing number of services to stay competitive with other providers. We've seen the proliferation of such features as:

• Daily valuation
• Loans
• Self-directed brokerage accounts
• Web access
• Investment education tools
• Multi-share classes
• Index funds
• ETFs 
• Target maturity funds
• Participant Investment advice

Now with the increased focus by the Department of Labor on the fiduciary aspects of 401(k) plans, the market place has responded. 401(k) providers offer services allowing fiduciaries to delegate some or all of their responsibility for plan investments. But as the headline says, some fiduciary services are more equal than others.

So here is a brief description of the services available in the order of lowest to highest fiduciary protection:

1. Due Diligence Support. Employers use the provider's evaluation process with regard to the available investment options. It's usually known as due diligence support. Employers use this tool to help construct an appropriate line-up for their plan, but they are still responsible for selecting and monitoring the plan investment options.
2. Fiduciary Certificate or Warranty. Employers receive a Certificate or Warranty generally available to plan sponsors if they select at least one fund from the provider’s lineup in designated asset classes. In addition to due diligence support for evaluating their funds, employers have last-resort fiduciary liability protection if numerous conditions are met.
3. Acknowledgment as a Fiduciary under Section 3(21)(A)(ii) of ERISA. An independent registered investment advisor (RIA) agrees to become an investment advice fiduciary under section 3(21)(A)(ii). The RIA recommends and monitors funds for the plan’s fund menu. However, employers are still responsible for selecting and monitoring funds on the menu.
4. Acknowledgment as a Fiduciary under Section 3(38) of ERISA. As in #3 above, employers use the services of an RIA. But with this service, the RIA agrees to become an investment advisor fiduciary under Section 3(38) of ERISA.  A Section 3(38) arrangement t represents the most comprehensive level of fiduciary support possible under ERISA since the RIA assumes all responsibility for selecting and monitoring the funds.

Which one is best is a decision that each fiduciary has to make based on his/her individual facts and circumstances. But remember, all fiduciary responsibilities cannot be delegated away. The responsibility remains to monitor the service provider on a periodic basis.

06 | 7 | 2011 Posted By Jerry Kalish

With the increasing spotlight on fiduciaries and their responsibilities for ERISA plans, many employers are asking themselves whether it’s time to buy fiduciary liability insurance.

With personal assets on the line for breach of fiduciary responsibility, there is no “one size fits all” answer. But, if you are a fiduciary considering fiduciary liability insurance, here are four misconceptions that can get in the way of proper decision making:

1. The ERISA Fidelity bond protects my personal assets. Not at all. Fidelity bonds which are required by ERISA provide coverage for acts of fraud or dishonesty but only for the benefit of the plan and the plan’s participants. It does not protect the fiduciaries themselves for liability claims.
2. I’m covered under our Employee Benefit Liability (EBL) policy. Not entirely. EBL insurance policies cover many claims arising out of errors or omissions in the administration of a benefit plan, but may not cover other aspects of fiduciary liability, e.g., investment of plan assets.
3. I’m covered under our Directors and Officers (D&O) policy. Usually not. These types of policies generally only cover directors and officers for their activities in that capacity and not as plan fiduciaries. They generally exclude coverage based on violations of ERISA.
4. I would be indemnified against any personal liability. Maybe yes, maybe no. ERISA specifically precludes a plan from indemnifying a fiduciary for breach of fiduciary responsibility. So who’s left? The employer who even if willing, may not have the financial resource to indemnify or may be restricted to do so by state law.

Fiduciary liability insurance can not, of course prevent law suits. But in conjunction with sound plan management, it can be an effective part of your risk management program. In other words, you can’t eliminate the risk, but you can maximize the protection. Consider talking to your property and casualty broker or consultant about fiduciary liability insurance.

04 | 6 | 2011 Posted By Jerry Kalish

 A "T", or technical foul, is part of the game of basketball. If you're a fan of the game, you know it's any infraction of the rules which doesn't involve physical contact such as unsportsmanlike conduct. 

The retirement plan equivalent of a "T" is when an employer misclassifies a worker in situations regarding whether:

• The worker is an independent contractor or an employee, or
•  An employee hired through a staffing agency/Professional Employer Organization (PEO) must participate in the client company's  retirement plan covering other employees.

The referee equivalent in these situations could be the Internal Revenue Service, the Department of Labor, State agencies, or all of them who have stepped up enforcement.

The financial consequences of misclassification could be costly in terms of income tax withholding; other employment related payments such as FICA, FUTA, state unemployment, and workers compensation; and retroactive inclusion in the retirement program. 

Staying with the basketball metaphor, I cover the issue of independent contractor vs. employee in my recent blog post,  Benefits Fouls, for BenefitsPro.com.  

The other side of the court involves leased employees and whether they are actually employees solely of the client company or the client company as a  co-employer with the PEO. It's a complicated topic that attorney Charles C. Shulman covers throughly in his article, Leased Employees and Employee Classification, on his Employee Benefits and Executive Compensation Blog.

So if you have any concerns about how you are classifying workers, then take a time-out and consult with your tax advisor. And even if you don't have any concerns, a periodic review of the status of each "non-employee" might  be helpful to avoid a "technical foul".

03 | 28 | 2011 Posted By Jerry Kalish

When I'm Sixty-Four is, of course, one of the classic songs by The Beatles, written by Paul McCartney (credited to Lennon/McCartney) and released in 1967 on their Sgt. Pepper's Lonely Hearts Club Band. 

The theme is about aging with a young man singing to his lover about his plans of them growing old together.

It was also one of the songs in their 1968 animated film, Yellow Submarine, the video for which follows:   

But that was in 1967 when retiring at that age was still a reality. No yellow submarine today - not with Americans’ confidence in their ability to afford a comfortable retirement at a new low. The "75" in the headline is a reference to Olivia Mitchell, a professor of insurance and risk at the Wharton School, who says that some employees may have to stay in the workforce to age 75 or older. 

Retirement preparedness, or lack thereof, will be the focus of my new weekly column for BenefitsPro the new blog published by Benefit Selling Magazine. Here is a link to my first post, The Challenge Ahead: Helping Employees Better Prepare For Retirement. 

03 | 27 | 2011 Posted By Jerry Kalish

Geraldine Ferraro who died yesterday at age 75 was a political trailblazer. 

She was, of course, the first woman named to a major-party presidential ticket when Walter Mondale picked her to be his Democratic party running mate in 1984. But while the Mondale-Ferraro ticket lost 49 out of 50 states to the Republican ticket of President Ronald Reagan and Vice President George Bush, let's not forget her ERISA legacy.

Then Congresswoman Ferraro authored the Retirement Equity Act of 1984 (REA) which was designed to protect participants' spouses who were mostly women from losing retirement benefits earned by their husbands.

REA provided that protection by amending ERISA in several important ways to: 

• Permit employees to leave and return to a job without sacrificing the pension credits built up unless the breaks in service exceed 5 consecutive years or the amount of time the employee worked at the job before leaving, whichever is greater.
• Provide protection against loss of participation and vesting credits when a woman or man is absent for specified parental reasons. These cover absences for pregnancy, childbirth, or adoption.
• Require plans to provide automatic survivor benefits for spouses of vested participants even if the participant dies before retirement.
• Prevent employees from waiving survivor benefits without the written consent of their spouses.
• Permit the assignment of pension benefits in divorce cases when there is a valid judgment, decree, or court order relating to child support, alimony payments, or marital property rights.
• Offer some vested former employees a new opportunity to choose preretirement survivor benefits and joint and survivor annuity benefits, provided certain conditions are met.

Her nomination for Vice President, a watershed moment. Her ERISA legacy, monumental. 

03 | 17 | 2011 Posted By Jerry Kalish

Yes, it's that time of year again when March Madness takes over many workplaces for the next three weeks. Outplacement firm Challenger, Gray and Christmas, Inc. estimates that employees will spend 8.4 million hours watching games from the office. 

But let's not even consider the lost productivity issue. Let's just compare it to the amount of time employees spend on other matters...such as their 401(k) plan.

Just saying. 

03 | 2 | 2011 Posted By Jerry Kalish

That 2% cut in Social Security taxes (from 6.2% to 4.2%) was supposed to stimulate the economy.

But according to Martin Crutsinger's and David Pitt's recent article on Blomberg BusinessWeek, the tax cut has little impact on the economy in January. Consumers increased spending by only 0.2% in January, the smallest increase since last June.

It's a big number, an estimated $110 billion that workers will receive from the Social Security tax cut. That means about $1,000 to $2,000 in additional income for most families and approximately $4,000 or more for families with two high-income earners.

So what's it going be, pay down credit card bills, deal with higher gas prices, more personal spending, or use the tax savings to put more away for retirement? Some of that $110 billion with perhaps an employer match plus the tax deferral can help close the retirement income gap.

And yes, it is effective only in 2011, but you gotta take advantage of the opportunities when they're available. 

02 | 17 | 2011 Posted By Jerry Kalish

 Retirement plans can get get pretty complicated also, but "fixing" one doesn't necessarily have to be.

That's the focus of the recent IRS announcement reaching out to employers who did not timely amend their Plans for EGTRRA. Here's the background.

Most retirement plans had to be amended and restated no later than April 30, 2010 to comply with the 2001 tax law, The Economic Growth and Tax Relief and Reconciliation Act. That law “acronymized” to EGTRRA made significant changes to the Internal Revenue Code as it affected retirement plans.

(See our EGTRRA Restatement Series and last year's Benefit Briefing, Why a Law Passed in 2001 Is So Important To Plan Sponsors in 2010).

Why was meeting the April 30, 2010 deadline so important? A Plan can lose its tax qualified status if the plan sponsor fails to make required plan amendments on a timely basis.

If April 30, 2010 has come and gone for those employers who didn't timely amend, the IRS has the Voluntary Correction Program through which employers can correct this plan document failure. The IRS is encouraging employers to take advantage of this program by offering a discounted fee of 50% but only until April 30, 2011.

For the details, here is a link to the IRS Voluntary Correction Submission Program for plan sponsors who missed the April 30, 2010 EGTRRA restatement details. 

02 | 13 | 2011 Posted By Jerry Kalish

That's Bob Walker on the cover of his new book, How Am I EVER Going to Retire?

If you're in the investment business and have had – or have – to pass the Series 6, 7, 63, 65, or 66, you may know who Bob is.

He's the owner of Pass The Test, Inc., the Chicago-based company who produces books, practice exams, and audio CD's to help pass these tests.

And he does so in the most effective matter possible – in plain English. A result, no doubt, of his background as a teacher with a Fine Arts Masters Degree in Creative Writing from the University of Oregon.

Bob has now turned his attention beyond the investment industry. His book, How Am I EVER Going to Retire?, available in a Kindle edition from Amazon, is directed towards the individual who has either not started investing yet, or is a participant in his company's 401(k) plan that he doesn't understand or may not even participate in.

In an understandable, easy to read manner, Bob explains the essentials:

1. Types of Investments
2. Mutual Funds
3. Types of Accounts
4. Annuities
5. Investment Approaches
6. The Investment Industry
7. The Regulators
8. Don't Get Took
9. More Types of Investments
10. Defense Wins the Game

It may be the best $5.99 investment someone who needs to get started saving for retirement can make.

02 | 10 | 2011 Posted By Jerry Kalish

There’s a new retirement plan design available, and it’s called a DB(k) Plan. What exactly is it?

As the name and visual metaphor suggest, it’s a combination retirement plan that allows an employer to provide both 401(k) benefits and pension benefits (traditional defined benefit or Cash Balance).

DB(k) Plans were added to the Pension Protection Act of 2006 which added Section 414(x) to the Internal Revenue Code. While these plans were made effective on and after January 1, 2010, there hasn’t been any guidance from the Internal Revenue Service until recently.

Last month the IRS issued guidance for DB(k) Determination Letters as part of Revenue Procedure 2011-6. Now you’ll be hearing a lot more about these unique retirement plans in this blog space so stay tuned. 

Picture credit: Two Sides of the Same Coin by Paul H. 

12 | 8 | 2010 Posted By Jerry Kalish

The Small Business Jobs Act of 2010 permits in-plan rollovers to a Roth account effective for all distributions made after Sept. 27, 2010. Prior to this law, Participants had to roll money out of their retirement plan to a Roth IRA to invest after-tax.

In 2010 only, a one-time special tax rule allows a rollover from a taxable account to a Roth Account completed in 2010 can be included in income in 2011 and 2012.

Because of this unique opportunity, it was necessary for the IRS to release some guidance on questions that were not answered in the Small Business Jobs Act.

Notice 2010-84 (issued Friday November 26th) clarifies a number of issues regarding in-plan conversions to a Roth account (in-plan Roth rollovers) including:

• Clarifying that 401(k) and 403(b) plans may retroactively amend plans for in-plan Roth rollovers;
• 402(f) notices need to be modified to add in-plan Roth rollover information (although safe harbor notices do not require modification for 2010 and 2011); and
• Clarifying several taxation and distribution issues.

What Can Be Rolled Over

Any taxable, eligible rollover distribution can be rolled over (in-service or after termination distributions). The plan may also provide that in-plan Roth rollovers are allowed for any permissible distribution under the Code while the plan may have more restrictive distribution requirements.

For example: plans may be amended to provide that in-service distributions are permitted at age 59-1/2 for in-plan Roth rollovers while the plan provides for no in-service distributions at a specified age.

Plans need to consider whether in-plan Roth rollovers will be allowed for any distribution under the plan (in-service and after termination distributions) or whether additional options will be available for purposes of in-plan Roth rollovers. Note that in-plan Roth rollovers are only permissible if the distribution is an eligible rollover distribution.

What Must be Done Before an In-plan Roth Rollover May Occur

The written plan must provide for 401(k)/403(b) elective deferrals. The plan can retroactively amend to provide for Roth deferrals but participants must be notified that they may begin making Roth elective deferrals. In-plan Roth rollovers made in 2010 will be includible in gross income in 2011 and 2012 unless the participants elect to have the income included in 2010.

Click here for the IRS Rollover Chart that has been updated to include the new in-plan Roth rollover option that is now in effect. 

11 | 28 | 2010 Posted By Jerry Kalish

I’ve seen it first hand with many employees eligible to participate in 401(k) plans. That is, employees who choose not to save for retirement. Sometimes, there’s a logical and personal reason. But sometimes, it’s just … procrastination.

And that part of it, I could never understand. But I now have a little more insight thanks to an article written by Steve Martin in the November 9, 2010 issue of Inside Influence Report. Mr. Martin alliteratively writes about the persuasive pull of procrastination.

Mr. Martin looks at recent research that explains why many people find it easy to come up with excuses that put off things for some time in the future. Not just unpleasant tasks, mind you, but things like saving money.

The research he cites is the article Procrastination of Enjoyable Experiences, Journal of Marketing Research (2010 in press), written by Suzanne Shu from the Anderson School of Management at UCLA and Ayelet Gneezy from the University of California in San Diego.

Here’s what their study was about. They offered participants a gift certificate good for coffee and cake at a high-end local bakery. Some participants were offered gift certificates that would expire in three weeks and another that would expire in two months.

When asked when they would use the gift certificates, more participants in the two-month group said they would use the certificate than did the three-week group (68% vs. 50%). The reality was quite different. About a third of the three-week group redeemed theirs, but only 6% of the two-month certificate redeemed theirs.

But how do we know that the results of the study were caused by procrastination and not something else. Mr. Martin tells us:

In order to ensure that the results of the study were attributable principally to procrastination and not another factor or reason, a series of follow up surveys were completed. Those who did redeem the certificates reported an enjoyable and worthwhile experience. Those that didn’t redeem them conveyed their regret and were most likely to agree with  statements such as “I got too busy and ran out of time” or “I kept thinking that I would do it a bit later.” There was a much lower agreement to statements such as “I forgot” and “I don’t like pastries” or “It seemed like too much effort.”

So lets relate this study to 401(k) procrastination. Are there employees who think the same way? Particularly, “I kept thinking that I would do it a bit later.” or “It seemed like too much effort.” You bet there are. 

This is exactly what automatic enrollment addresses, or as I said a while back, 401(k) automatic enrollment or how to overcome employee inertia.  

Picture credit: Kevin's Practical Hacks blog post, 6 Simple Steps To Conquer Procrastination. 

11 | 16 | 2010 Posted By Jerry Kalish

Every year the Internal Revenue Service announces the cost-of-living adjustments applicable to qualified retirement plans for the following year. The limits will remain unchanged for the second consecutive year. 

 Following are the key retirement plan limits for 2011 recently announced by the Internal Revenue Service:

• 401(k) and 403(b) Deferrals: $16,500
• Catch-Up for Age 50 and older: $5,500
• Defined Contribution Maximum Allocation: $49,000
• Defined Benefit Maximum Annual Benefit:$195,000
• Maximum Compensation for Retirement Plan Purposes: $245,000
• Highly Compensated Employee (HCE) Threshold: $110,000

Click here to download our chart for a list of all the retirement plan limits for 2011 compared to 2010. 

Similarly, the Social Security Administration announced that for the second year in a row, there will be no automatic increase in Social Security and SSI benefits or the taxable wage base ($106,800) because there was no increase in the cost of living.

But what about Medicare premiums and deductibles? Here's an excellent explanation in Sibson Consulting's Capital Checkup website:

The standard monthly Part B premium and deductible will both increase by slightly more than 4 percent. This is less than the 14 percent increase between 2009 and 2010. The dollar amounts are shown in the first two rows of the table below. However, most Medicare beneficiaries will continue to pay the same $96.40 premium they paid in 2010 because of a "hold-harmless provision" in the law.2 (Because Social Security benefits will not increase in 2011, as announced by the Social Security Administration, certain beneficiaries will not pay the 2011 Part B premium rate.)

About a quarter of Medicare beneficiaries cannot take advantage of the hold-harmless provision because either they do not have their Part B premiums withheld from Social Security, they have their Part B premiums paid on their behalf by Medicaid, they are subject to the income-related additional premium amount discussed below, or they are new enrollees. These individuals will pay the higher 2011 premium rate.

I'll refrain from any political commentary, but you can read Sibson's entire article, 2011 Medicare Premiums, Deductibles, and Co-Insurance, for a complete explanation of the Medicare changes for 2011. 

10 | 1 | 2010 Posted By Jerry Kalish

Earlier this week, over 125 brokers, consultants, advisers attended the 5th Annual Employee Benefit Adviser Summit in Boca Raton, Florida. Looking Into The Future: What You and Your Clients Will Look Like.  

Here's a link to Employee Benefit Adviser's report, Advisers Find Opportunities in Change at EBA Summit. My own presentation at one of the breakout sessions, Looking Into The Future: What Your Clients and Your Business follows: 

09 | 20 | 2010 Posted By Jerry Kalish

Pictured up top is one of several seminar invitations that the national marketing company, Seminar Direct, makes available to financial professionals who want to promote their services through direct mail and seminars. 

In this case, it's Roth IRAs, first made available by Congress in 1997 under the Taxpayer Relief Act. For the most part the financial industry has done a pretty good job of educating the individual investor. The Investment Company Institute (ICI), the national association of U.S. investment companies, reports in their research paper, The U.S. Retirement Market, First Quarter 2010, 17 million households now have Roth IRAs totaling $215 billion.  

Roth 401ks? Not so good. Since the January 1, 2006 effective date, employer adoption has been slow. Only about 31% of 401k plans have added the Roth 401k as a savings option. Further, only 7% of 401k investors with access to a Roth 401(k) use one. 

These statistics baffle Michael J. Francis, President of Milwaukee-based Francis Investment Counsel LLC, who was quoted in a recent article in 401 helpcenter.com: 

The financial planning community cheered when this powerful wealth accumulation tool was finally made available," said Francis. "Yet it has been largely ignored by the vast majority of employers and 401k savers. I attribute this apathy to lack of information."

It's a sentiment echoed by Carla Fried who writes in CBS Money Watch, Gen Y & Employers: A Failure to Communicate on Roth 401(k) Benefits?. 

Maybe the tide is turning. A recent Hewitt study, The Role of Roth 401(k) in Retirement Savings, indicates that a growing number of large employers are adding a Roth 401(k) or Roth 403(b) option with more expected to implement them in subsequent years.

Our own client experience has been similar, many of whom took the opportunity to add Roth 401(k) as part of the EGTRRA restatement process. 

But Mr. Francis and Ms. Fried are correct. Plan sponsors need to do a better job of communicating Roth 401(k) to plan participants. Especially if the Senate provision to permits Roth conversion with a 401(k) plan becomes law which the American Society of Pension Professionals & Actuaries (ASPPA) discusses in their recent news release, ASPPA Applauds Passage of Roth Conversion Provision. 

For further information on Roth 401(k)s, here is a link to our 2006 FAQs, Giving Employees A Choice.

08 | 19 | 2010 Posted By Jerry Kalish

A little over a year ago, I postulated on the the psychology behind today's economy.

The old economy, I said, was personified in the classic “Greed is good” speech by Gordon Gekko as played by Michael Douglas in the 1987 Oliver Stone classic, Wall Street.

Gekko returns in Stone's sequel, Wall Street: Money Never Sleeps. It's different this time. Today's economy is made up of people that Jay Suhr calls “The Cautionary Generation”.

You'll have to wait until September 24 to see the movie, but you can read about it now in my blog post, The Return of Gordon Gekko, in the Small Business Advocacy Blog of which I am the Editor.

08 | 12 | 2010 Posted By Jerry Kalish

Those are the great Isely Brothers pictured off to the left whose music I grew up with. Memories of which were brought back to me by an article written by a kindred pop culture soul.

And with no disrespect intended, in of all places, a big Washington, D.C. law firm. It's David Fuller, a Partner in Morgan Lewis’s Employee Benefits and Executive Compensation Practice, who edits their firm's Payroll & Perks Bulletin Board.

In their recent issue, David writes about the IRS attempt to collect post bankrupcy taxes and interest from the Isley Brothers. You really had to be there to get all the references. So here's David's post, Is It Worth It to Twist and Shout reposted with his permission in it's entirety with links supplied by me.

Three of the brothers composing the famous R&B group the Isley Brothers filed for bankruptcy. The bankruptcy trustee made payments of more than $3 million to the IRS and the Isleys thought they had once again found Smooth Sailing—until the IRS decided The Heat Is On and took action to collect post-petition taxes and interest.

The Isleys then tried to Fight the Power and challenged the allocations of the tax payments. The Third Circuit this month upheld the dismissal of the Isley Brothers’ complaint challenging the IRS’s allocation of payments.

Marvin Isley, who passed away on June 6, was not part of the dispute. What It Comes Down To as the Isleys would say, is that taxpayers must be well prepared and well represented when challenging the IRS.

Just because you think It’s Your Thing (and you can “Do what you wanna do”) doesn’t mean the IRS will agree.

There's really not much I can add to David's post except to take it on home with a video of the afore-mentioned Twist and Shout as recorded by the Isely Brothers in 1962. And for you young-uns out there, that thing on the spindle is a 45 rpm record.   

08 | 7 | 2010 Posted By Jerry Kalish

Pardon the pun, but more employers are indeed achieving cost and operating efficiencies when the payroll system and 401(k) administration can directly talk to each other.

In the unconnected world, there are a multitude of steps that need to be done in order to get the employee's 401(k) contribution into the 401(k) recordkeeper's platform. With an integrated system, all of this takes place electronically, and the employer is removed as the middleman.

The result? Many employers have regained as much as 50 to 100 hours annually – time which could now be spent on strategic organizational matters.

You can read more about how employers are achieving these kinds of results in my Employee Benefit News column, Getting Plan, Payroll Into Alignment.

07 | 22 | 2010 Posted By Jerry Kalish

Unlike the money belt pictured above, the dollars charged for 401(k) services will start to become more apparent under the recently published Department of Labor Interim Final Regulation on Improved Fee Disclosure. 

Going forward, I'll be commenting on the new rules as they start to impact service providers, plan sponsors, and employees. That's I call the "who" and "how much" part of retirement plan fees.

But for now, don' forget that there is also the "what" part which is subject to one of the basic qualification requirements. That is, the plan must be established and maintained by the employer for the "exclusive benefit" of the employees and beneficiaries.

That means that the plan cannot pay for expenses that are considered to be the responsibility of the employer. These are called "settlor" expenses. On the other hand, expenses that relate to the fiduciary's administration of the plan can be paid out of plan assets. These are called "operational expenses". 

You can find the details about what expenses can (and can't) be paid with 401(k) plan assets in my recent column in Employee Benefit News.

06 | 25 | 2010 Posted By Jerry Kalish

I could have gone with Verizon's "Can You Hear Me Now" Guy as my visual metaphor for this blog post.

But then I found out that there isn’t one “Can You Hear Me Now" Guy but many. Verizon has a thick rulebook which Gizmodo reports spells out the rules on how Guy should dress and comport himself during public appearances.

While I didn’t exactly feel betrayed by learning about multiple Guys, it did trigger a similar feeling back in the 60s when we booked the Drifters for a college party. The Drifters that did show up weren’t the Official and Sole Authentic Original Drifters, but another group using the same name.

So I decided to go in a different direction for today’s visual metaphor -old school - with the picture of Don Adams as Maxwell Smart, Agent 86, in the classic TV series, Get Smart. (Infinitely better than the recent movie and definitely not the first “Smart Phone” - sorry about that).

What I’m visualizing is the 401(k)helpcenter.com article about a recent study which reveals why plan sponsors select, stick with, and switch plan providers. What they are reporting on is The Briskin Consulting Study of Small-Retirement-Plan Sponsors Advice. The study’s conclusion is that “assistance, not investment performance, drive satisfaction and attrition among small-plan sponsors.”

No surprise here. The retirement plan industry is no different than any other service industry. Clients change service providers because of lack of service. In the small retirement plan market (however defined), I’ve seen service issues in situations in which providers have:

• Exited the market
• Outsourced poorly
• Changed service models
• Receiving compensation without providing commensurate services

The Briskin Study refers to the end result as attrition. I call it opportunity.

06 | 14 | 2010 Posted By Jerry Kalish

Our friend Roger Wohlner, a fee-only financial planner, who blogs at Chicago Financial Planner, sent me an email after reading the Marshall McLuhan reference in yesterday's post, Communicating 401(k): Is the Medium the Message?

Roger reminded me about McLuhan's cameo in Woody Allen's classic 1977 firm, Annie Hall. Thanks, Roger. The rest of you may enjoy it also. 

06 | 13 | 2010 Posted By Jerry Kalish

If you’re not of my generation, then let me introduce you to Marshall McLuhan by way of this YouTube video.

McLuhan, one of the visionary thinkers in the momentous decade of the 1960s, coined the expression "the medium is the message" which he introduced in his most widely known book, Understanding Media: The Extensions of Man, published in 1964.

Simply stated, McLuhan was saying that the medium itself influences how the message is perceived. McLuhan who died in 1980 didn’t live to see how spot-on he was going to be.  

So how does all of this figure in to communicating 401(k) plans? I mean really communicating 401(k) plans to participants in terms of saving money for retirement on a tax favored basis and making informed investment decisions with those dollars.

Fact of the matter is that employee education just hasn’t worked. It’s not for the lack of effort put forth by 401(k) providers which I discussed in my September 2009 column for Employee Benefit News, Lost in Translation.

And maybe it hasn’t worked because we are using the same communication methods to reach the four generations now in the workforce for the first time in our history. All of whom communicate and use technology differently.

Here’s what Larry Rosen, a professor of psychology at California State University, had to say about  this in his recent article on CNNOpinion, Generation 'Text': FB me.

We are in the midst of four distinct generations of Americans: Baby Boomers (born 1946-64), Generation X (1965-79), Net Generation (1980-89) and the new iGeneration (born in the 1990s and beyond and given the "i" designation to represent media such as iPods and the Wii but also to reflect the "individualized" nature of their media).

Until recently, "communicate" meant to talk face-to-face or on the phone. But both the Net Generation and the iGeneration have turned the concept of communication upside down. The old ways are, well, old. It is now all about texting, IMing, Facebooking, Skype-ing -- pretty much anything but talking live or on the phone.

And in the case of communicating 401(k) plans, anything but reading employee booklets and attending 401(k) meetings. So maybe, just maybe, we should relate the “how” we are communicating to the “who” we communicating and realize that McLuhan was right.

The medium is the message, and let’s start using the new ways to communicate.

05 | 23 | 2010 Posted By Jerry Kalish

 There’s an old expression among tax practitioners referring to taxpayers who know there is a potential tax problem, but are willing to take their chances. They’re “playing audit roulette”.

Not a good thing for plan sponsors to do with stepped compliance activities by the Internal Revenue Services and the Department of Labor who have oversight responsibility for the approximately 500,000 401(k) plans covering approximately 50 million employees.

And here’s the latest. Last week the IRS Employee Plans Compliance Unit (EPCU) announced that it will be sending a letter and instructions to 1,200 employers sponsoring 401(k) plans asking them to complete a 46-page 401(k) Compliance Check Questionnaire.

The EPCU will use a secure website to collect responses on the following topics:

• Demographics
• Participation
• Employer and employee contributions
• Top-heavy and nondiscrimination testing
• Distributions and plan loans
• Other plan operations
• Automatic contribution arrangements
• Designated Roth features
• IRS voluntary compliance and correction programs
• Plan administration

While the IRS indicates that this is not an audit or investigation, it does say that “failure to complete the Questionnaire will result in further enforcement action.”

While the odds of a 401(k) plan sponsor being selected are low, about 417 to 1, plan sponsors should view it as a reminder to periodically review plan operations and take corrective action if necessary. Far better to do so using available Internal Revenue Service and Department of Labor voluntary correction programs before getting caught up in an audit or investigation. 

05 | 9 | 2010 Posted By Jerry Kalish

 No, that’s not my high school graduation picture. It’s a Microsoft staff photo from December 7, 1978 from the StateMaster website.

Yes, that’s Bill Gates on the bottom row left, and co-founder Paul Allen on the bottom row right. The company was just three years old and still located in Albuquerque before it moved to its new home  in Bellevue, Washington the next year.

A lot’s changed for Microsoft since then. The same 1978 “that was then, this is now” reference point can be used for 401(k) plans. 1978 was the year in which Congress amended the Internal Revenue Code by adding section 401(k).

The differences are many, e.g., economic, demographic, cultural, political. Whatever, and now may be an appropriate time for plan sponsors to consider the extent to which their 401(k) plans are doing what they are supposed to do.

It’s a topic I write about in my column, 401(k) Plans Must Adapt To New Economic Realities, in the May, 2010 online issue of Employee Benefit News.

Times change. Maybe retirement plans should too.

05 | 1 | 2010 Posted By Jerry Kalish

Defined benefit plans and defined contribution plans - "apples and oranges" , right? Conceptually, yes. In a defined benefit plan, it's the employer who has to fund the promised benefit, but it's the employee who contributes and generally invests his or her account in a defined contribution plan, e.g., 401(k).

But in the real world in which most employees who are, in fact, covered by a retirement plan, it's 401(k) or nothing. And so the key result of a recent study, Defined Benefit vs. 401(k) Investment Returns: The 2006-2008 Update, by the consulting firm Towers Watson, has some serious implications.

The study indicates that defined benefit plans have outperformed defined contribution plans by approximately 1% a year which is consistent with their last analysis for the period 1995 and 2006.

Doesn’t sound like much, does it? But that 1% per year really matters. It can add up in terms of more lifetime retirement income. In my December 2007 blog post, What's 1% Worth, I cited research by the investment management firm AllianceBernstein that 1% translates into about $220,000 extra at retirement—and an extra 10 years of spending as shown below:

So why the difference in defined benefit and defined contribution investment returns?

Towers Watson cites possible reasons why defined benefit plans have had better investment returns. It could be because how investment results are reported, or because of different percentages of equity exposure, or it could be that

DB plan trustees have a fiduciary responsibility for investment performance. They or the professionals they hire usually have considerable financial education, experience and access to sophisticated investment vehicles — advantages 401(k) plan participants typically lack.

So in that context, then, shouldn't plan sponsors seriously consider a 401(k) managed account option?

04 | 13 | 2010 Posted By Jerry Kalish

That’s Declan Patrick MacManus pictured above, but we know him by his stage name Elvis Costello, the English singer-songwriter of Irish heritage. The picture is actually the cover art for Watching the Detectives, the 1977 single by Elvis Costello and his backing band, the Attractions, which gave him his first UK hit single.

It’s my pop culture segue to our own ERISA version of “watching the detectives”. However, in our world, the “watcher” is the Department of Labor (“DOL”) and the “detectives” are the accounting firms charged by ERISA with performing an independent audit as part of the Form 5500 filings for qualified retirement plans with more than 100 participants.

And it’s not exactly front page news that the DOL doesn't exactly view CPAs as rock stars when it comes to ERISA audits. I wrote about the DOL’s concern about audit quality almost four years ago on this blog, Department of Labor seeks comments on guidelines for ERISA auditor independence.

Recently, our friends at Employee Benefit News carried an article, Legal Alert: Keeping A Watchful Eye On Retirement Plan Auditors, written by Frank Palmieri, a partner with the Law Firm of Palmieri & Eisenberg. Mr. Palmieri writes about an initiative by the DOL.concerning ERISA audits.

That initiative consists of the DOL issuing letters to accounting firms who perform ERISA audits requesting copies of work papers and management letters. The purpose of which is, quite simply, to detect errors in the administration of qualified retirement plans and for plan sponsors to correct those errors.

But here’s the rub. The law doesn’t permit the DOL to take direct enforcement action against the plan auditor for substandard work. They can, however, take indirect enforcement action against the Plan Sponsor, the Plan Administrator and the person who engages a plan auditor, by imposing civil penalties.

Why? Because the selection and monitoring of service providers, including plan auditors, is a fiduciary function. In that regard, you may find helpful the discussion of the "dos and don'ts for hiring an auditor" in my July 1, 2009 Employee Benefit News article, All You Need To Know About ERISA Audits. 

04 | 8 | 2010 Posted By Jerry Kalish

For a business owner choosing a retirement plan, it's kinda like those compare and contrast essay questions on college exams. Except this time, it's real life and a lot more complicated than the venn diagram pictured above.

Fortunately, our friend Denise Appleby at her Appleby Retirement Dictionary has provided a handy and comprehensive chart comparing and contrasting the basic features and benefits of:

• SEP IRA
• SIMPLE IRA
• Solo-k/Individual-k
• Traditional 401(k)
• Money Purchase
• Profit Sharing
• Defined Benefit

Here is a link to Denise's Retirement Plans Comparison Chart for Small Business-2010 Plan Year.

04 | 5 | 2010 Posted By Jerry Kalish

I was thinking recently about the late Shel Silverstein (September 25, 1932 – May 9, 1999). He was an incredibly talented Chicago guy whose creativity reached across the socio-economic spectrum as a poet, singer-songwriter, musician, composer, cartoonist, screenwriter and author of children's books.

(And no, dear, it wasn't about me running out and getting a tattoo like the one pictured here depicted from an illustration in Shel Sllverstein's classic children's book, The Giving Tree. The picture itself and others appeared in writer Cheryl Rainfield's  blog post, Literary Tattoos. 

Rather, I was recalling his Woulda-Coulda-Shoulda poem which goes like this:

All the Woulda-Coulda-Shouldas
Layin' in the sun,
Talkin' 'bout the things
They woulda coulda shoulda done
But those Woulda-Coulda-Shouldas
All ran away and hid
From one little Did.

Why now? It’s because it’s tax time, and it’s do late to do tax planning – retirement or otherwise – for last year. And for many business owners and plan sponsors, waiting under later in the year to plan for 2010 may be too late. Starting now can make a big difference and perhaps avoid some of the situations we see every December:

• Not Enough Time To Maximize 401(K) Contributions. Adopting a 401(k) plan 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.
• Not Enough Compensation. Many owners/employees of S-Corporation 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.
• 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 with a SIMPLE should keep November 1, 2010 in mind if a different plan type is intended in 2011.

So let me leave you with this. It isn’t anywhere close to Woulda-Coulda-Shoulda, but, hey, I'm just a pension guy:

Pension plan procrastination perils proper personal planning.

03 | 31 | 2010 Posted By Jerry Kalish

That’s a picture of a transparent memory chip developed by a group of South Korean scientists that Mark Wilson reports on in his December 17, 2008 blog post, Researchers Develop Transparent Memory, See-Through Electronics Next. Mr. Wilson calls it the precursor to completely transparent electronics.

So imagine that this technology is incorporated into the new tablet computers. Jason Chen offers an interesting scenario in his blog post, Be a Walking Wikipedia With the Handheld Looking Glass Computer:

There's no better way to annoy your travel companions than to take something like this handheld-computer design wherever you go. Not only can you hold it up to buildings and get the address, history and architectural schematics (you know, for a heist), but it also supposedly hooks up with your personal organizer, a dictionary and Google—for that extra bit of information overload.

Now imagine having this same “looking glass” technology to see through 401(k) product offerings to find all the fees. Fact is, we’re pretty darn close to that today as 401(k) fee transparency has taken another step forward.

Not in the form of regulatory action by the Department of Labor or class action lawsuits. But rather in the form of a plan sponsor entering into a proposed settlement with a 401(k) provider.

You can read the details in the Groom Law Group's March 11, 2010 Memorandum To Clients, Court Grants Preliminary Approval of Hartford Fee Lawsuit Settlement. But here’s the bottom line. Groom reports that Hartford will be paying approximately $14 million if the Court approves the settlement in June.

In addition, the insurance company will make changes to its plan documents, group annuity contracts, and funding agreements; and provide additional revenue sharing disclosures to current and future plan sponsors and participants

I’ll let the ERISA attorneys out there comment on the significance of this settlement in what the retirement plan industry calls the “401(k) Space”. (I'm resisting the urge to riff on that one). I’ll just offer up two practical suggestions to plan sponsors:

1. Know what you are signing
2. Be careful about ceding discretion to a service provider

Sometimes low tech can work well too. 

03 | 28 | 2010 Posted By Jerry Kalish

That's a picture of the oldest message in a bottle. It spent 92 years 229 days at sea according to the Guinness Book of World Records. A bottom drift bottle, numbered 423B, was released at 60º 50'N 00º 38'W on 25 April 1914 and recovered by fisherman, Mark Anderson of Bixter, Shetland, UK, at 60º 50'N 00º 37'W on December 10, 2006.

But in the 21st Century, the bottle numbered 401(k)/403(b) with the message inside of guaranteed lifetime retirement income doesn’t have 92 years to wash up on shore with solutions.

The need is obvious. Just consider the impact of the recent stock market meltdown and continuing economic problems on retirement savings and retirement dreams deferred.

The solutions are, of course, much more difficult to develop. While innovative retirement income products are being developed by the financial service industry, a recent study by Cogent Research titled In-Retirement Income indicates a vacuum in which retirement income products are simply not resonating with pre-retirees and retirees and no single provider stands out.

While we all waiting for the vacuum to be filled – and filled it will be – defined contribution plans like 401(k) and 403(b) are most likely the environment in which it will be happening. And that's the starting point which our blogging buddy, attorney Bob Toth, spells out on his blog, The Business of Benefits which links to his recent BNA Tax Memorandum, Income Guarantees in Defined Contribution Plans.

03 | 21 | 2010 Posted By Jerry Kalish

That's how many people fill out their brackets for March Madness. Jennifer Taglione writes about these and other shortcuts used to pick the winner of the NCAA basketball championship in her post, Bracketology 101: Common Bracket Methodologies, on the Bleacher Report blog.

That type of decision-making may be o.k. for picking (or trying to pick) the winner of the NCAA basketball championship. But for selecting a new 401(k) service provider, short-cut decision-making is not a good idea. Selecting a 401(k) service provider is, of course, a fiduciary decision.

401(k) Helpcenter provides some excellent guidance in their COLLECTED WISDOM™ On Choosing and Monitoring Plan Providers. It may even help avoid what I have seen as the common mistakes made in selecting a 401(k) service provider:

• Not understanding service and investment models
• Not understanding fees
• Not listening to employees about what matters to them
• Making the decision-making based solely on company politics and other relationships
• Looking solely at “costs”

Similar type of decision-making I write about in How Not To Hire An Auditor For Your ERISA Plan.

03 | 4 | 2010 Posted By Jerry Kalish

2009 was a challenging year for employers and employees. 

From our vintage point, we are seeing more employers than in recent years finding it necessary to return excess 401(k) contributions to Highly Compensated Employees by the March 15 deadline or provide a supplemental 100% vested contribution called a Qualified Non-Elective Contribution, a/k/a “QNEC”.

Unfortunately, passing 401(k) discrimination tests is not as easy as it was for Bill and Ted passing  their history test in the 1989 classic comedy, Bill & Ted’s Excellent Adventure. If you missed it (it comes around from time to time on cable), Bill S. Preston, Esq. played by Alex Winter and and Ted Logan played by Keanu Reeves are two high school slackers that use a time machine to go back in time to bring back a group of famous historical figures to use in their presentation. 

Those illustrious individuals, shown above, that were thrust into 1989 California (and what a trip that was) included Napoleon Bonaparte, Billy the Kid, Socrates, Sigmund Freud, Ludwig van Beethoven, Genghis Khan, Joan of Arc, and Abraham Lincoln.

Unfortunately, we don’t have a time machine or the late George Carlin who played Rufus from the future who supplied the lads with that time machine.

But going forward, the March 15 deadline can be an excellent focal point for employers to rethink those plan design elements that might help improve 401(k) discrimination results. 

Returns of excess 401(k) contributions by HIghly Compensated Employees can sometimes be avoided changing the plan to: 

• Add an employer safe harbor contribution
• Add an employer safe harbor match
• Change the waiting period
• Change the definition of compensation
• Add automatic enrollment

But any of these changes means, of course, starting the planning process now - or maybe have history repeat itself a year from now. 

02 | 5 | 2010 Posted By Jerry Kalish

Our friends at Employee Benefit News Legal Alert published one of those "must read" articles. Attorney Cynthia Marcotte Stamer writes Tough Times Are No Excuse for ERISA Shortcuts. Ms. Stamer correctly points out that irrespective of the business hardships that plan sponsors are facing, the Department of Labor (DOL) will aggressively pursue enforcement if they perceive that a plan sponsor has failed take the necessary steps to protect plan participants.

Here are three key points she makes:

1. Many employers don't understand their fiduciary responsibilities and potential liabilities associated with sponsoring a retirement plan.
2. Plan sponsors frequently incorrectly assume that they can rely upon retirement plan service providers to ensure that their fiduciary responsibilities are being met.
3. Plan sponsors in other cases don't realize that they meet ERISA's functional definition of a fiduciary.

For comprehensive and understandable resources on what this "fiduciary stuff" is all about, check out The Fiduciary Education Campaign, a compliance assistance initiative of the Employee Benefits Security Administration (EBSA), the DOL agency responsible for fiduciary oversight.

Employee Benefit News Legal Alert is just one of the free resources provided by Employee Benefit News. Here's a link to check them out.

01 | 29 | 2010 Posted By Jerry Kalish

That was the title of a blog post I wrote exactly one year ago today when Brightscope, Inc., an independent data analytics company launched their 401k ratings disclosure website.

It featured  the BrightScope Rating™, a quantitative 401(k) plan rating developed by BrightScope, Inc. in partnership with some of the country's top independent fiduciaries, finance professors, and 401(k) experts. BrightScope Ratings™ take into account over 200 unique data inputs per plan and calculate a single numerical score to define 401k plan quality at the company level.

In noting that it was the nation’s first online 401(k) rating system, I ended my post by saying, As for me, I’m still thinking about the implications of this innovation. Could be huge.

So I thought it would be interesting to see exactly the progress this start-up company has made over the past year.

Here’s a brief quantitative look-back. Then: 5 employees, now: 22. Then: 800 401(k) plans rated, now: 34,000 401(k) plans rated. Then: a few hundred page views a day, now: approximately 12,000 a day.

The buzz about BrightScope started from their initial press release and has been fueled by media coverage in both mainstream and trade media.

Since the beginning of 2009, the Company has launched the following products:

• July 2009: Plan Management Dashboard for corporate plan sponsors
• September 2009: Advisor Central for retirement-plan advisers
• January 2010: Personal 401(k) Fee Report for 401(k) participants.

They have arrived in the middle of the “perfect storm”: increased Congressional scrutiny and involvement in 401(k) plans, stepped up regulatory focus by the Department of Labor, and everyone’s concern about the adequacy of retirement income – or lack thereof.

Only time will tell the extent to which Brightscope will impact the 401(k) plan industry. But impact it they will. Year 2 should be very, very interesting.

01 | 23 | 2010 Posted By Jerry Kalish

That's the title of a press release I received this week from Cogent Research, a market research and strategic consulting firm based in Cambridge, Massachusetts about the results of their 2010 Investor Brandscape™ report.

According to Cogent, Fidelity Investments has forfeited its position as both the number one distributor and mutual fund provider to key rivals Charles Schwab and Vanguard. Cogent said it is because of significant shifts in brand perceptions, household penetration, as well as changes in investor loyalty.

The Cogent report which is based on a representative survey of 4,000 affluent and high net-worth investors in the United States reveals a decline in the number of investors using 401(k) plans. In fact, for the first time ever, affluent investors now report having more dollars allocated to IRAs than to employer-sponsored retirement plans.

In an interview Meredith Lloyd Rice, an author of the report, made the following key points.

• The proportion of investors that hold a 401(k) has gone down significantly. As of Oct. 2009, she said, only 59% of investors’ surveyed hold an employee-sponsored retirement account, down from 70% in Oct. 2008.
• The population is also aging and those closer to retirement are rolling over their employee-sponsored retirement plans into IRAs, another reason for the decrease in participation in 401(k) plans.
• Younger investors are more likely to start their own businesses or freelance and aren’t necessarily working in traditional full-time jobs that offer employee-sponsored retirement plans.
• High unemployment is also cutting into contributions.

In big picture terms, the results of this report aren't about market share or brand loyalty. Rather, It's how the intersection of our aging population, higher unemployment, and lower 401(k) participation is impacting retirement security - or lack thereof.

01 | 10 | 2010 Posted By Jerry Kalish

That's the poster from the not so good 1979 movie, The Shape of Things To Come. You kinda get the picture from the tagline Beyond the earth... Beyond the moon... Beyond your wildest imagination!

The movie was an adaptation of  the 1933 science fiction novel, The Shape of Things To Come, by H.G. Wells which speculates on future events from 1933 until the year 2106.

My own prognostications for the future are not nearly as expansive. But rather limited to the world of 401(k) for 2010. Here's a link to my January 2010 column in Employee Benefit News, The Shape of Things To Come for 401(k) Plans. 

12 | 31 | 2009 Posted By Jerry Kalish

It’s that season of the year. No, not the obvious holiday season, but the award show season. And I’ve got my own called, The Retirement Plan Year in Review: The Good, The Bad, and The  Ugly.

The reference is, of course, to Sergio Leone's classic 1966 movie, considered the greatest of the Italian spaghetti westerns, starring Clint Eastwood (the Good), Eli Wallach (the Bad), and Lee Van Cleff (the Ugly).

And so with apologies to the afore-mentioned director and actors, here are my 2009 nominations in each of the three categories.

• The Good: Increased Consumer Spending
• The Bad: Job Losses
• The Ugly: Early Retirements Hurt Social Security System and Many Recipients

You can see the entire "award show" in my December, 2009 column in Employee Benefit News.

So for 2009, that's a wrap.

Best wishes for a healthy, happy, and prosperous New Year.

12 | 26 | 2009 Posted By Jerry Kalish

Welcome to Adam Pozek and his new blog, Pozek On Pension to the cadre of retirement plan bloggers. He is Vice President, Consulting Services for Sentinel Benefits & Financial Group.

In the few posts Adam has published so far, he provides context for what’s happening with retirement plans with a point of view.

And here’s one that immediately caught my eye as a response to a plan sponsor or advisor “shopping” for a retirement plan administrator. I’ll simply link them to Adam’s post, Is Cheapest Always Best?

Right on!

11 | 29 | 2009 Posted By Jerry Kalish

The Employee Benefit Research Institute (EBRI), an independent non-partisan research organization, in their annual Retirement Confidence Survey (RCS) has been asking workers how confident they are in having enough money for a comfortable retirement since 1993.

And in today’s economy, it should be no surprise that EBRI reported The 2009 Retirement Confidence Survey: Economy Drives Confidence to Record Lows; Many Looking to Work Longer. The Executive Summary stated

Workers who say they are very confident about having enough money for a comfortable retirement this year hit the lowest level in 2009 (13 percent) since the Retirement Confidence Survey started asking the question in 1993, continuing a two-year decline. Retirees also posted a new low in confidence about having a financially secure retirement, with only 20 percent now saying they are very confident (down from 41 percent in 2007).

The 2009 RCS reports that workers who have lost confidence in their ability to secure a comfortable are responding as follows:

• 81% have reduced their expenses
• 43% are changing the way they invest
• 38% are working more hours or a second job
• 25% are saving more money , and
• 25% are seeking advice from a financial professional

Sounds reasonable, yes? But here’s the rub. The RCS concludes that faulty assumptions and a lack of planning still hinder the ability of many Americans to realistically assess the preparations they need to take to ensure a financially secure retirement.

And that’s the problem that Frank Armstrong, III and Paul B. Brown address in their new book, Save Your Retirement: What To Do If You Haven’t Saved Enough or If Your Investments Were Devastated by the Market Meltdown.

So what’s so special about this book amidst the glut of books about retirement planning? Simply this. It reflects the real life experience of the authors in contrast to the media-created “investment experts” for many of whom the current recession is their first.

Frank Armstrong has more than 35 years of experience in the securities and financial services industry and is the founder and principal of Investor Solutions, Inc., a fee-only registered investment advisor, based in Miami. Paul Brown is a longtime contributor to the New York Times and co-author of the best selling retirement plan guide Grow Rich Slowly. He is a financial expert for ThirdAge.com, the popular website devoted to the concerns of people over age 40.

There’s nothing magic in their book. It’s just basic, old-school financial management in which Armstrong and Brown respond directly to what I call the “new financial realities” by showing battered investors

• Where to move their savings
• How to recalculate what they’ll really need to retire
• How to assess when they can now afford to retire
• How they should change their approaches to investing
• How to use the federal tax system to save more
• What to expect from Social Security now

So if you’re one of those people worried about how and when you can afford to retire, then this book can be an excellent guide. Here's a link to Amazon if you want to purchase the book, and you can also subscribe to Frank's companion blog, Sink or Swim.

You can also check out other book reviews I’ve done: Josh Itzoe's timely Fixing The 401(k); Fran Hawthorne's controversial Pension Dumping: The Reasons, The Wreckage, The Stakes for Wall Street; and Christian Jarrett’s and Joannah Ginsburg’s This Book Has Issues - Adventures in Popular Psychology.

11 | 27 | 2009 Posted By Jerry Kalish

Most annual retirement plan limits are indexed to inflation; and because of the decline in the Cost of Living Index in 2009, many of the limits remained unchanged for 2010.

Following are the key retirement plan limits for 2010 as announced by the Internal Revenue Service.

• 401(k) and 403(b) Deferrals: $16,500.
• Catch-Up Limit (Age 50 and Older: $5,500.
• Defined Benefit: $195,000.
• Maximum Compensation: $245,000.
• Highly Compensated Employee: $110,000.
• Social Security Taxable Wage Base: $106,800.

Click here to download our chart for a list of all the retirement plan limits for 2010 compared to 2009 and 2008.

It may be good news for employees, many of whom expected reductions, but not good news for 50 million Social Security recipients. The negative inflation rate meant that they will not get a cost of living increase next year – the first time since 1975.

But while by law, Social Security benefits can't decline, premiums for the Medicare drug program are expected to increase next year by 11%. Social Security recipients who have these premiums deducted from their benefits will receive reduced checks.

And what are the implications of this deflation beyond 2010? Here is a link to J.P. Morgan’s article, Deflation and the Effect on Benefit Plan Limits, that discusses its impact on both private and public retirement plans.

11 | 15 | 2009 Posted By Jerry Kalish

If you missed that 2000 stoner comedy Dude, Where’s My Car?, you had several chances recently to catch it on cable. But if you’re still not aware of this movie that was a modest box-office success but has managed to develop a cult following, let me raise your pop culture awareness.

Two potheads played by Ashton Kutcher and Seann William Scott wake up from a night of partying and can't remember where they parked their car. And it occurred to me what if they woke up 40 years later and couldn’t find their 401(k) accounts from all the different employers for whom they worked. (Yea, yea, I know I should get a life outside ERISA!).

That’s a likely scenario for many employees who were never part of a defined benefit pension plan and participated only in defined contribution plans such as profit sharing and 401(k). In an economy in which workers change jobs frequently, employers go out of business, move or are acquired, it’s not unusual for them to lose track of former account balances.

The resources to find these lost defined contribution accounts are even more limited than for defined benefit plans. For these plans at least, the Pension Benefit Guaranty Corporation (PBBC) does have its Pension Search database, but it’s only useful to assist employees whose defined benefit pension plan the PBGC has taken over. The PBGC does, however, provide information on how to track down a lost pension from other sources in their publication, Finding a Lost Pension.

There are, however, at least two resources, however limited, that may help:

1. The Social Security Administration which receives Schedule SSA information from the Department of Labor each year for terminated employees with vested benefits. However, the information is only as current as the date that the employer left his former employer.
2. The National Registry of Unclaimed Retirement Benefits (NRURB), a database operated by the benefit distribution processing firm PenChecks. However, employers must take the initiative to register names of former employees who have left account balances in their retirement plan. There is currently approximately 50,000 such individuals in their database.

So what’s the solution? One to consider is the approach taken by the U.K. and Australia. Each country has a central registry for the purpose of helping people find lost pensions. You can read about this approach in the March/April 2002 issue of Contingencies magazine article, Retirees ISO Their Lost Pensions, written by David Blake of the Pensions Institute in London and John Turner of the American Association of Retired Persons (AARP).

The bottom line is that employees are on their own, and it’s time to address the matter. 

And by the way, if you did miss the movie that inspired this post, be patient. The sequel, Seriously Dude, Where's My Car, is supposed to premiere next year.

10 | 23 | 2009 Posted By Jerry Kalish

Common Craft has just released their new video, Saving for Retirement In Plan English. They are superbly talented producers of videos for training and education, whose product they say is "explanation".

The video can be licensed for use by any organization that has the goal of increasing awareness and adoption of a retirement savings program, e.g., 401(k) plan sponsors.

Earlier this year, I blogged about Common Craft's video, Investing Money in Plain English as a way to help 401(k) participants get back to the basics.

Sometimes less is more.

10 | 9 | 2009 Posted By Jerry Kalish

In a recent series of three Revenue Notices and four Notices the Treasury Department issued Retirement Savings & Initiatives to help Americans save for the future.

The new Initiatives:

1. Expand automatic enrollment in 401(k) and other retirement savings plans
2. Create easier ways to save tax refunds
3. Allow unused leave to be converted to 401(k) savings
4. Provide a better explanation of rollover options

Let me expand on the last item because of its time sensitive nature. Employees when receiving a distribution from a qualified retirement plan must be given what we in the retirement plan business call a “402(f) notice” named after Section 402(f) of the Internal Revenue Code which explains distribution options and their tax consequences. Most of us use a notice based on IRS safe harbor language dating back to 2002.

IRS Notice 2009-8 (25 pages, PDF) provides updated and simplified model employee notices which explain distribution options for retirees and other terminating employees updated for recent tax legislation. The existing employee notices can be used through December 31, 2009 but only if they are modified to reflect all currently applicable statutory changes, i.e., the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Pension Protection Act of 2006 (PPA).

So what to do? One of our Chicago ERISA attorneys, Andy Williams of Aronberg Goldgehn makes the following recommendations in his recent Retirement Savings & Initiative Bulletin:

All 402(f) notices need to be revised to reflect current statutory requirements. The substantive changes parallel those required for retirement plan documents. (see Retirement Plan Update: 2009 Deadline for Amendments). Plan administrators can use their existing 402(f) notices until the end of 2009, but only if they are customized to reflect current legal requirements. It makes more sense to adopt the applicable model notice from IRS Notice 2009-68. Because it is unclear that there is any grace period for adopting the new employee notice, this change should be made now with respect to all subject retirement plans, which includes plans qualified under Section 401(a) of the Internal Revenue Code (profit sharing, Section 401(k) and defined benefit pension plans) as well as Section 403(b) tax deferred annuity arrangements maintained by not-for-profit entities.

You can check out Andy's other bulletins on his Benefit Law Group of Chicago website.

09 | 23 | 2009 Posted By Jerry Kalish

Gimme Shelter is, of course, one of the classic songs by The Rolling Stones, and it first appeared as the opening track on the band’s 1969 album Let It Bleed.

The song was written in the context of the cultural turmoil of the 1960s, e.g., the Vietnam War, and the lyrics speak of seeking shelter from a coming storm.

Oh, a storm is threat’ning,
My very life today;
If I don’t get some shelter,
Oh yeah, I’m gonna fade away

Gimme Shelter was needed all too soon on December 6, 1969 documented in the 1970 film of the same name directed by Albert and David Maysles and Charlotte Zwerin. The documentary chronicled The Rolling Stones’ 1969 US tour, which culminated in the disastrous Altamont Free Concert at which the above picture of Mick Jagger was taken.

The song and the film were also indicative of the long and sometimes inglorious history of tax shelters. During this time, the top tax brackets in the U.S. was extremely high, 70%; and there was a growing trend towards marketing and packaging tax shelters for the middle class. In Rolling Stones terms, Gimme Tax Shelter.

There is nothing inherently wrong with tax shelters which are methods to reduce taxable income, e.g. qualified retirement plans. But human nature being human nature, “abusive tax shelters” (defined by the IRS as transactions promoted for the promise of tax benefits with no meaningful change in a taxpayer’s income or assets) appeared in every increasing numbers.

Generally, the IRS has found several forms of abusive tax shelters such as the use of multiple layers of domestic and foreign pass-through entities such as Trusts, Partnerships, S-Corporations, and Limited Liability Companies. The cost of adverse tax consequences resulting from an abusive tax transaction can be significant.

And, oh yes, certain forms of qualified retirement plans have been classified as such by the IRS. In the late 1990s, for example, some fully insured defined benefit pension plans permitted by Section 412(i) of the Internal Revenue Code were funded by life insurance policies with “springing cash values”.

These policies had no cash value for the first 5-7 years, after which they had significant cash value. Just before the cash value sprung, the participant would purchase the policy from the plan for the policy’s surrender value, zero. The objective was create a tax free transaction. The fallout – both financial and legal – from these types of retirement plans continues.

I wrote about the newest form of supercharged retirement plan in one of my weekly columns for my other blog home, Slate’s BizBox blog, How To Buy A Business...Maybe, Maybe Not. It’s supposed to work something like this. A new business owner rolls his account from his former employer’s plan into his new retirement plan, and then uses the funds to buy stock in his new company.

Thus, the new business is capitalized with tax-deferred money. If it sounds too good to be true, it may very well be. It’s one of the transactions right on the IRS’s radar screen for abusive tax schemes. The IRS calls these transactions ROBS, rollover for business start-ups, so you kind of get the drift of their view.

For the technical details, here are two links.

• The October 1, 2008 memorandum that Michael D. Julianelle, IRS Director of Employee Plans, penned. The memo alerts IRS agents performing audit reviews and determination letter approvals to study each of these transactions on a case-by-case basis.
• McKay Hochman provides an excellent discussion of the retirement plan issues in their recent Email Alert, Rollovers for Business Start-ups (ROBS).

So what to do before committing money to any tax shelter? Attorney Susan Berson writes that some of the questions the IRS will ask about the tax shelter are the same ones you should ask before investing. Susan is a Partner in the boutique law firm, The Banking and Law Group, LLC, specializing in banking law, tax litigation, business law and mediation services.

Not much I can add to what Susan, formerly a senior trial attorney with the United States Department of Justice Tax Division in Washington, D.C., can say except this:

It’s worth the time and money to seek an opinion with a tax advisor not associated with the transaction. The cost of adverse tax consequences resulting from an abusive tax transaction can be significant.

09 | 13 | 2009 Posted By Jerry Kalish

That’s Chicago’s own Bill Murray and Scarlett Johansson pictured in a scene from Lost In Translation, the 2003 movie in which they co-starred.

I’ll skip the movie review and just describe it as writer/director Sofia Coppola’s story about Murray and Johansson playing two people out of sorts with Japan, the country they find themselves visiting. Coppola won the Oscar that year for Best Writing, Original Screenplay.

Kinda like 401(k) participants attempting to translate investment education programs in managing their accounts. My September column in Employee Benefit News discusses how many plan sponsors have added an independent investment advice component to address the situation. Here is the link (free registration may be required) .  

09 | 9 | 2009 Posted By Jerry Kalish

Form 5500 isn’t just transforming disclosures as fellow blogger, Bob Toth, explained in his post 2009 Form 5500 Schedules A and C Will Create New Fiduciary Burdens For Plan Sponsors. The reporting road will be also be different.

Beginning with the 2009 plan year, the Department of Labor (DOL) will require retirement and welfare plans to file their Form 5500 electronically. It’s called EFAST 2, and it’s effective for plan years beginning on or after January 1, 2009. Electronic filing will be available starting January 1, 2010.

All plans, including retirement, welfare and 403(b) plans, will need to file their 5500s electronically except for “owner-only plans”. These are plans covering the sole owner (and his/her spouse) or partners in a partnership (and their spouses) and no employees. Owner only plans can continue to file a paper copy of the 5500-EZ with the IRS. However, owner-only plans, which do not hold employer stock, may elect to file a Form 5500-SF (short form) electronically with the DOL.

While the transformation from paper filing to electronic filing will require significant procedures changes for those of us involved in plan administration, the ultimate challenge may be dealing with those clients who are not exactly high up on the technology curve. But then, that's what client service is all about.

09 | 2 | 2009 Posted By Jerry Kalish

Bankruptcy cases increased approximately 35% for the 12-month period ending June 30, 2009 , according to statistics released by the Administrative Office of the U.S. Courts. The number of cases went from 967,831 to 1,306,305.

These statistics call attention to one of the often overlooked aspects of a retirement plan - protection from bankruptcy.

It's a complicated topic which I discuss in my other blog home, Slate's Bizbox blog sponsored by Open from American Express. Here is a link to my recent column, What Happens To Retirement Plans In A Bankruptcy?

For further information on the bankruptcy process itself, here is a link to Bankruptcy Basics published on the website of the U.S. Courts.

08 | 31 | 2009 Posted By Jerry Kalish

The picture above is the cover of Jim Collins’ bestseller, Good To Great. The book, says Mr. Collins, shows that

Greatness is not primarily a function of circumstance; but largely a matter of conscious choice and discipline.

He’s talking about corporate management, of course. But why not think about 401(k) plans in those same terms. How do we go from good 401(k) plans to great 401(k) plans?

That process is clearly underway. There are folks out there leading the charge. They include our friends and fellow bloggers Brightscope, a firm which quantitatively rates 401k plans, and Josh Itzoe. Josh is both a CFP® and AIF® and is a Principal of Greenspring Wealth Management, Inc., a registered investment advisory firm and Independent Fiduciary in Towson, MD. I reviewed Josh's book Fixing The 401(k) earlier this year. 

There’s also Roger Wohlner, CFP®, whose local, and in his blog, Chicago Financial Planner, writes about the characteristics of a good 401(k) plan. Those ingredients, he says, are:

• An active and engaged Investment Committee is essential.
• An investment process governing the management of the plan.
• A menu of solid, well diversified investment options is offered.

What can take a 401(k) plan from good to great is Roger’s conclusion:

In the future hopefully plans will offer their participants the option of having an unbiased, unconflicted Fiduciary Advisor manage their individual 401(k) accounts. This goes far beyond the education currently offered by some plans and, in my opinion, gets to the real heart of what participants need.

And why? Participants in 401(k) plans just haven't been achieving an appropriate rate of return. No great insight on my part, but just take a look at recent research to see how really bad it’s been.

For the past 15 years, Dalbar, a Boston-based financial research firm, has been issuing a report called the Quantitative Analysis of Investor Behavior (QAIB) that examines the returns that investors actually realize and the behaviors that produce those returns.

In its 15th annual study, Dalbar discovered that equity, fixed income and asset allocation mutual fund investors experienced average annual losses for all time periods examined except the longest (20-year) time frame. And even those positive returns did not keep pace with the average inflation rate.

I’ll leave the commentary and analysis of the report’s results to the investment experts like Josh and Roger, but one stat jumped out at me. While the S & P 500 earned an average return of 8.41% from 1988 to 2008, the average equity investor earned a mere 1.87%.

Some investment experts call that 6.54% differential the cost of uninformed investing, and others call it the cost of going it alone. I call it the cost of inadequate retirement income.

There’s no guarantee that independent investment advice is the answer. To quote the ubiquitous compliance officer: “Past performance is no guarantee of future investment results.”

But then again, investment education programs haven’t worked. 

08 | 26 | 2009 Posted By Jerry Kalish

Each week Nevin E. Adams, JD, PLANADVISER Editor-in-Chief writes a column called IMHO (In My Humble Opinion), and he's always a good read.

He's just published a two-part series that's an excellent, common sense approach for fiduciaries that's definitely worth keeping handy. It's called “To Do” List: 10 Things You’re (Probably) Doing Wrong—or Not Doing Right—as a Plan Fiduciary.

His 10 things are:

1. Not having a plan/plan investment committee.
2. Not HAVING committee meetings.
3. Not keeping minutes of committee meetings.
4. Not having an investment policy statement.
5. Not removing “bad” funds from your plan menu.
6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.
7. Depositing contributions on a timely basis.
8. (Not) monitoring providers on a regular basis.
9. Not following the terms of the plan document.
10. Not realizing who is a fiduciary—and what that means.

To get the full picture, here are links to the complete columns: Part 1 and Part 2.

08 | 25 | 2009 Posted By Jerry Kalish

What's an eligible rollover distribution and what's not can be as complicated and confusing matter as the maze pictured above. Here's a recent and handy discussion of the rules and a chart that may be helpful to find your way through it. It's published by McKay Hochman which you can find here.

08 | 24 | 2009 Posted By Jerry Kalish

I was flipping - or rather, clicking - through my album collection yesterday, and landed on The Well's On Fire, Procul Harum's 2003 studio album. If you're not a child of the '60s or are too young, they're the 1960s British rock group best known for their 1967 hit single, A Whiter Shade of Pale, and who are still touring.

And there it was, Track No. 9, The Wall Street Blues which some might say is as relevant now as it was then. So in that light, let's roll the video and scroll the lyrics: 

Procol Harum lyrics

I don't mean to bum you out on a Monday morning, but, hey, we got to keep it real, don't we?

08 | 18 | 2009 Posted By Jerry Kalish

The economy doesn't seem to be improving, and hardship distributions from 401(k) plans continue to be taken. A few months ago I posted, Hard Times Mean More 401(k) Hardship Distributions.

I'm revisiting this matter again to point you to how to make hardship distributions correctly as discussed in the IRS' Summer 2009 Edition of Retirement News for Employers. 

Here are the highlights of the IRS' 7 steps to making hardship distributions:

1. Review the terms of your plan.
2. En sure that the employee complies with the plan’s procedural requirements.
3. Verify that the employee’s specific reason for hardship qualifies for a distribution using the plan’s definition of what constitutes a hardship.
4. If the plan, or any of your other plans in which the employee is a participant, offers loans, document that the employee has exhausted them prior to receiving a hardship distribution.
5. Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee’s financial need.
6. Make sure that the amount of the hardship distribution does not exceed any limits under the plan and is made only from the amounts eligible for a hardship distribution.
7. If the plan has a provision that the employee taking a hardship distribution is suspended from contributing to the plan for at least 6 months, make sure to enforce that provision. 

Basic, yes. Practical, very. Here is a link to the complete article, 7 Steps to Making a Hardship Distribution (PDF).

08 | 13 | 2009 Posted By Jerry Kalish

That's Les Stroud pictured above whose TV show, Survivorman, is one of my favorites. One of my other favorites is Bear Gyylls show, Man Versus Wild.   

Both are survival experts who go toe-to-toe with some of the harshest environments on the planet and come through alive.

So if you'll grant me some editorial license, Les's picture is the visual metaphor I'm using for the harsh environment in which fiduciaries must operate. And it is harsh out there.

Buffeted by the most complex set of forces since ERISA arrived in 1974, plan fiduciaries today must cope with heightened compliance enforcement by the Internal Revenue Service and the Department of Labor, increasing litigation by plan participants and tightened fiduciary liability insurance markets.

But despite all these forces that are swirling around, there are indeed some practical ways that fiduciaries can effectively manage their responsibilities. Here is a link to my column in the August issue of Employee Benefit News in which I discuss this matter. (Free registration may be required).

Employee Benefit News is an employee benefit publication which provides free newsletters including  seminars and podcasts from industry experts, and online content for plan sponsors. One of their other publications, Employee Benefit News Legal Alert, also carried  my article. You can check all of their publications here.

But I do have one nagging question. Les Stroud is Canadian. Bear Grylls is British. Would I be too much of a homer if I asked where are the Americans?

08 | 10 | 2009 Posted By Jerry Kalish

That’s Bloc Party, a British indie rock block pictured above. And If it can be broken then it can be fixed is the opening line from Pioneers, one of the tracks on Silent Alarm, their 2005 debut album.

The album was crafted by chief lyricist Kele Okereke to examine the feelings and hopes of young adults about pertinent issues of the day. So now let’s fast forward four years, and one of today's issues that needs fixing is Wall Street.

Just a few months ago I wrote about that issue in my post, The Times They Are A-Changin' For Wall Street And Big Law. Marc Tracy, my editor at my other blog home, Slate's Small Business blog, also covered the issue in his post, The Great Rearranging Hits Wall Street.

So what’s the fix? And it can be fixed says our fellow blogger, Bill Singer, a securities lawyer whose blog, Broke and Broker I’ve written about before. Bill also writes a column, Intelligent Investing, for Forbes in which he recently wrote, Becoming Part Of The Solution, his eight-point program to reform Wall Street and its regulatory community.

Here's a summary of Bill's suggestions:

1. Professionalize Financial Services Providers
2. Implement a uniform regulatory disclosure system on all customer statements
3. Establish a centralized national auditor
4. Abolish Self-Regulatory Organizations
5. End Mandatory Customer and Industry Arbitration
6. Create a Fund for Full Payment to Defrauded Investors
7. Implement Bounty Program for Whistleblowers and Tipsters
8. Create a Systemic Risk Monitor (SRM)

You can follow the details in Bill's future columns.

In the meantime, here's the complete first stanza from Pioneers:

If it can be broke then it can be fixed, if it can be fused then it can be split
It's all under control
If it can be lost then it can be won, if it can be touched then it can be turned
All you need is time

And the political will!

08 | 7 | 2009 Posted By Jerry Kalish

Classic rock bands never go away. They keep on touring, and are rediscovered by new generations of music fans. Kinda like, those classic tax planning techniques that are being rediscovered by new generations of business owners.

One of those oldies, but goodies is buying life insurance through a profit sharing or 401(k) plan. In today’s economy, the reason is obvious. Cash flow, or lack thereof. Here’s a link to our Benefit Briefing that explains how life insurance fits into profit sharing and 401(k) plans in question and answer format.

Picture credit: Knebwort, the "Stately Home of Rock for 35 years".

07 | 30 | 2009 Posted By Jerry Kalish

If you’ve been around retirement plans for any length time, you’ll know that the acronym QDRO (one of many in the benefit business) stands for Qualified Domestic Relations Order.

It’s a court order that creates a right for an alternative payee to receive some or all of a participant’s benefits in a qualified retirement plan. It’s one of those exceptions to the Internal Revenue Code’s general rule that prohibits benefits in a qualified retirement from being assigned or alienated.

And it’s up to the Plan Administrator to determine whether a DRO (another one of those acronyms) or Domestic Relations Order issued by a judge pursuant to a state domestic relations law is, in fact, a QDRO. That is, it meets the requirements under federal law. It's a topic I've written about before. (See Dividing Retirement Benefits on Divorce, and What ERISA Has To Say About It.)

Steve Rosenberg in his Boston ERISA and Insurance Litigation Blog gives us some insight on the practical application of ERISA's QDRO rules in his recent post, Doing The QDRO Shuffle. Steve writes

Here’s a great opinion, out of the United States District Court for the District of Rhode Island, on QDROs, their statutory basis, their purpose, and how they should be structured. Notably, the court weighs in a very sensible manner on the never ending question of whether, under ERISA, the divorce decree at issue must comply exactly with the requirements imposed by ERISA to qualify as a QDRO or whether instead, as in horse shoes, close enough counts. In this circuit, close enough is usually good enough, and courts tend to enforce the divorce decree so long as the court is convinced it can accurately ascertain the intent and purpose of the agreement from the decree, regardless of whether the exact detailed requirements that ERISA imposes to qualify as a QDRO have been met.

The opinion he references is Metropolitan Life Ins. Co. v. Drainville, and he provides us the Lexis site for it: 2009 U.S. Dist. LEXIS 63613.

But the view of QDROs from 30,000 feet is a little bit different. The Houston Chronicle reports that Continental Airlines has sued 9 pilots who filed divorce papers. Continental claims nine pilots used sham divorces as part of a scheme to collect their pensions early.

In a recent lawsuit, the Houston-based airline claims the pilots used sham divorces to collect their pensions early. Continental alleges that the pilots filed divorce papers but continued to live with their spouses and didn’t tell anyone – including their children. Once the divorces were final, the former spouses received rights to the pilots’ pensions and applied for lump-sum distributions, which Continental said were worth as much as $900,000 apiece.

Continental also alleges that after they got the money, the couples remarried. Why? Continental suggests that the pilots were concerned about losing significant parts of their pensions because of the financial difficulties the airline industry was encountering, and that the maximum annual pension guaranteed by the Pension Benefit Guaranty Corp. (PBGC) is far less than a typical airline pilot pension, i.e., 2009 maximum of $54,000 for a 65-year old.

So now what’s a Plan Administrator to do? According to the report, Continental sent copies of the law suit to the Secretary of Labor and the Secretary of the Treasury.

But it’s nothing new. In 1999, UAL Corp, the parent company of United Airlines, asked the Department of Labor (DOL) how a Plan Administrator should treat domestic relations orders the Plan Administrator has reason to believe are “sham” or “questionable” in nature.

The DOL in Advisory Opinion 1999-13A responded by saying that

… “if the plan administrator has received evidence calling into question the validity of an order relating to marital property rights under State domestic relations law, the plan administrator is not free to ignore that information”.

You can read the entire Advisory Opinion here and the DOL's publication, The Division of Pensions Through Qualified Domestic Relations Orders.

So what's the answer in situations in which the QDRO is suspect? Let's use aviation jargon, and just say, let your attorney be the air traffic controller.

Picture credit: Sandkarx via Flickr of Mauna Kea, top to bottom.

07 | 22 | 2009 Posted By Jerry Kalish

Whether your preference is Sean Connery, George Lazenby, Roger Moore, Timothy Dalton, Pierce Brosnan, or now Daniel Craig, the James Bond character has been used in the longest running and most financially successful English language film franchise to date.

The Bond movies started in 1962 with Dr. No. For us ERISA people, our Bond originated in 1974 with the passage of ERISA which required that retirement plans be covered by a fidelity bond.

Here's our 2009 version as the July 31 Form 5500 filing deadline for calendar year retirement plans rapidly approaches (unless extended).

And, if history is our guide, then there will be retirement plans for which the bonding amount is insufficient, or in some case have have no coverage at all.

So here's a link to our publication, THE ERISA BONDING REQUIREMENT: What Plan Sponsors Need to Know to Be in Compliance Updated for the Pension Protection Act of 2006. Long title, but I hope the short the Q&A format helps.

07 | 13 | 2009 Posted By Jerry Kalish

It's already the middle of July, and for many retirement plan sponsors Form 5500 will be due by the end of this month unless extended. And if you’re a plan sponsor whose 5500 must include an ERISA audit, selecting a plan auditor is a fiduciary function.

Here is a link to my column in the July  issue of Employee Benefit news about what you need to know about ERISA audits. (Free registration may be required). Employee Benefit news is an employee benefit publication which provides free newsletters, seminars and podcasts from industry experts, and online content for plan sponsors. You can check it out here.

07 | 11 | 2009 Posted By Jerry Kalish

You remember that classic labyrinth wooden maze game. It’s the toy that has captivated and challenged children and adults for generations. It takes concentration and dexterity to guide the steel ball through the maze to reach the winning position.

Well, this is the 21st Century after all, and some folks from the Cowtown Computer Congress in Kansas City made it into a robotic labyrinth game as pictured above. They plugged an Arduino and two servos into the wooden labyrinth board game, and added some programming and a WiiFit board.  

Kinda like a 401(k) participant managing his or her own account to get to retirement with adequate income. Instead of WiiFit, they’re using employer sponsored investment education programs. Now I don’t know about how the computer folks feel about the results of their project, but 401(k) participants now think that current investment education programs are coming up short.

That acccording to String Financial’s recent study, Market Insights: Helping Tomorrow’s Retirees Better Prepare Today.

String Financial surveyed over 400 defined contribution plan participants in the third quarter of 2008. The respondents’ collective view of educational materials supplied by 401(k) providers and their employers is that they are: 

• Difficult to understand. 34% of respondents felt the materials included terms or concepts that they did not understand and were not adequately explained;
• A commodity product:. 41% agreed that the materials do not contain information that could not be easily found elsewhere (19% disagreed);
• Ineffective. Fewer than 19% of respondents indicated that the educational resources led to changes in retirement planning behaviors or practices.

And in real terms, even worse if you look at how research conducted by DALBAR. For the past 15 years, DALBAR has been issuing a report called the Quantitative Analysis of Investor Behavior (QAIB) that examines the returns that investors actually realize and the behaviors that produce those returns.

I’ll leave the commentary and analysis of the report’s results to the investment experts like our friends at Interlake Capital Management, LLC who in their blog, The Float, wrote, Dalbar 2009: Not Pretty.

Not pretty, indeed. While the S & P 500 earned an average return of 8.41% from 1988 to 2008, the average equity investor earned a mere 1.87%. Some call that 6.54% per year over that time period the cost of uninformed investing, and some call it the cost of going it alone. I call it the cost of inadequate retirement income.

And the answer is? 

07 | 7 | 2009 Posted By Jerry Kalish

There a lot of business myths out there. One of the most potentially dangerous is that there is a "7-Year Rule" and a "6-Year Rule" respectively for maintaining business and ERISA records. Both may be guidelines, but not the practical side of record retention.

That's the topic of my recent post over at my other blog home, Slate's BizBox blog for small business. Here's a link to Hang On To Your Records. 

07 | 5 | 2009 Posted By Jerry Kalish

You may be familiar with the PBS TV series, Antique Road Show. It’s that show that visits various cities in the U.S., and invites people to bring their unusual antiques and collectibles to be valued by appraisers.

But sometimes, things go awry in these situations as shown in the video below - actually an advert for the BBC version of the show in HD.

 
Hopefully, 401(k) participants who have hard to value assets in their accounts won't experience the same type of chaos. But there can be serious issues nonetheless.

Let's start with a definition. Hard to value assets, a/k/a "HVA" - another one of our many ERISA acronyms) include real estate, nonpublicly traded securities, shares in a limited partnership, and collectibles. They’re usually found in self-directed brokerage accounts ("SDBAs" - sorry, another acronym) which I wrote about earlier this year, Self-Directed Brokerage Accounts: Deja Vu All Over Again?

J.P. Morgan's recent newsletter analyzed the issues and regulatory activity impacting HVAs in their article, Plan investments – Hard to Value Assets. I'll leave the critical analysis to the experts like Brian Donohue, FSA, the Managing Director of J.P. Morgan's Compensation & Benefit Strategies.

But there's an aspect of HVAs that very timely to some of our clients at this time of year. Form 5500 due at the end of this month for calendar year plans unless extended. HVA can impact  "small plans” (those with fewer than 100 participants). These plans are generally exempt from the general requirements under Title I of ERISA that a retirement plan be audited each year by an independent qualified public accountant as part of the plan’s annual report Form 5500.

The exemption is based on the requirement that at least 95% of a small plan’s assets must be “qualifying plan assets” which those assets that can be readily valued. Or in other words, having not more than 5% of HVAs. In such case, the audit waiver can still be met if additional bonding is obtained in accordance with Department of Labor regulations.

And as to who pays the cost of the additional bonding, the Plan Administrator can require that the cost be paid by the participant whose self-directed account  caused the threshold to be exceeded. A policy clearly stated in the plan's Investment Policy Statement. You do have one, don't you?

06 | 30 | 2009 Posted By Jerry Kalish

This is the fourth in our EGTRRA Restatement Series, the purpose of which is to help retirement plan sponsors handle the required amendment and restatement of their retirement plans. Last week, I discussed plan document choices.

Today's post is about the Summary Plan Description ("SPD") and its distribution requirements - electronically speaking. For many retirement plan sponsors the SPD that's part of the EGTRRA Restatement process may be the first in several years. So for purposes of this post (and brevity), I'll conveniently cut through all the technical rules about content, timing, etc., and get right to distributing the SPD in the electronic world.

The Department of Labor (DOL) is the federal agency, of course, that has oversight responsibility for complying with ERISA's reporting, disclosure and fiduciary rules. One of which is that Plan Administrators provide participants and beneficiaries with a copy of the SPD and Material Modifications of the Summary Plan Description (MMSPD) in a manner that is "reasonably calculated" to ensure the actual receipt of the documents.

But in an electronic business environment with email, websites, etc., how do you actually met this requirement. Like many aspects of ERISA that are facts and circumstances based, the regulators provide safe harbors.

The DOL issued safe harbor regulations permitting Plan Administrators to distribute SPD through electronic media as long as certain requirements were met. First issued as interim regulations in April, 1997, the DOL issued final regulations on April 9, 2002. These regulations apply not to just SPDs, but also to permit electronic distribution of COBRA notices, qualified domestic relations orders (QDROs), and qualified medical child support orders (QMCSOs).

Here's a brief overview of the DOL's safe harbor rules: First, retirement plan participants must be able to access electronic information as an integral part of their duties, and they must be able to access documents in electronic form anywhere they are reasonably expected to perform work. If not, then they must consent to electronic delivery.

The DOL safe harbor says that

1. The electronic delivery system must confirm actual receipt of the transmitted information.
2. The system must protect the confidentiality of participants by incorporating measures designed to designed to stop unauthorized access or receipt of the information.
3. The electronic version of the document must be consistent with the style, content and format normally required.
4. Notice of the document's significance must be provided at the time of electronic delivery.
5. The participant must be apprised of his or her right to receive a paper copy of the document free of charge upon request.

Note that all along I've been saying "distributed" and not just "made available". Thus, just simply posting it on the company intranet, for example, doesn't meet the distribution requirement. Such was one of the holdings in a recent court case.

What are the consequences of a Plan Administrator to properly distribute an SPD? As with most ERISA disclosure requirements, there's the potential for substantial financial penalties. It's one of  those "kids don't try this at home" ERISA matters. Check with your advisors first.

Next up, to submit or not to submit the Plan to the IRS for a determination letter, that is the question.

06 | 23 | 2009 Posted By Jerry Kalish

It's the age-old story: worker classification, or rather misclassification. I wrote about it this past February, Independent Contractor or Employee? Employee Classification Still A High Priority Enforcement Matter.That was about the IRS auditing employers to determine whether those "independent contractors" were actually employees with required tax withholdings and possible inclusion in benefit plans.

I cover the same issue today in my other blog home, Slate's BizBox Blog, but this time it's about stepped up enforcement by the states for income tax withholdings and employment taxes. No doubt because of the economy. You can read about it here.

06 | 18 | 2009 Posted By Jerry Kalish

See larger image.

Inspired by today's DOL-SEC Joint Hearing on Target Date Funds and Envestnet survey of employee understanding of target funds. 

06 | 16 | 2009 Posted By Jerry Kalish

Over at my other blog home, Slate’s Bizbox Blog today, I wrote about Staying Up-To-Date on Your Retirement Plan. Not up-to-date in terms of your plan document as I'm doing in our EGTRRA Restatement Series, but up-to-date in terms of the timely deposit of payroll taxes and employees' 401(k) contributions.

So an article by way of Dave Baker's BenefitsLink provided some practical suggestions in dealing with this issue. Attorneys Kelsey N. H. Mayo and David L. Woodard of the North Carolina law firm, Poyner Spruill LLP write about Audit Risk Rising—What an Employer Can Do Before an Audit Happens.

While their article is about payroll taxes, they address the issue I mentioned in my Slate column about businesses outsourcing the payroll function. Here's what they have to say about that:

In addition, if you are an employer that has outsourced its payroll functions to a third-party, it is important to remember that the employer remains liable to the IRS for any employment tax violations. To identify and prevent issues you should:

* Receive regular documentation from your payroll vendor that shows how payroll taxes are being determined and paid.
* Periodically reconcile statements received from your payroll vendor to ensure employment tax amounts are being calculated and submitted correctly.

They also point out that

Given these impending audits, it is also important to remember that other agencies and states, including North Carolina, routinely share information with the IRS, including information regarding tax avoidance schemes and questionable tax practices. This information sharing could lead to additional investigations from other agencies and the state.

One of those information sharing agencies, by the way, is the Department of Labor. 

06 | 16 | 2009 Posted By Jerry Kalish

If you provide retirement plan services, here's a "must read" blog post by our fellow blogger, Bob Toth, Of Counsel to Giller and Calhoun. Bob writes about The SEC's and DOL's Cross Agency Retirement Plan "Compliance Waltz". Bob's post also includes a link to his article of the same name that appears in the May-June 2009 Issue of the Practical Compliance & Risk Management For the Securities Industry.

05 | 12 | 2009 Posted By Jerry Kalish

Remember the classic “Greed is good” speech by Gordon Gekko as played by Michael Douglas in the 1987 Oliver Stone classic, Wall Street. Here’s Douglas in his 1988 Academy Award winning role telling us why "greed is good":

Fast forward to today at a time when greed is viewed quite differently. It's one those psychological elements behind today's economy that was explored by an an interdisciplinary panel at a recent conference called, "Crisis of Confidence: The Recession and the Economy of Fear.”

Over at my other blog home, Slate’s Bizbox Blog, I write about this conference sponsored by the University of Pennsylvania's Department of Psychiatry and the Psychoanalytic Center of Philadelphia. Check out, Greed used to be good. 

And here's an interesting side note. Greed may no longer be good, but apparently power clothes are making a comeback. The ABA Journal Law News Now reports that Worried Lawyers Embrace Gordon Gekko’s Wardrobe. But as someone commented on the article, "It’s called Nordstrom Rack.  It’s where law students, lawyers, and consultants facing tougher times now go to shop".

05 | 8 | 2009 Posted By Jerry Kalish

Here is a link to my column in the May issue of Employee Benefit news about how automatic enrollment in 401(k) plans boosts 401(k) participation. (Free registration may be required). This is the first of the monthly columns I will be writing for Employee Benefit news - an employee benefit publication which provides free newsletters, seminars and podcasts from industry experts, and online content for plan sponsors. You can check it out here.

05 | 4 | 2009 Posted By Jerry Kalish

Suppose you’re a plan sponsor that wants to increase 401(k) participation among your low income employees, what do you do?

You know, of course, that employee financial education programs by themselves are not enough to influence a change in employee behavior. You might consider automatic enrollment about which I’ve written about before.

Automatic enrollment has been shown to raise 401(k) participation rates dramatically when it is applied to new hires, particularly new hires who are low earners. In one important study, automatic enrollment increased 401(k) participation rates of those making under $20,000 annually from 13 percent to 80 percent.

Research from the Retirement Security Project (a member of the Retirement Made Simpler coalition) indicates that low-income individuals can, and will, save given the right circumstances.

So what exactly are the right circumstances? If you are thinking outside the box like Staples, you partner up with Progress Through Business, a nonprofit organization focusing on poverty alleviation issues, and H&R Block to offer discounted tax preparation to low-income employees of Staples, Inc. thorough a pilot program called Tax Break first rolled out in January 2007 and run again in January 2008.

What follows are the highlights of a study of this unique program prepared by John Hoffmire, PhD Director of the Center on Business and Poverty University of Wisconsin-Madison, Wisconsin School of Business and Thomas Harms, Treasurer, Progress Through Business, for the filene Research Institute.

What made Tax Break unique was the inclusion of opportunities for low income employees to enroll in both employer and government benefit programs in the tax preparation process. The result was a significant increase in employee participation in such employer-sponsored plans as 401(k) retirement plans, employee stock purchase plans, and tuition reimbursement programs. Enrollment in government benefits also increased, with higher incidences of the Earned Income Tax Credit, child care credits, renters credits, education credits, and various advantages that are available to but sometimes not accessed by eligible low-income taxpayers.

The employees screened for benefits in 2007 showed a 29% increase in 401(k) plan enrollment, a 16% increase in Employee Stock Purchase Plan enrollment, and a 42% increase in scholarship program enrollment. In terms of just the 401(k) plan, employees benefited by accumulating retirement saving and receiving a 50% match by Staples on the first 6% an employee contributed.

The program worked out well for Staples. After one full year of tracking, those who participated in the program during the 2007 tax season showed a 32% improvement in retention over those who did not participate. This improvement in retention more than covered the costs incurred by Staples.

In fact, according to Hoffmire, “For each dollar that Staples invested in the program, they got back more than $6 in retention benefits related to having to hire others and train others who they did not want to lose. This calculation was based on the cost that McDonalds faces when they lose a worker they did not want to see leave the company. In fact, the savings were even greater for Staples, because their costs related to unwanted turnover are even higher than McDonald’s.”

So why the excellent results? Because someone thought outside the box and recognized tax filing is the single largest financial event of the year for that for low income employees. And it presented a unique “teachable moment”. That is, a time at which an individual is most receptive to learning something.

In addition, the researchers found other advantages that accrued to Staples and its employees. Hoffmire said, “On certain days, when the tax program was being promoted in Staples’ large distribution centers, you could notice an improvement in the error rates as employees seemed to show more care for their work as they felt they were being offered a benefit that was worth the equivalent of a 2% raise just through the tax preparation component of the program.”

Here is a link to the complete study, The Economics of Serving Low-Income Employees at Tax Time: Implications for Credit Unions (PDF, 63 page).

Picture credit: red mountain communications. 

04 | 30 | 2009 Posted By Jerry Kalish

I've written about Solo-Ks before over at my other blog home, Slate's BizBox. (See The Wonderful Solo-K).  It's a special retirement plan for the self-employed or small business owner with no employees (other than their spouse) to establish 401(k) plans and to max out their deductible retirement plan.

But as we creep toward 5500 filing time for 2008 calendar plans (July 31, 2009 unless extended to October 15, 2009), there is a yellow caution light out. And that's whether Form 5500 has to be filed for these so-called "owner-only" plans.

I cover the basics on that topic in Don't Miss Out On Your Solo-K over at Slate's BizBox, a special promotion by OPEN from American Express. And yes, even blogs have "product placement."

04 | 23 | 2009 Posted By Jerry Kalish

Hardship distribution provisions in 401(k) used to be one of those retirement plan matters on which plan sponsors didn’t spend a whole lot of time.

Lately, however, that’s not the case. From our vantage point, we’re seeing more requests for hardship distributions than ever before. That being the case, I’m going to take a few moments to discuss 401(k) hardships in the context of the current economic situation.

Background

While hardship provisions, like loans, are allowed by law, employers are not required to provide for them in a 401(k) plan. Many do because they provide a sense of security to participants as they balance between retirement savings and current financial needs. In other words, a safety value in case they ever need the money for a financial security. And that time is now for many participants.

So is an overview of what constitutes a hardship and they should be administered. Hardship distributions from a 401(k) plan can be permitted under two general rules: safe harbor rules and general rules for an immediate and heavy financial need (more about that later).

Safe Harbor Rules

Under these rules, a hardship distribution would only be made upon the finding by the Plan Administrator of an immediate and heavy financial need where such Participant lacks other available resources. The IRS says the following are the only financial needs considered immediate and heavy:

Expenses for (or necessary to obtain) medical care that would be deductible under Code section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);

• Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
• Payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the employee, or the employee's spouse, children, or dependents;
• Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence;
• Payments for burial or funeral expenses for the employee's deceased parent, spouse, children or dependents;
• Expenses for the repair of damage to the employee's principal residence that would qualify for the casualty deduction under Code section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income);

And Safe Harbor means exactly that. Follow the rules listed above, and a plan sponsor will automatically be in compliance with IRS regulations.

General Rules

Under these rules, a hardship distribution shall only be made upon the finding by the Plan Administrator of an immediate and heavy financial need where such Participant lacks other available resources. But unlike the Safe Harbor rules, whether a Participant has an immediate and heavy financial need is determined based on all relevant facts and circumstances.

For example, the need to pay the funeral expenses of a family member would constitute an immediate and heavy financial need and a distribution made to a participant for the purchase of a boat or television would not constitute a distribution made on account of
an immediate and heavy financial need.

The General Rules for hardship provide flexibility for the employer to allow distributions based on the facts and circumstances of the employee and are not listed in the safe harbor rules. Whether that is desirable or not is another matter. This flexibility, however, is achieved only if the appropriate language is included in the plan.

So now finally, what exactly is an immediate and heavy financial need of an employee? IRS regulations say that a hardship distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if:

• The employee has obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer;
• The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution (Safe Harbor only).
• Hardship distribution may not exceed the amount of the employee's need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.

A withdrawal made by a 401(k) plan participant, either under general or safe harbor rules, is subject to heavy tax and penalty consequences and should therefore only be done as a last resort. And let's hope that the "last resorts" don't continue to be situations with which 401(k) participants are confronted.

For the official version of hardship distributions, here is a link to the IRS' FAQs regarding hardship distributions.

04 | 21 | 2009 Posted By Jerry Kalish

The album cover pictured above is of The Times They Are a-Changin', singer-songwriter Bob Dylan's third studio album, released in January 1964. 

The title track is one of Dylan's most famous. Many at the time felt that it captured the spirit of social and political upheaval that characterized the 1960s. 

Now let’s fast forward some 45-plus year later. There’s another type of upheaval going on. This time it’s financial. And we’re seeing some profound changes taking place in the financial services industry. 

Over at my other blog home, Slate's Small Business blog, a special promotion by Open from American Express, both Marc Tracy and I see these changes taking place in two different areas. Marc on Wall Street, and me on “Big Law” (that's the colloquial expression given to the 250 largest American law firms, with about 15 of them having more than 1000 lawyers).

Marc writes that The Great Rearranging Hits Wall Street when he says

Indeed, the essential disappearance of the investment-banking industry--with all five of the major i-banks having either switched to less flexible and more regulated bank holding companies (Goldman, Morgan Stanley), been bought by bank holding companies with the aid of ample federal government subsidy (Bear Stearns, Merrill Lynch), or, er, filed for bankruptcy and disappeared (Lehman Brothers)--has left an absolutely gigantic vacuum for start-ups who now know that the only way to survive is to stay relatively small.

In Big Law and Small Business, I noted that the ABA Journal reports that for the first quarter of the year approximately 7,000 attorneys and staff have lost their jobs in addition to canceled summer programs, postponed first-year associate start-dates, and pay cuts across the board including partners. Not a pretty picture for the 43,000 imminent law-school graduates about to enter the legal job market. But at the same time, many of the smaller law firms and boutique law firms are doing very well, thank you.

So what does it all of this mean? Well, there are at least two ways to look at it.

There’s Seth Godin who said in his brilliant blog post, Small is the New Big. In the recent recession, it seem more right-on and prescient. And if all this seems pretty obvious to you, Seth wrote this in June, 2005.

And then there’s Dylan who in the climatic lines of the final verse of The Times They Are a-Changin' wrote and sang:

The order is rapidly fadin'
And the first one now
Will later be last
For the times they are a-changin'.

Here, take a look and listen yourself:

Lyrics | Bob Dylan lyrics - The Times They Are A-Changin' lyrics

04 | 14 | 2009 Posted By Jerry Kalish

Much of what’s out there on blogs is pretty vanilla at best. Except for those individuals that combine their expertise with a definite point of view. It’s makes for interesting reading and provides context for what’s going on in their particular field – and sometimes in the larger picture of the economy and business environment.

And that’s been the criteria for adding blogs to our blog roll. So here’s one more. It’s Bill Singer’s Broke and Broker Blog, the tag line of which is An irreverent Wall Street Blog. Spot-on!

Bill is a securities industry attorney who advocates on behalf of small- and mid-sized broker-dealers, registered persons, whistleblowers, and defrauded public investors. And yes, he does have a P.O.V. Bill also publishes the legal/regulatory/compliance site of RRBDLaw.com.

And now here’s full disclosure. Bill has just recently included us as a featured blog on Broke and Broker. But honestly, we would have added him even if he hadn’t featured us. And here’s just one reason why: one of last’s week’s posts, Blowin' in the Wind: The Art of Stock Market Forecasting. P.O.V. indeed.
 

04 | 9 | 2009 Posted By Jerry Kalish

With so much going on in the retirement plan arena, I nearly missed the subhead in Pensions & Investments article, Borzi strong on DC fee disclosure issue. (Free registration may be required).

"Borzi", as those of us in the benefit business know, is Phyllis C. Borzi, just nominated by President Obama to be Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). It's the federal agency which has oversight over ERISA reporting, disclosure and fiduciary requirements.

The headline isn't exactly breaking news. Fee disclosure - the word of art is transparency - has been and will continue to be a high priority for the Department of Labor.

The subhead that made me sit up was Annuities, DB concerns also on radar for nominee to lead EBSA (emphasis supplied). The article itself says that Ms. Borzi "also might require 401(k) plans to offer annuities to plan participants to help ensure they have an adequate income at retirement".

It's starting to happen, folks, the annuitization of 401(k) plans: new products being developed, distribution ramping up, and now what may be regulatory and even legislative mandates. And it may be sooner rather than later.

04 | 7 | 2009 Posted By Jerry Kalish

Making complex ideas easy to understand is a topic I've blogged about before. Last month, I blogged, I asked you what time it is, not how to make a watch, which included Jonathan Jarvis' excellent video The Crisis of Credit Visualized.

Here's another example. It's the video, Investing Money in Plain English. It was created by Common Craft, superbly talented producers of videos for training and education, whose product they say is "explanation".  

Maybe it's time for 401(k) investment education to get back to basics.

03 | 27 | 2009 Posted By Jerry Kalish

Maybe the visual metaphor is an extreme answer to the question raised above. But asset allocation for participants investing their accounts in employer stock seems to be an investment strategy on the decline.

Asset allocation is, of course, that strategy of a 401(k) participant distributing his or her investments among different asset classes so as to diversify. It's one of those concepts that has been de rigueur as part of 401(k) investment education.

Asset allocation seemed to be getting traction with those employees who invested in employer stock. According to a December 2008 Issue Brief, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007, published by the Employee Benefit Research Institute, those 401(k) participants continued to seek diversification of their investments.

Since the Enron debacle, the share of 401(k) accounts invested in employer stock continued to shrink, falling by 0.5% to 10.6% in 2007. That continued a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend, but they were less likely to hold employer stock.

But between then and now things changed. Earlier this month, The Wall Street Journal reported that Despite Risks, Workers Guzzle Employer Stock. The article noted a study by Hewitt Associates that in January, for the first time in more than seven years, a large group of 401(k) participants invested more money into employer stock than any other type of investment. Employees invested $65 million in employer stock that month.

Employer securities are a big part of retirement plans. According to the above-mentioned EBRI Issue Brief, almost 2/3 of 401(k) plans with more than 5,000 participants offered employer stock as an investment option in 2007. And about 8% of participants in those plans had more than 80% of their account invested in employer shares.

So how much stock is too much stock? The Financial Industry Regulatory Authority (FINRA) issued an investor alert, Putting Too Much Stock in Your Company—A 401(k) Problem. (FINRA is the non-governmental regulator for nearly 5,000 brokerage firms, and was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange).

FINRA says that says that if a participant has than 20% of his or her assets in company stock, and this investment also constitutes more than 20% of their overall investment portfolio, they should consider rebalancing their investments to increase diversification.

Many retirement experts say that is even too much, and that employees should keep no more than 5% to 10% of their balances in company stock, and some believe such shares don't belong in retirement plans at all.

Obviously, more work needs to be done on 401(k) investment education.
 

03 | 19 | 2009 Posted By Jerry Kalish

 Hat tip to Rick Bales at Workplace Prof Blog by way of David Mills' Courtoons.

03 | 14 | 2009 Posted By Jerry Kalish

Every once in a while I’ll start to wander off into “Pensionspeak” when I’m talking to a client. And when I do, I’ll catch myself by remembering what one of our important business partners once told me when I started to get too technical. Or even technical at all depending on the audience. He told me that when someone asks you what time it is, don’t tell them how to make a watch. 

And in that spirit, I pass along a better understanding of something that affects us all of us - as plan sponsors, participants, and retirement plan service providers. That's the credit crisis. So here's a nifty video created by designer Jonathan Jarvis called The Crisis of Credit Visualized that helps make it more understandable than would a watchmaker.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

 Now if I could only communicate the 401(k) discrimination rules like this.

Footnote: Jonathan's video is picking up buzz in the blog world. Two influential bloggers, Dan Ariely on his predictably irrational blog and Garr Reynold on his Presentation Zen blog recently featured it.

03 | 12 | 2009 Posted By Jerry Kalish

I was honored to be a guest speaker today to The Lake County Estate Planning Council. The group is an interdisciplinary organization for professionals involved in estate planning to better serve the needs of the public in estate planning.

The title of my presentation is:

LIFE INSURANCE IN QUALIFIED RETIREMENT PLANS:
The Impact of the New Economic Realities on Business Owners, Employees, Beneficiaries and Financial Service Providers

Here it is:

 Life Insurance in Retirement Plans

03 | 6 | 2009 Posted By Jerry Kalish

If you’re a TV reality show fan, you’ll recognize the quoted part of the headline as the opening from Bad Boys, the theme from Fox’s long-running show COPS, by Inner Circle, the Jamaican raggae group.

The second part of the headline can be viewed as life imitating art. As the economy tanks, crime rises. Marc Tracy over at my other blog home, Bizbox - a special promotion by OPEN from American Express on Slate, writes about that in Sniffing Out Employee Fraud.

But it’s not just white collar crime. Just this week, the CFO of a client called me about a terminated employee caught shopping at the company warehouse using a ten-fingered midnight discount. The terminated employee has now applied for a profit sharing plan distribution. He asked me whether the company could impose a forfeiture of his vested account balance.

In other words – and the focus of this post - may a nonforfeitable benefit ever be forfeited?

Back in the day (pre-ERISA), retirement plans did have “bad boy clauses” in which forfeitures were imposed because of employee dishonesty or a violation of a promise not to compete.

But now in the modern era, bad boy clauses are generally not permitted. Generally, I say, because the Pension Answer Book, one of our “go-to” resources cites a number of court cases and Internal Revenue Service regulations that vested benefits in excess of the benefits required to be nonforfeitable under the ERISA alternative vesting schedules may be forfeited because of an employee's misconduct or dishonesty

So paraphrasing one of the Pension Answer Book’s examples, suppose an employer’s plan had a five-year graded vesting provision. The plan provides for forfeiture of benefits if an employee with less than three years of service terminates employment and works for a competitor or is dishonest. Permissible because the plan could have had three-year cliff vesting.

The Pension Answer Book points out that the qualified plan must provide the specific criteria for application of this bad boy clause, and it can not be discriminatory in operation.

Whatever. A bad boy clause isn’t even going to be an option for most employers today since most employers use pre-approved plan documents, e.g., prototypes and volume submitter, which won’t have such clause.

And to use an individually designed plan with such clause would be many times more expensive for both preparation of the document and the IRS determination letter process. And add additional cost if protracted discussions with the IRS is required.

Sorry. 

02 | 24 | 2009 Posted By Jerry Kalish

There has been as lot of discussion and media attention on the impact of the financial markets’ meltdown on 401(k) accounts – most of which was either anecdotal or generalized.

For example, much commentary that in 2008 during which major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37%, participants in 401(k) plans suffered corresponding losses.

But here’s the reality in an analysis published yesterday by the nonpartisan Employee Benefit Research Institute (EBRI).

I’ve written about the EBRI before (see Employee Benefit Research Institute (EBRI) Relaunches Website) and the research they make available for us retirement industry folk and policy makers.

The analysis used the EBRI/ICI 401(k) database of more than 21 million participants to estimate the impact of market activity on 401(k) account balances from Jan. 1, 2008, to Jan. 20, 2009. The ICI (Investment Company Institute) is the organization that represents the mutual fund industry.

Because of the importance of this issue, I don’t want any summary I would do to dilute the significance of their analysis which showed that participants’ losses were largely determined by their account balance, age, and job tenure.

So following are the key points directly from their press release:

Impact Varies By Account Balance

Not surprisingly, how the recent financial market losses affect individual 401(k) account balances is strongly affected by the size of a participant's account balance. Those with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions: Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, since contributions had a bigger impact than investment losses. However, those with more than $200,000 in account balances had an average loss of more than 25 percent.

Impact Varies by Age and Job Tenure

401(k) participants on the verge of retirement (ages 56–65) had average changes during this period that varied between a positive 1 percent for short-tenure individuals (one to four years with the current employer) to more than a 25 percent loss for those with long tenure (more than 20 years).

Short-Term vs. Long-term

While much of the focus has been on market fluctuations in the last year, investing for retirement security is (or should be) a long-term proposition. When a consistent sample of 2.2 million participants who had been with the same 401(k) plan sponsor for the seven years from 1999–2006 was analyzed, the average estimated growth rates for the period from Jan. 1, 2000, through Jan. 20, 2009, ranged from 29 percent for long-tenure older participants to more than 500 percent for short-tenure younger participants.

Recovery Time and Future Stock Market Performance

The analysis also calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the sharp stock market decline. Because future performance is unknown, this analysis provides a range of equity returns: At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.

Near-Elderly With Very High Equity Exposure

Estimates from the EBRI/ICI 401(k) database show that many participants near retirement had exceptionally high exposure to equities. Nearly 1 in 4 between ages 56–65 had more than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 percent. As a result of the Pension Protection Act of 2006, many 401(k) plan sponsors appear to be offering lifecycle/target-date funds, which automatically rebalance asset investments into more "age appropriate" allocations. Had all 401(k) participants been in the average target-date fund at the end of 2007, 40 percent of the participants would have had at least a 20 percent decrease in their equity concentrations, and consequently, might have mitigated their losses, sometimes to an appreciable extent.

Here is a link to the full February 2009 Issue Brief, The Impact of the Recent Financial Crisis on 401(k) Balances (24 pages, PDF). 

02 | 21 | 2009 Posted By Jerry Kalish

We welcome a new blog to the employee benefit blogging community. It's the Business of Benefits, the focus of which is issues facing insurance companies, financial service providers, and plan sponsors.

It's being published by the law firm of Giller & Calhoun. The named partners are Evan Giller in New York City and Monica Dunn Calhoun, Denver. Bob Toth in Ft. Wayne, Indiana has recently joined Evan and Monica as of counsel to the firm. Bob, you may recall, was my co-author in our recent 403(b) Crunch Time Series.

Each of the three attorneys who comprise the firm - what I call a "boutique, virtual law firm" - have over 20 years experience in the "business of benefits." That is, a law practice which combines elements of ERISA, tax law, insurance law, securities law and investment law that affect 403(b) and qualified retirement plans.

I'm looking forward to hearing what they have to say.

02 | 18 | 2009 Posted By Jerry Kalish

No, not the academy awards. Too early for that. But this post is about the ostrich-like approach 401(k) participants have taken in opening (or rather not opening), their December 31, 2008 statements. Earlier this month, I posted the visual below about participants' hesitation, Just Get It Over With, from Jessica Hagy's award winning blog,  Indexed,

That's a facetious description, of course. But specific and troubling data comes out of a recent survey by I-Pension, LLC, a Newton, MA-based Registered Investment Advisor focused on middle-income investors.

I-Pension surveyed middle-income investors following the 2008 year-end meltdown and found that: 

• 27% of the respondents admitted to not opening their fourth-quarter 401(k) statements.
• Of those that did open their statements and read their statements, almost 33%spent less than one minute reviewing the results and 72% spent less than 3 minutes.

Here is I-Pension's press release that discusses the survey and other findings regarding 401(k) participants' investment expertise - or lack thereof.  

To paraphrase a pop culture expression, the answer is out there somewhere.

02 | 8 | 2009 Posted By Jerry Kalish

Remember that kids' game, Animal, Vegetable, or Mineral? You had to guess into what category the object fell. Well, today in business, there is a similar question. Independent contractor or employee?

But it's not a game. The misclassification of a worker can have serious financial consequences. 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 that 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.

Rush Nigut, a West Des Moines, Iowa-based attorney also has an on-going concern about the classification issue and has written about the subject. His recent post on his blog, Rush on Business, State of Iowa to Step Up Contractor Misclassification Efforts, also include links to other information on the matter. It is anticipated, Rush said, that these enforcement efforts could bring in millions in additional revenues to the state.

But it's not just the State of Iowa or other states for that matter, the Internal Revenue Service, of course, also has a keen interest in proper classification of workers. Just last month, the IRS updated their on-line resource page, Independent Contractor (Self-Employed) or Employee? The page includes links to how to get a determination from the IRS on a worker’s status and how to get tax relief.

And for any complicated tax matter like this one that can be a potentially costly tax miscue, consult a qualified tax advisor. This is another one of those "kids, don't try this at home" matters.

Picture credit: Animal, Vegetable, or Mineral?, by Michael Cook. Installation: each unit 4ft., x 4ft., overall dimensions 8ft. 6in. x 8ft. 6in. for each group of four, Museum of Fine Arts, Santa Fe, 1990. 

02 | 5 | 2009 Posted By Jerry Kalish

Unless you've been asleep, compliance with fiduciary responsibilities is one of the highest priorities of the U.S. Department of Labor (DOL).

And if you're a small employer, it can be a difficult and challenging assignment to be responsible for a retirement plan. But here's some help.

The DOL will be sponsoring a free seminar in Chicago on June 24 and in Atlanta on July 9: A Retirement Plan Compliance Assistance Seminar for Small Business.

Representatives from both the DOL and Internal Revenue Service will discuss fiduciary responsibilities, reporting and disclosure requirements, common mistakes and how to fix them.

Here are links to the seminar brochure and registration information for each location:

For Chicago on June 24 and for Atlanta on July 9.

If you're a local plan sponsor in either of these areas, attendance could be very worthwhile.

02 | 2 | 2009 Posted By Jerry Kalish

Last week in a blog post about self-directed brokerage accounts, I wrote about participants just starting to open their year-end 401(k) statements with some (or much) hesitation. But here's Jessica Hagy in her award winning blog,  Indexed, whose picture, Just get it over with, is far more effective than my words about hesitating to get the bad news.

01 | 29 | 2009 Posted By Jerry Kalish

Transparency has several meanings.

In optics, transparency is the material property of allowing light to pass through.

When used in a social context, transparency implies openness, communication, and accountability.

In the 401(k) industry, transparency means fee disclosure. And, of course, it's what Congress and the Department of Labor have been focusing on over the last few years.

But it may be the private sector that puts transparency into a very practical setting. BrightScope, Inc., an independent data analytics firm today announced the launch of their 401k ratings disclosure website featuring the BrightScope Rating™, the nation’s first online 401(k) rating system.

The new BrightScope Rating™ debuted today (see Press Release) at the 2009 Los Angeles Benefits Conference, co-sponsored by the Internal Revenue Service (IRS), the American Society of Pension Professionals & Actuaries (ASPPA) and the National Institute of Pension Administrators (NIPA).

What’s a BrightScope Rating™? It’s a quantitative 401(k) plan rating developed by BrightScope, Inc. in partnership with some of the country's top independent fiduciaries, finance professors, and 401(k) experts. BrightScope Ratings™ take into account over 200 unique data inputs per plan and calculate a single numerical score to define 401k plan quality at the company level.

For example, BrightScope currently rates the 401(k) Plan for the Southwest Airlines Pilots as among the top plans within its respective peer group, as measured in terms of plan size, number of participants and employee demographics.

Participants contributing to this plan, BrightScope says, have a high likelihood of having a secure retirement.

The picture below is a snapshot of what you would see on the BrightScope website for the Southwest Airlines plan.

The complete rating can be viewed by clicking here.

You can see detailed scores and attributes for the other approximate 1000 of the largest 401(k) plans that BrightScope has reviewed to date by visiting their website, www.brightscope.com with more plan ratings available later this year.

As for me, I’m still thinking about the implications of this innovation. Could be huge. 

01 | 26 | 2009 Posted By Jerry Kalish

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Just about now, 401(k) participants are starting to open their year-end statements. Some because they’re just starting to receive them, others because they’ve decided it’s now time to confront the harsh reality of substantially diminished account balances. That is, if they haven’t already gone on-line (how many times?) the last quarter. But, of course, the piece of paper in their hands makes it official.

And so what you may start to see again – and we already have – is 401(k) participants saying, “hey, I can do a better job than this” and wanting to manage their accounts themselves in what the retirement industry calls “self-directed brokerage accounts” or SDBAs. These individual accounts are established and maintained either on a stand-alone basis or through the 401(k) provider handling the menu of funds.

SDBAs were popular back in the days of irrational exuberance when 401(k) participants wanted to go beyond the limitations of the fund menu. The driving force was usually a business owner or important Highly Compensated Employee with a large account balance. And so while there are many reasons not to have SDBAs as part of a 401(k) plan, those participants with clout may cause is to happen in today's investment climate.

In that case, it’s incumbent on the plan sponsor to structure a program that deals with such concerns as

• Fiduciary liability for improper investment transactions
• Unrelated business taxable income (UBTI)
• Administrative and investment expenses
• Valuation

All of which can be dealt with proper planning and execution. The starting point for which is the Investment Policy Statement. You do have one, don’t you?

Photo above, deja vu, by pngn via Flickr.

01 | 19 | 2009 Posted By Jerry Kalish

With a new Administration and a new Congress about to take over, we’re going to start to see the think tanks and not-for-profit organizations issuing research and recommendations regarding public policy for retirement plans.

One of those organizations is the National Institute on Retirement Security (NIRS), a not-for-profit organization whose stated mission is to “encourage the development of public policies that enhance retirement security in America”.

Last week the NIRS released a national public opinion survey that reveals widespread retirement insecurity among Americans. More than eight out of ten Americans are worried about their ability to retire, and 71% indicated they feel it is harder today to retire as compared to previous generations.

No surprises and caused no doubt by current economic conditions and the current state of employer sponsored retirement plans, i.e. the demise of defined benefit plans and the large declines in 401(k) balances.

The survey, Pensions & Retirement Security: A Roadmap for Policy Makers (PDF, 39 pages), was commissioned by the NIRS and conducted by Matthew Greenwald and Associates, the public opinion and market research company.

Public policy considerations aside, there was some important information regarding what Americans want from a retirement plan. The survey indicated that

• Americans want portability, followed by employer contributions, continuation of benefits for a spouse after death, and a regular check that cannot be outlived.
• Respondents are less interested in managing investments.
• Americans want to take individual responsibility/control over their retirement savings and trust themselves most, but they tend to be less interested in managing their investments and often say 401(k) savings are a “gamble.”
• Americans are divided as to whether retirement plans should allow loans against retirement savings.

Are you listening plan sponsors and retirement industry?

01 | 7 | 2009 Posted By Jerry Kalish

Over at Slate's BizBox blog, a special promotion by Open from American Express, I posted an article that discusses the financial advantages of a "Solo-K" for someone who is self-employed. 

In fact, "Solo-K" is not specifically mentioned in the Internal Revenue Code. It's a name given by some unknown, creative marketing person to describe a profit sharing plan with a 401(k) provision for the self-employed business person. Check out The Wonderful Solo-K.

01 | 4 | 2009 Posted By Jerry Kalish

I was one of those commentators who ended last year on a “glass half empty” note when I characterized the 2008 retirement plan year as The Good, the Bad, and the Ugly. Some commentators like Mark Miller were much more direct. Mr. Miller ended the year in his column that appears on his website, RetirementRevised, by writing 2008 ends with alarming retirement benefit trends.

But this is a new year when we can look ahead – and indeed, look ahead with optimism. The present retirement plan system can be fixed. And whether or not changes are made on either the legislative or regulatory level, or waiting for whenever the economy improves, the process can and should start now.

Josh Itzoe is among those of us that believe that many of the “broken” retirement plans, i.e., 401(k) plans, can be fixed by plan sponsors and other fiduciaries. Josh is both a CFP® and AIF® and is a Principal of Greenspring Wealth Management, Inc., a registered investment advisory firm and Independent Fiduciary in Towson, MD.

And to the point of this post, Josh is also the author of a recently published book, Fixing The 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully. So what’s so special about this book amidst all of the many 401(k) books out there. Here’s how Matthew D. Hutchison, MS, CPC, AIFA®, CRC®, answers that question in his Forward to the book.

There are many books about 401(k) plans. There are hundreds of thousands of professionals who want to invest your 401(k) assets. Very few of them, unfortunately, embrace a “participant first” approach to delivering retirement plan services. That is what makes this book so special. It is focused on one thing: Protecting future participant benefits. The goal of this book is to serve the best interests of nearly fifty million individual participants.

Those of us who have been around 401(k) plans for a while know who Matthew Hutcheson is. He’s an Indepenent Fiduciary himself and a published author and internationally recognized authority on retirement plans and their associated fiduciary issues. He's also testified before Congress on these matters.

There’s nothing magic in Josh’s book. It’s just basic, old-school procedural prudence, the process by which fiduciaries act solely in the best interests of plan participants and their beneficiaries. It’s not only good risk management for fiduciaries, it's just good management period.

 Here are some of the areas that Josh covers in his book:

• The basic fiduciary responsibilities outlined under ERISA.
• The roles, responsibilities, and motivations of the various people/companies involved in selling and servicing these plans.
• Which questions to ask and what information to gather in order to uncover and reduce the various fees and expenses associated with 401(k) plans.
• How to design a 401(k) plan to deliver successful outcomes.
• How to help employees use the plan most effectively.

So if you’re a plan sponsor concerned about both your personal responsibilities and your participants’ retirement security, then this book can be an excellent guide.  Here's a link to Amazon if you want to purchase the book. You can also follow Josh through his new blog of the same name, Fixing The 401(k).  

12 | 27 | 2008 Posted By Jerry Kalish

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12 | 23 | 2008 Posted By Jerry Kalish

Over at Slate's BizBox blog, a special promotion by Open from American Express, I posted an article that discusses one of the things it takes for business owners to be able to make retirement plan contributions. Check out Be A Park-Down-The-Street-Businessperson.

12 | 22 | 2008 Posted By Jerry Kalish

A Risk Management Tool for Fiduciaries in A New Retirement Plan Environment Updated for the Pension Protection Act of 2006 (PDF)

Introduction

My last post was a year-end ERISA fidelity bond reminder. ERISA does not require liability protection; the only mandatory insurance is an ERISA Fidelity bond to protect the plan assets from losses due to misuse or misappropriation. The ERISA Fidelity bond protects the plan assets. Without fiduciary liability insurance, who protects the fiduciaries?

Executive Summary

The new retirement plan environment referred to in the headline includes a recent case unanimously decided by the U.S. Supreme court that has significant implications for plan fiduciaries.

On February 20, 2008 in LaRue v. DeWolff Boberg & Associates, Inc., et al., the Court ruled 9-0 that

Section 502(a)(2) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), does not provide a remedy for individual injuries distinct from plan injuries, but that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in one or more, but not all, participants’ accounts.

In non-legalese, the Court held that individual participants in a defined contribution plan can
sue for a breach of fiduciary duty that results in a loss to the participant’s own account, even if not all participants’ accounts have similar losses.

No one knows, of course, whether we will see an increased in lawsuits against fiduciaries, but many ERISA attorneys predict that LaRue’s victory means that there is likely to be a significant increase in litigation involving 401(k) plans, and that plan fiduciaries may be confronted with a variety of claims brought by plan participants seeking to recover losses to their individual accounts.

In this new environment, we think that fiduciaries should think in risk management terms and consider whether they should purchase fiduciary liability insurance.

This Benefit Briefing will provide you with answers to frequently asked questions (FAQs) to help you decide whether you should purchase fiduciary liability insurance. 

12 | 20 | 2008 Posted By Jerry Kalish

Last July, I asked the question will Form 5500s reveal outdated fidelity bonds or retirement plans without bonds at all. That was prior to the July 31st due date (unless extended) for calendar year retirement plans required to file Form 5500 for the 2007 plan year. And, I noted, as in the past, there will be a number of plan sponsors who have to indicate on the 5500 thay they have outdated fidelity bonds or none at all.

Since the fidelity bond requirement is high up on the Department of Labor’s compliance priorities, it’s not a great leap to assume that the Department of Labor monitors this item on Form 5500.But 2007 was then, and this is now. It’s not too late to meet the bonding requirements for 2008 which are:

• All persons, including fiduciaries, who handle funds or other property of an employee benefit plan (“called plan officials”) have to be bonded unless they are covered by an exemption.
• Each plan official is required to be bonded for at least 10% of the amount he or she handles, but in no event less than $1,000.
• The maximum bond amount required under section 412 with regard to any one plan is $500,000 per plan official, or $1 million per plan official in the case of a plan that holds employer securities.

The Department of Labor recently issued Field Assistance Bulletin No. 2008-04 to address the fidelity bonding questions that its investigators frequently confront during their examinations of ERISA plans. The issues are presented in a question-and-answer format consisting of 42 frequently asked questions (FAQs) covering:

1. ERISA Fidelity Bonds
2. Exemptions From The Bonding Requirements
3. Funds Or Other Property
4. Handling Funds Or Other Property
5. Form And Scope Of Bond
6. Bond Terms And Provisions
7. Amount Of Bond

An ERISA fidelity bond is not the same thing as fiduciary liability insurance which is not required by law.  That's a topic for my next post in which I'll discuss in an FAQ format. 

12 | 10 | 2008 Posted By Jerry Kalish

Over at Slate's BizBox blog, a special promotion by Open from American Express, I posted an article that discusses the pros and cons of borrowing against your 401(k) account. Check out Your 401(k); Another Way to Borrow.

11 | 28 | 2008 Posted By Jerry Kalish

It's that time again. The 401(k) safe harbor notice requirement of December 1 is fast approaching.  And if you’re a plan sponsor still undecided about whether you want to have a Safe Harbor 401(k) plan for 2009 because of economic uncertainties next year, then you can take advantage of a safety value that’s permitted by the regulations.

Instead of distributing a Safe Harbor notice that guarantees the 3% contribution regardless of its subsequent financial condition, an employer can provide a “conditional notice” at least 30 days before the start of the plan year.

The notice would state that the employer may give a safe-harbor contribution for the following year. And then no later than 11 months later, the employer must provide another notice indicating that the Safe Harbor has been elected and the 3% contribution will be made for that year.

That’s for the 3% Safe Harbor contribution across the board. But what about the Safe Harbor match: can it be stopped during the plan year? The answer is yes by providing a notice to the employees at least 30 days before the contributions are to be stopped.

And here’s two important matters that are part of this discussion:

1. There must be the proper plan documentation.
2. The 401(k) discrimination tests must be provided for the entire plan year.

Actually, there’s one more important consideration - your employee's expectations. Go beyond the formal notice requirements when communicating with your employees.

Graphic above by YES NO MAYBE, a London-based streetwear / urban clothing label that was "born of its creator’s indecisiveness."

11 | 18 | 2008 Posted By Jerry Kalish

I'm pleased to announce that I am now a regular contributing author for BizBox by Slate, a special promotion by OPEN from American Express.  I'm one of 5 contributors whose focus is helping business owners manage and grow their businesses. Come visit us.

11 | 10 | 2008 Posted By Jerry Kalish

Saturday's post, Balance Forward 401(k) Plans: Someone's Gotta Win, Someone's Gotta Lose, generated several emails to me on the topic.  The comments involved frequency of the valuation and whether interim valuations could or should be done. Let me see if I can respond to all of them at one time.

First, some additional background. Balance forward recordkeeping was the traditional method of accounting when only contributions were made by the employer and deposited once a year. As 401(k) features were added to existing profit sharing plans and daily valuation technology available to even the smaller plans, employers increased the valuation frequency, e.g., quarterly or monthly, or simply changed to a daily valuation system.

So it seems to me that the real issue is: Should balance forward plans provide for interim valuations, and if so, how? And like all matters ERISA, there are both tax and fiduciary issues to consider. Here's Sungard Relius discussing, Interim Valuations: The Right Thing to Do?, in more detail.

So no easy answer here. But definitely one of those matter to discuss with ERISA counsel.

11 | 8 | 2008 Posted By Jerry Kalish

Balance forward 401(k) plans may seem like an arcane topic for a Saturday morning even if you’re a pension person. But if you’re a plan sponsor or a 401(k) plan participant, today’s investment climate is not a good time to be part of one. Let me explain why.

Balance forward is an industry term given to those defined contribution plans, e.g., 401(k) and profit sharing, in which participants’ accounts are valued monthly, quarterly or annually. And after all the accounting takes place, it can be 4-8 weeks after the valuation date before participants receive statements. Most defined contribution plans, however, value participants’ accounts daily right after the markets close.

And I hadn’t given much thought to them lately thinking they were an anachronism. But the topic came up a recent conference of pension people that I attended, and there’s more of them out there than I thought. My brief skimming of one of the Form 5500 databases indicated that there are at least 70,000 401(k) plan not counting the profit sharing plans that allow participants to self-direct their accounts.

So what’s the problem you might ask. My visual metaphor up top is the answer. Like chess, balance forward retirement plans are a zero-sum game. That’s what the economists and game theorists call a situation or interaction in which one participant’s gain results from another participant’s loss. And in the context of the recent huge swings in the stock market, balance forward plans are a bigger zero-sum game than ever before.

Here why? Assume a participant in a balance forward plan with a $50,000 account balance as of December 31. The participant receives a distribution for $50,000 on March 1. But between January 1 and the distribution date, the plan has lost 20%. Thus, the plan - which is to say - all the remaining participants eat the $10,000 loss.

But now let's assume that same participant receives the same $50,000 distribution. But instead of the plan suffering a market loss, it increased by 20%. Now all the remaining participants in the plan share in the $10,000 gain.

Now that's fair, isn't it?

11 | 4 | 2008 Posted By Jerry Kalish

Every year the Internal Revenue Service releases cost of living adjustments to applicable dollar limits for retirement plans. Here is a link to a chart (pdf) that summarizes the most frequently used limits.

10 | 22 | 2008 Posted By Jerry Kalish

“Joe The Plumber” has had his 15 minutes of fame, and then some. Our friends at Slate’s Bizbox blog for whom I regularly contribute went beyond the political rhetoric when they said Keep Helping Small Business.

And here’s why the new administration should do more for “Joe The Plumber” and all the other small businesses than tax credits. They will be an important part of the changing nature of the American business landscape according to a recent research study by Intuit, the maker of QuickBooks, and the Institute for the Future, a non-profit research organization.

The study, the Intuit Future of Small Business Report, gives us a peek into our future, when it says that by 2017, small businesses will be formed and run by a new and more diverse group of entrepreneurs, with a new outlook based on the changing nature of the American business landscape. Here's a summary:

• The Changing Face of Small Business

Entrepreneurs in the next decade will be far more diverse than their predecessors in age, origin, and gender. These shifts in small business ownership will create new opportunities for many, and will change both the will become increasingly common and diverse, new forms of small and personal U.S. and the global economy.

A new breed of entrepreneurs will emerge. Entrepreneurs will no longer come predominantly from the middle of the age spectrum, but instead from the edges.People nearing retirement and their children just entering the job market will become the most entrepreneurial generation ever.

Entrepreneurship will reflect an upswing in the number of women. The glass ceiling that has limited women’s corporate career paths will send more women to the small business sector.

Immigrant entrepreneurs will help drive a new wave of globalization. U.S. immigration policy and the outcome of the current immigration debates will affect how this segment performs over the next decade.

• The Rise of Personal Businesses

Personal businesses—one person businesses with no employees—have become an important part of the U.S. economy and will increase in number over the next decade. The growth will be driven by shifts in larger company employment practices and changes in technology.

Contract workers and accidental and social entrepreneurs will fuel a proliferation of personal businesses. Economic, social, and technological change and an increased interest in flexible work schedules will produce a more independent workforce seeking a better work–life balance. 

 See?

10 | 2 | 2008 Posted By Jerry Kalish

I've been reminded again of that old Mac Davis song, Texas in My Rear View Mirror, in recent discussions with clients and their other advisors regarding the impact of reductions in force and layoffs on their retirement plans. 

My fellow Lex Blogger, Michael Moore, nicely discusses the employment law aspects of this economic fallout in his post, Managing Layoffs and Reductions in Force, on his Pennsylvania Employment and Labor blog.  

Now here's where the Mac Davis reference comes in. A partial termination of a retirement plan is perfectly clear in the rear view mirror. That is, it's based on facts and circumstances, an expression I've heard on many occasions from my attorney friends over the years. There is no objective set of rules.

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

• Consider the partial termination rule in the context of the planning for the reduction in force and layoffs about which Mr. Moore writes.
• Determine whether it would make sense to submit the plan to the IRS for a ruling as to whether a partial termination occurred.

If you want to get into the nitty gritty of partial terminations, here is a link to the IRS' 401(k) Resource Guide - Plan Participants-Plan Termination.

09 | 30 | 2008 Posted By Jerry Kalish

See full-size image.

I was certainty premature yesterday in thinking the bailout bill was going to pass when I wrote the bailout bill is like a Christmas tree - something for everyone including retirement plans. And I wasn't alone. The stock market reacted with the largest one day drop in its history.

No one knows the road ahead, but Tim Chapmen, President of PMFM, the firm that provides managed individually managed accounts via its 401(k) Toolbox program had a perspective today about all of this that I want to share with you. (Full disclosure: 401(k) Toolbox is used by many of our clients). Yesterday Tim wrote:

Today we had the largest one day drop in the history of the stock market. The Dow was down 777 points (6.98%); the S&P 500 lost 106 points (8.79%) and the NASDAQ was down 199 points (9.14%).

Stocks were lower most of the day but the sell-off really accelerated when Congress voted down the $700 billion 'bail-out' package. It will be interesting to see where the market - and Congress - go from here, but the question I've been asked most often is, "How did we get in this mess in the first place?"

First, a little background. In 1977, Congress passed the Community Reinvestment Act (CRA) to require banks to make real estate loans in areas they might not otherwise consider. In 1995, some additional teeth were put into the CRA regulations and banks had to step up the effort or else run afoul of the banking regulators.

In 1999, to continue the effort to extend the possibility of home ownership for low and moderate income earners, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") loosened their loan requirements, which gave birth to more adjustable rate mortgages, no documentation loans, lower down payments, etc. (Today we call those riskier loans 'sub-prime'.)

It is important to understand that banks and mortgage companies typically only 'originate' home loans to collect a fee and then sell them. With Freddie and Fannie's lower standards for buying the loans, the mortgage lenders could pay less attention to the borrower's qualifications, write new loans and collect more fees to their hearts content. Wall Street jumped on board and bundled these mortgages into 'packages' called Collateralized Mortgage Obligations and Collateralized Debt Obligations (CMOs and CDOs). They would split these packages into pieces, even get mortgage insurance on some of them to get an AAA rating, and sell them to other investors. This gave banks and mortgage companies another outlet, in addition to Fannie and Freddie, to sell the loans which means they could write even more.

More people were enjoying the American Dream, banks were booking nice fees that helped the bottom line, and Wall Street was making a fortune selling these 'derivatives' that represented a pool of loans. Everybody in the loop was happy as could be . . . while real estate prices were going up.

Warren Buffet once said "When the tide goes out you can see who's been swimming naked." When the real estate market started to soften a couple of years ago, there were definitely a lot of folks feeling pretty naked.

When the real estate bubble began to leak air the situation turned ugly quickly. Homeowners struggling to make their payments started to default in huge numbers, when it was apparent their homes weren't worth what they'd borrowed. That started a chain of events that resulted in the market for sub-prime paper drying up.

One factor that accelerated this problem was a change in the accounting rules that required firms to 'mark to market' their holdings on a regular basis. (Mark to market means 'tell me what it's worth today, not what you expect to get at maturity'.) It was a post-Enron legislative action to create transparency and 'protect' investors, but as these investment banks were forced to continually write down the value of their holdings, they were in turn required to put up more capital. When the appetite for sub-prime loans went away - there were no buyers to be found - companies without additional collateral to put up, like Bear Stearns and Lehman Brothers simply went out of business.

The problem from my perspective is what I call the Law of Unintended Consequences. The idea of home ownership is certainly a noble one that is tough to argue against; greater transparency for investors is a noble idea too. But these legislative initiatives set in motion a chain of events that have taken the past 9 years to completely unfold. There's plenty of other blame to go around here too. Mortgage lenders selling loans to folks who obviously couldn't afford them, home buyers buying homes beyond their means, and Wall Street pouring gasoline on the fire by providing the vehicles to really accelerate the opportunity. The resulting financial meltdown was no doubt unintended, but it is very real nonetheless.

So the question is this: Politicians got us into this mess, can politicians get us out of it? And my answer is, I simply don't know. I can understand the argument that something needs to be done to keep our markets liquid and operating efficiently. It's like a drunk driver in an auto accident - he's clearly at fault but that doesn't mean the paramedics ignore him.

My worry is just like it's taken a long time for the ramifications of the change in lending restrictions to come to fruition, it will likely be years before we know the effects of any current Congressional actions.

Picture taken by the author a short two weeks ago in Canmore, Alberta, Canada, gateway to the Canadian Rockies. 

09 | 29 | 2008 Posted By Jerry Kalish

The bailout bill working its way through Congress now has something for everyone - including retirement plans. The legislation is being called TARP, ("Troubled Asset Relief Program"), and it's an acronym that some retirement plans will get to know better. In addition to bailing out financial institutions, TARP also permits the Treasury to protect "the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan." Presumably that means both defined benefit and defined contribution plans. If passed, there will obviously be direct involvement by the Labor Department regarding the ERISA aspects, e.g., fiduciary and disclosure obligations.

Stay tuned for the details.

09 | 22 | 2008 Posted By Jerry Kalish

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While I was off exploring the Canadian Rockies with my friend and certified mountain guide Peter Amann, I found out when I returned that quite a bit had happened back here in the States. Bank of America buying Merrill Lynch, the largest brokerage firm; Lehman Brothers filing bankruptcy; and AIG, the largest insurance company in the world asking the Fed for $50 billion to tide them over until they can sell enough assets to spruce up their credit rating.

All of this, of course, has 401(k) participants concerned about how these events affect their account balances. They’re also concerned about how secure their account balances really are. David Pitt writing for Netscape addresses this issue in his recent article, Is Your 401(k) Plan Protected? 

Q: What safety measures are in place to protect the money I have invested in my company's 401(k) account?

A: The federal government has established rules for the people running your 401(k) plan, whether it's company officials - common in small companies - or a provider working with your company to administer the retirement plan.

What Mr. Pitt is referring to and what the rest of his article discusses are the ERISA  rules that govern fiduciary conduct overseen by the Department of Labor and the protection from a plan sponsor's bankruptcy. But with all due respect to Mr. Pitt, it's a little more complicated than that. 

The real focus, it seems to me, should be on potential insolvency issues involving those entities holding plan assets. I discussed one aspect of this issue back in April in my post, What Every Fiduciary Should Know about Their Brokers ... and Also Their Custodial Banks, and Financial Contracts. 

Fiduciaries should also know about the protections plan assets should have from creditors of insurance companies offering 401(k) plans under group annuities. The degree of protection will vary depending on how the retirement plan account is funded which may include:

• Investments in a separate account insurance product issued by the carrier
• Investments held in a trust or custodial account with a Trust Company affiliated with the carrier
• Guaranteed investments through the general account of the carrier
• Self-directed brokerage accounts held at a broker/dealer
• Mutual funds that are advised or sub-advised by investment firms experiencing financial difficulties

If you've been around long enough like me, you'll recall the 1990s during which we struggled with insolvency issues affecting ERISA plans. I'm not suggesting that history is repeating itself. I am, however, suggesting that fiduciaries should evaluate whether their retirement plans are sufficiently protected by knowing their contractual and statutory remedies.  

09 | 5 | 2008 Posted By Jerry Kalish

See full-size image.

"Same, same, but different" is a familiar saying in Thailand, and as shown on the left, the subject of a book of objects photographed in Thailand by Thomas Kalak, the photographer from Munich. It means, I understand, similar but not exactly the same. Kinda like, 403(b) plans and 401(k) plans.  

And that's a good jumping off point for me to answer a question posed to me  the other day in an email from one of this blog’s readers. Asks the reader, "Are the 403(b) regulations the same as the 401(k), as far as the 7-day rule for a small sponsor to deposit 401(k) contributions". It’s an important question as the distinction between 403(b) plans and 401(k) plans is starting to blur with the 403(b) regulations effective January 1, 2009.

What the reader is referring to, of course, is the recent Department of Labor Proposed Regulation that employee contributions to a "small"retirement plan (one with less that 100 participants) will be deemed to be made in compliance with the law if those amounts are deposited with the plan within 7 business days of receipt or withholding. (See my post, Department of Labor Proposes Safe Harbor Rule for Deposit of Employee 401(k) Contributions...Finally).

So the answer is yes, a 403(b) plan would be subject to the 7-day requirement if it's an ERISA plan. Now that's an important "IF". A 403(b) sponsor could find that their newly required plan document if not carefully drafted could cause them to wake up New Year's Day with an ERISA plan. And, thus, subject to all the ERISA rules (old and new) including reporting, disclosure, prohibited transactions, and fiduciary obligations. And, of course, the afore-mentioned 7-day deposit rule as part of the mix.

But 403(b) plan sponsors do have an obligation to make timely deposits of employee contributions. The 403(b) regulations require an employer to transfer contributions to the plan “within a period that is not longer than is reasonable for the proper administration of the plan”. For example, within 15 business days of the month the amount would have otherwise been paid to the participant.

So thanks, kind reader, for your question. I hope I've answered it to your satisfaction.

Here's a link to fellow blogger Bob Toth's post on 403(b) plans inadvertently becoming ERISA plans, The New 403(b) Documents and ERISA. He and his partner, Nick Curabba, provide excellent - and understandible - coverage of 403(b) plans and the new ERISA "stuff" on Baker & Daniels' Benefits Biz Blog.

09 | 3 | 2008 Posted By Jerry Kalish

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Venn diagram template via GraphJam. 

09 | 2 | 2008 Posted By Jerry Kalish

Our fellow bloggers at Slate magazine’s BizBox blog have been following what the general business media have saying about 401(k) plans for small businesses. Their most recent post on the topic, The 401(k) Question Continued ...  picked up on an article in U.S. News and World Report, What Small Business Owners Need to Know About 401(k)'s, that focused solely on 401(k) plans as the best retirement vehicle for business owners.

But as I indicated in an earlier post, Which way to the best retirement plan?, what’s best is  based on the specific set of facts and circumstances. One size doesn’t fit all.

While you don’t read a lot about them, SIMPLEs and SEPs do have their advantages for the business owner. SIMPLEs permit salary reduction contributions and matching contributions, and SEPs allow employer contributions of up to 25% of compensation. Both have substantially less documentation and compliance requirements (and expense) compared to a qualified retirement plan, i.e., 401(k)/profit sharing plan, but the trade-off is less design flexibility and plan features. 

So 401(k) as a slam dunk? Maybe more like a jump ball.

08 | 21 | 2008 Posted By Jerry Kalish

The Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. The GAO investigates how the federal government spends our taxpayer dollars and has often been called the "congressional watchdog,"

I blogged about the GAO just the other day in my post, Getting ready for the first wave of Baby Boomers reaching retirement age: the Social Security Administration's big challenge. That post discussed the GAO’s report assessing how the Social Security Administration’s reduced workforce will manage the increased number of Social Security recipients as the Baby Boomers retire.

401(k) plans have also been on the GAO’s project list with particular emphasis on the fiduciary aspects of ERISA. Back in December, 2006, I blogged that GAO's 401(k) fee report, Congressional comments picking up buzz in local papers. The political result of that report was the introduction of legislation in Congress requiring more fee disclosure. That legislature was s put on hold when Congress adjourned while the Department of Labor has made significant regulatory initiatives in this area.

All this is background for the most recent GAO report issued last month, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors Highlights of GAO-08-774, a report to the Chairman, Committee on Education and Labor, House of Representatives. While it doesn’t break any new ground, it does provide an excellent overview of where the retirement plan industry is now with respect to: 

1. Common 401(k) plan features, which typically have important fiduciary implications, and factors affecting these decisions.
2. Challenges sponsors face in fulfilling their fiduciary obligations when overseeing plan operations.
3. Actions the Department of Labor takes to ensure that sponsors fulfill their fiduciary obligations, and the progress Labor has made on its regulatory initiatives.

The GAO also renews its recommendations to Congress to pass legislation that would help the Department of Labor’s fiduciary oversight. From the report’s conclusion (and note the section I have highlighted in italics):

Since our 2006 report, Labor has made progress on its disclosure initiatives but some important fiduciary issues have yet to be fully addressed. In our previous reports, we asked Congress to consider amending ERISA to (1) explicitly require 401(k) service providers to disclose to plan sponsors the compensation they receive from other service providers and (2) give Labor authority to recover plan losses against certain types of service providers, even if they are not currently considered fiduciaries to that plan under ERISA. While Labor has proposed a regulatory change that could eliminate some of the confusion surrounding certain fiduciary obligations, it is unclear how closely the final regulation will follow the proposed rule. We continue to believe that changes to ERISA would help Labor in its efforts to promote sponsors' fiduciary oversight and be in the best interest of participants.

Here's the link to the complete report, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors.  

08 | 18 | 2008 Posted By Jerry Kalish

Just recently, I thought that it might be the dog days of summer as far as setting up a retirement plan is concerned.

But it may be the “retirement plan season” is here after all - at least in the minds of our fellow bloggers at Slate magazine’s BizBox blog. Their post today is What Retirement Plan Should You Offer? 

So let me take a stab at answering. One way to answer it is to start with the types of retirement plans that are available:

• Payroll Deduction IRA
• Simplified Employee Pension (SEP)
• SIMPLE IRA Plan
• 401(k) Plan
• SIMPLE 401(k) Plan
• 403(b) Plan 
• Profit-Sharing Plan
• Money Purchase Plan
• Defined Benefit Plan

The Internal Revenue Service provides excellent thumbnail sketches on their website, Choosing A Retirement Plan: Retirement Plan Options. But that’s really taking the horse before the cart. The starting point, we believe, should be the business owner answering two questions:

1. What is my objective? Is it to maximize my own contributions, or is it to attract, motivate, and retain the high performing employees I need to grow my business? Or, is it a combination of both?
2. Where am I in the life cycle of my business? Is my business in a start-up, fast growth, stable growth, or transition/exit stage?

Then, he or she will be able to decide upon the “best plan” or combination of plans that fits their circumstances at this time. A decision that should be periodically reviewed on a regular basis once a retirement plan is put in place. 

Which Way? quilt pictured above via Doodle's Quilts.
 

08 | 17 | 2008 Posted By Jerry Kalish

 Line-graph template via GraphJam.

08 | 12 | 2008 Posted By Jerry Kalish

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 403(b) plans are going to look a lot like 401(k) plans starting January 1, 2009 when the new final regulations become effective. (See my posts last year, If it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b) Part 1 and Part 2). 

Non-profits can generally also sponsor a 401(k) plan, and some are considering making a switch. But while the plan document requirement is now common to both, there are some important differences that non-profits should consider about making a change. Here are just a few:

• Discrimination Testing. 401(k) plans are subject to testing. 403(b) plans are not, but must make deferrals "universally available".
• Investment Options. 401(k) plans have a wide-range of investment options. 403(b) plans are restricted to custodial accounts invested in mutual funds or annuity contracts issued by insurance companies.
• Catch-up Contributions. Qualifying 403(b) plans can permit up to an additional $3,000 in catch-up contributions by eligible employees in addition to the $15,500 and $5,000 catch-up limits applicable to both types of plans.

It's a little more involved than this, of course., and here's a link to Ft. William's more comprehensive discussion of the choices, Should Nonprofits Switch From 403(b) to 401(k).

Picture credit:  Artist Robert L. Barnum's Jump Ball, a sculpture on Ferris State University's Michigan Art Walk in Big Rapids, Michigan.  

08 | 10 | 2008 Posted By Jerry Kalish

For those of us who work with business owners, we buckle up our seat belts during the last quarter of the year. Buckle them up a little tighter in December, and tighter still at actual year end.

We call it the “retirement plan season”, the time when many business owners decide to set up a retirement plan before the year end deadline. We’ve “celebrated” New Year’s Eve on more than one occasion by waiting for a signed plan document to be faxed or emailed to us.

It’s not that business owners aren't usually aware of what a qualified plan retirement plan can accomplish, but procrastination is part of human nature - and sometimes a business owner's nature. He or she may say, “I’m going to wait until year end to put a retirement plan in place since I can still get the tax benefits for the whole year.” The owner (and maybe even the accountant) believes that setting up a retirement plan today, next month, or at year end are all the same thing.

That ain’t necessary so. There can be a real cost of waiting until the year end deadline. Here are some reasons why sooner rather the later is the time to set up a retirement plan.

1. 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. (Not always looked on kindly by the IRS who may say that isn't "reasonable compensation" as discussed in an earlier post, "So now what exactly is 'reasonable compensation?'). However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.

2. 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.

3. Timely notice not given 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 does not give the requisite termination notice by November 1, 2008 means no profit sharing/401(k) plan for 2009. An employer with a SIMPLE should keep November 1, 2008 in mind if a different plan type is intended in 2009.

Timing can be everything.

08 | 6 | 2008 Posted By Jerry Kalish

It didn't have a big box office in 1986 when it was released, but the ¡Three Amigos! movie has gone on to become a comedy classic. And how could it not, 

• Written by Steve Martin, Lorne Michaels, and Randy Newman
• Directed by John Landis
• Starring Steve Martin, Chevy Chase, and Martin Short
• Supporting roles played by the late Phil Hartman, John Lovitz, and Joe Mantega (Chicago guy!)
• Original music by the late Elmer Bernstein

Now let's fast forward 22 years to today's headline, ¡Three Amigos! of 401(k) Fee Disclosure Opening At A Retirement Plan Near You Soon. And in the starring roles (drum roll please) will be:

1. New Reporting Requirements for Schedule C of the 2009 Form 5500. Effective January 1, 2009, the Department of Labor (DOL) will be requiring new and extensive disclosures for service provider fees and other compensation. How extensive? See for yourself. Here's a link to the DOL's FAQs About The 2009 Form 5500 Schedule C. Nick Curabba on Baker & Daniels' Benefits Biz Blog gives us some help in his post, DOL's New Thinking on Schedule C.

2, The DOL's proposed amendments to the service provider fee disclosure regulations under Section 408(b)(2) of ERISA. The new regulations mandate disclosures of compensation and conflcts of interest by plan service providers. The effective date will be 90 days after the final regulation is published in the Federal Register. It's possible that the DOL will make the effective date coincident with the January 1, 2009 Schedule C date discussed above.

3. The DOL's proposed regulations released July 23 that would impose new requirements for the disclosure of fee and expense information to participants in self-directed retirement plans, i.e., 401(k) plans.  The proposed regulations would be effective for plan years beginning on and after January 1, 2009. At the same time, the DOL proposed changes to the regulations under Section 404(c) of ERISA that would incorporate these new disclosure requirements.

The DOL is, of course, the producer/director of these new ¡Three Amigos!.  But unlike the original, this isn't a comedy. And unlike the orignal, viewing isn't discretionary - it's required.

07 | 26 | 2008 Posted By Jerry Kalish

July 31st, is of course, the due date (unless extended) for calendar year retirement plans required to file Form 5500 for the 2007 plan year. And, as in the past, there will be a number of plan sponsors who have to indicate on the 5500 thay they have outdated fidelity bonds or none at all.

One of my 2006 posts, It's Bond. Fidelity Bond, discussed the then requirements. My attempt at humor aside, it is a serious matter. There's still time for plan sponsors who aren't in compliance to do so before filing. 

Here's a link to our Briefing in Q & A format (PDF) on fidelity bond requirements updated for the Pension Protection Act of 2006.

06 | 20 | 2008 Posted By Jerry Kalish

I do not argue in defense of those unethical salesmen who sell the wrong product at the wrong fee to the wrong person. There are employers and employees for whom some of the products are unsuitable. But, as we issue new RFPs to support the new regulations, we are finding that there are very real services being provided in this market.

• Identify plan sponsor and participant needs
• Manage the RFP process
• Involve themselves in the process of changing service providers
• Provide an investment policy statement
  
• Assist with fund selection and performance monitoring
• Conduct employee enrollment meetings
  
• Provide assistance to individual participants
• Continually involve themselves with the plan sponsor and the other service providers
• Communicate rollover and other options to terminating employees

05 | 22 | 2008 Posted By Jerry Kalish

What must a plan sponsor do to fulfill its responsibility?

Essentially a plan sponsor must take action. The FAB points out that "authority over a plan's assets subject to the trust requirement of Section 403(a) of ERISA…must be assigned to i) a plan trustee with discretionary authority over the assets, ii) a directed trustee subject to the proper and lawful directions of a named trustee, or iii) an investment manager." The trustee, especially in small plans, is often the business owner.

What if the fiduciary has not assigned responsibility?

The FAB answers this directly: "[I]f no trustee or investment manager has the responsibility, the fiduciary with authority to hire the trustees may liable for plan losses due to a failure to collect contributions because the fiduciary failed to specifically allocate this responsibility."

What about plans such as a SIMPLE IRA or SEP IRA that have no trustee?

The FAB answers this question via a footnote that states, "In the case of SIMPLE IRAs and SEPs, the plan sponsor generally will be a named fiduciary because the documents establishing the plan provide the employer with the authority with respect to management and administration of the plan…"

What happens when one trustee, who has no direct responsibility for collecting contributions, knows that contributions are delinquent?

ERISA has a section, 405(a) (3), that makes one trustee (fiduciary) liable for the breach (failure to perform assigned duties) of another trustee (fiduciary) if the trustee has knowledge of the breach of another unless the trustee makes a reasonable effort to remedy the situation.

The FAB points out various actions that could be taken including contacting the DOL, notifying other fiduciaries that contributions are delinquent or seeking a court order. It then says, "The documents and instruments governing a plan cannot serve to absolve a co-fiduciary from liability for failing to take steps to remedy a known breach of another fiduciary."

05 | 11 | 2008 Posted By Jerry Kalish

• Increases in all categories of wealth accumulation (e.g., retirement plan, housing equity and other financial wealth) increase the probability of retiring while good earnings prospects, implying high opportunity cost for retirement, induce continued employment.

• The type of retirement plan available to workers has a significant impact on when they retire. Workers entitled to traditional DB plan benefits are more likely to retire than those who are not, while workers with significant assets from DC plans tend to significantly delay their retirement.

• New evidence supports the hypothesis that business cycles (stock market booms and busts) increase the probability - and thus timing - of retirement for DC plan participants.

• Health insurance (HI) has a large effect on the retirement decision. HI, if conditional on employment, strongly discourages retirement, while alternative sources of health insurance, such as employer-sponsored retiree HI, spouse’s HI or public HI, facilitate or encourage labor force exit.

• The retirement behavior of older workers is significantly linked to Social Security policy. The ongoing increase in the normal retirement age for Social Security and the cohort-specific actuarial adjustment of SS benefits, as defined by the law, will encourage younger cohorts to work longer.

Here is a link to the page to download Watson Wyatt’s Paper (PDF, free registration required).

05 | 4 | 2008 Posted By Jerry Kalish

No, advisers themselves aren’t getting smaller, it's just that their numbers are. More of them are leaving the financial planning industry as reported by Plan Adviser citing a new report by Cerulli Associates, a research firm specializing in the financial service industry.  Cerulli's Edge Advisor Recruiting Edition says that the number of financial advisers in the U.S. declined from 256,569 in 2005 to 245,831 last year.

And those entering the industry are getting older – quickly. According to Cerulli more than 62% of advisers were under age 30 when they entered the industry in the 1980s. By 2007, only 3% of financial advisers were under the age of 30. The reason, Cerulli notes, is that the job of financial adviser is increasingly becoming a haven for second-career professionals.

So where are the new advisers coming from then? According to Investment News, from other investment firms who recruit for advisers from each other. In other words, it’s a zero-sum game. In practical terms, it means that the boomers have a declining universe of experienced financial advisers to help them manage their retirement assets. 

My friend, Dr. Susan Mangiero asked the question the other day on her blog,  Pension Risk Matters, Do You Have Your Own Fiduciary? If not, why not? Maybe part of the answer to Susan's question is that the good ones are just harder to find.

Picture credit: Grant Williams (August 18, 1930 - July 25, 1985) shown in his role of Scott Carey in the science fiction classic film The Incredible Shrinking Man. The film has become an existential cult classic. Released in 1957, and re-released in 1964, it was written by Richard Matheson. Here is a link to the trailer (ad preceeds) on videodetective.com.

04 | 29 | 2008 Posted By Jerry Kalish

The necessity of communicating with ex-employees results in increases workload, plan costs, and your liability. (Ted) Benna says some former employees who harbor grudges against their ex-employers have used the non-receipt of plan information as a reason to file suit.

Victims of downsizing often perceive their layoff as being unfair, which can lead to various forms of retaliation. Informational justice, defined as providing employees with adequate explanations in a timely manner, has been prescribed as a way to mitigate the retaliation tendencies associated with unfairness perceptions. Few studies, however, have examined contexts in which informational justice might be more vs. less effective in this regard. In the present research, we explored whether employees' perception of the employer's integrity moderates the relationship between informational justice and retaliation among layoff victims. Results from a field and laboratory study suggest that informational justice helps manage retaliation only when layoff victims perceived that their employer had high (vs. low) integrity prior to the layoff. In Study 2, we found that perceived sincerity mediated the impact of informational justice by integrity interaction on retaliation.

04 | 21 | 2008 Posted By Jerry Kalish

Gen X is in the middle of a 'retirement perfect storm' of very high expectations, low retirement savings and massive concern about the future of Social Security. It's a black hole to them.

I like the black hole analogy. But I’m glad we know about it now, when we can still do something about it.

I've painted a grim picture here, but I'm not complaining--I think I've accepted all of the facts above without resentment. I haven't ever known the world to be any other way. I'm still a cockeyed optimist. I believe that younger people still have a good chance of getting out of debt, buying real estate, retiring comfortably, and even retiring early. But for our generation, financial security requires total independence and total responsibility. We are the only ones we can count on when it comes to our financial futures.

04 | 13 | 2008 Posted By Jerry Kalish

Probably the biggest barrier to arbitration serving as a forum for complicated commercial disputes is that the Federal Arbitration Act effectively provides no substantive oversight of an arbitration ruling, making the arbitrator's ruling the final decision, and only allows judicial review for the purpose of addressing any serious procedural errors during the course of an arbitration.

There may well be innocent explanations for fact that the chances of an investor recovering significant damages from a major brokerage firm are statistically small in mandatory arbitration. However, our data clearly indicates a decline in both the overall “win” rate and the expected recovery percentage against major brokerage firms, at a time when the misconduct of these firms reached its apex with the analyst fraud scandal.

04 | 5 | 2008 Posted By Jerry Kalish

I've got that queasy feeling again in my stomach.

The recent collapse of Bear Stearns gave me flashbacks to the 1990s during which we struggled with insolvency issues affecting ERISA plans.

If you were around back then, you’ll remember the insurance companies that failed or were seized by insurance regulators as a result of failed investments in real estate or junk bonds. And it was not just these companies. The financial stability of the rest were called into question in 1991 by the four insurance company rating services that downgraded their ratings on the claims paying ability of virtually every life insurance company in the country.

And you may also remember the insolvencies of Mutual Benefit Life Insurance Company and the infamous Executive Life Insurance Company whose GICs and annuities had been used to fund retirement plans - and what was involved to get these issues resolved for plan participants.

But that was then and this is now. Or is it? The recent volatility in the credit markets reminds fiduciaries yet again of the need to be proactive in protecting the assets of plan participants. This time around potential insolvency issues involve plan assets held by brokers, custodial banks, and financial contracts such as repos, swaps, securities lending, etc.

James Stewart writing in the Wall Street Journal after the Bear Stearns collapse tells us no worries because Safety Nets Protect Brokerage Accounts.

But with all due respect to Mr. Stewart, if you’re a fiduciary out there, you need to have more than a "feel good moment" after reading his article. A good starting point is to read the K&L│Gates law firm's recent Financial Services Alert, "Key Insolvency Issues for Broker-Dealers, Custodial Banks and Counterparties to Repos, Swaps and Other Financial Contracts." Here is what they say about evaluating whether assets are sufficiently protected.

A key to evaluating whether your assets and financial contracts with a broker, custodial bank or counterparty are sufficiently protected is to know your contractual and statutory remedies. As shown above, these vary with:

• The type of broker: U.S. or offshore;
• The type of security-holding arrangement: “customer name” or street name;
• The amount of leverage on a securities account: fully paid or on margin;
• The existence of other contracts with a broker and its affiliates, which might be cross-collateralized by the same assets;
• The type of assets covered: securities or other types (commodities, currency, etc.);
• The type of contract: securities brokerage or other types (repos, swaps, etc.);
• Whether the broker carries “excess SIPC” insurance, and if so the coverage limits;
• Whether assets and cash at a bank are held in a trust or fiduciary capacity;
• Whether a financial contract is the type that qualifies for the “safe harbors” from the automatic stay in a bankruptcy or an FDIC receivership or conservatorship;
• Whether your institution is the type that qualifies for exercising termination remedies under the “safe harbors” from the bankruptcy stay.

This list illustrates that the degree of exposure for financial arrangements with brokers, custodial banks and counterparties can vary widely. Some assets and contracts will be entitled to greater protection, in terms of distribution priorities, account insurance and termination remedies. Others may be more vulnerable and risk a lower percentage recovery in the event of an insolvency. Each asset and contract must be evaluated separately to determine where it lies on that continuum.

Here is a link to the complete K&L│Gates Financial Services Alert.

04 | 2 | 2008 Posted By Jerry Kalish

Retirement plans in the U.K. and this country are a lot alike. Employers in both countries have shifted from defined benefit plans to defined contribution plans. Employers in both countries use a trust-based system complete with fiduciary responsibilities. And employers in both countries are understandably trying to limit their exposure to fiduciary liability. U.K. employers, however, are trying to offload any risk by entering into what is called “contract-based plans.”

These are arrangements in which the employer hires a single provider such as an insurance  company or an asset manager to run what’s essentially a series of individual pension policies. Beyond hiring a single provider, the employer has no responsibility for investment manager selection, fund monitoring, or employee education.

These contract-based plans seem to be gaining in popularity. According to the 2007 annual survey released by the the National Association of Pension Funds (NAPF), 56% of the U.K. defined contribution plans surveyed were trust-based plans compared with 89% two years earlier. The NAPF, a London-based industry organization representing more than 1,000 pension funds in the U.K., says that

This might suggest that some of the employers who have most recently closed their DB schemes to new entrants have substituted contract-based DC arrangements.

So how do the regulators in the U.K. feel about employers trying to avoid governance responsibilities? Apparently, not enough by our standards. In January, The Pensions Regulator, the government agency that oversees all U.K. employer-sponsored pension plans, issued guidelines that encourage contract-based pension sponsors to voluntarily set up their own governance arrangements. There was no requirement requiring companies to follow its recommendation.

All of this is, of course, in marked contrast to ERISA’s requirement that fiduciaries are responsible for monitoring service providers. It takes me back to those thrilling days of yesteryear, pre-ERISA, during which most pension plans were individual policy plans purchased from life insurance companies. The remnant of which today are 403(b) plans. But that’s changing fast. (Here is a link to several 403(b) posts on Baker & Daniels BEC team's new and excellent Benefits Biz Blog and to two of my own from last year, If it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b), Part I and Part II).

Source: March 31, 2008 article in Pension & Investments by Thao Hua, "More U.K. companies turn to contract plans. But alternative to trust-based DC plan may not be safeguard."

03 | 31 | 2008 Posted By Jerry Kalish

The median’s household’s wealth declines more slowly than its remaining life expectancy, so that real annualized wealth actually tends to rise with age over retirement (emphasis mine).

03 | 28 | 2008 Posted By Jerry Kalish

• Find out who has what. figuring out what retirement assets an individual owns should be easy, but finding the spouse's might require some digging.
• Get documents in order.
• Consider tax ramifications.
• Protect survivor's benefits.
• Change beneficiaries.
• Monitor any distributions.

03 | 24 | 2008 Posted By Jerry Kalish

The Lawrence Berkeley National Lab calls KEVLAR® the "Wonder Material" on it’s website because of its strength. The material is used by law enforcement, the military, and by civilians.

Police wear bulletproof vests made of KEVLAR® which we know from watching cop shows. The U.S. Navy uses KEVLAR® cables to support sonar facilities to find out how much noise submarines make because it is 20 times stronger than steel under water. And windsurfers use sails that are made with KEVLAR® which can withstand the force of 60 mph winds and don't rip easily.  But unfortunately, we can’t use the Wonder Material to make a 401(k) plan.

LaRue, understandably, has brought out all the pundits. A few have suggested the best protection is allowing participants to self-direct their investments, a few have suggested not allowing participants to self-direct, and a few have said to not permit self-directed brokerage accounts. 

But in my opinion, most of the commentators have nailed it. It’s not about the structure, it's about process. Specifically, "procedural prudence", a concept that has been part of the fiduciary world long before ERISA.

But what exactly does it mean? In my view,  it's having a process in place that can answer the following questions about plan investments:

• Is there an investment policy statement?
• What objective criteria were used to evaluate the investments?
• What was done when a choice failed to meet the criteria?
• What other service providers were considered?
• How were the employees educated?

Questions that might be asked by the Department of Labor or plan participants (or their attorneys). It's both risk management and prudent management.

Yes, it’s that simple, and that difficult.

KEVLAR® is a registered trademark of E.I. du Pont de Nemours and Company.

03 | 20 | 2008 Posted By Jerry Kalish

Just to your left is a picture of one of the 10 vehicles damaged in a parking lot at a hospital by a fire that started in the trunk of someone's car. Fire firefighters suspect that fumes built up inside the trunk and were ignited by an electrical source, such as the taillights or brake lights. The gas containers did not have the lids on tight. They only had the spouts with caps, which would allow vapors to leak.

You can see this visual metaphor coming a mile away, can't you? It's about plan sponsors making good decisions, one of which is the selection of 401(k) service providers. LaRue has retirement plan sponsors refocused  on that - or they should be. LaRue, after all, was about a participant who claimed that the plan's fiduciaries failed to follow his investment instruction to sell securities. This failure, he claimed, resulted in a loss of $150,000 in the value of his account.

Selecting 401(k) service providers in a prudent manner (it is, in fact, a fiduciary function) may avoid such problems down the road. And so, here's just a short list of how plan sponsors should not select 401(k) service providers. 

• Not understanding service and investment models
• Not understanding fees
• Not listening to employees about what matters to them
• Making the decision-making based solely on company politics and other relationships
• Looking solely at “costs”

It's a new day out there, folks.

Picture credit: How Not to Transport Gasoline on the Naval Safety Center website. 

03 | 18 | 2008 Posted By Jerry Kalish

It starts tonight, the 2008 NCAA Men’s basketball tournament (the play-in game between Mt. St. Mary's and Coppin St. with the winner having the dubious honor of playing North Carolina on Friday). And a lot of money is going to be lost. No, not just by most of the bettors, but by employers whose employees will be focusing more on the games than on work.

However, according to a recent survey by the Lincoln Retirement Institute, a research arm of Lincoln Financial Group, employees will be spending more time thinking and planning for retirement than focusing on the tournament. Their survey indicated that 72% of those surveyed will spend less than one hour in making their picks while 87% said that they will spend up to 5 hours in March thinking about and planning for retirement.

But if I were a betting man, I'd put my money on Jim Challenger's view. Mr. Challenger, CEO of outplacement firm Challenger Gray & Christmas, Inc., estimates that the NCAA basketball tournament could cost employers $1.7 billion in wasted work time over the 16 days business days of the tournament. His estimate is based on 37.3 million workers in office pools and 1.5 million watching games online at their desks.

More time spent, I would guess, than checking 401(k) balances online.

03 | 15 | 2008 Posted By Jerry Kalish

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• Whether to continue to work
• When to apply for Social Security benefits
• What to do, if anything, about housing
• What choices to make about insurance and health care
• How financial assets should be invested
• What distribution options to take from employer retirement plans and IRAs

03 | 1 | 2008 Posted By Jerry Kalish

As with any safe harbor, of course, the seven-day safe harbor could easily become the expected standard practice. We might even expect future investigations by the Department to focus on whether contributions were forwarded within seven days, rather than attempt to determine when assets were reasonably segregable. In other words, everything outside of the safe harbor could become dangerous waters for plan sponsors.

02 | 29 | 2008 Posted By Jerry Kalish

Looking for a quick fix, which is your retirement savings, could spell doom. People, this is a temporary Band-aid, and it’s going to hurt when you have to rip it off.

02 | 25 | 2008 Posted By Jerry Kalish

• 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.

02 | 24 | 2008 Posted By Jerry Kalish

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• Agreements that purport to relieve the financial institutions serving as plan trustees of any responsibility to monitor and collect delinquent contributions.
  
• Circumstances where no other trust agreement or plan document assigns those obligations to another trustee or imposes the obligations on a named fiduciary with the authority to direct a trustee.
  
• Plan documents and trust agreements silent or ambiguous on the matter.
  

The responsibility for collecting contributions is a trustee responsibility. If a plan has two or more trustees, the duty may be allocated to a single trustee. A plan may also provide that a named fiduciary may direct a trustee as to this responsibility or may appoint an investment manager to take on this duty. To the extent the nature and scope of the trustee’s responsibilities are specifically limited in the plan documents or trust agreement, it is generally the responsibility of the named fiduciary with the authority to hire and monitor trustees to assure that all trustee responsibilities with respect to the management and control of the plan’s assets (including collecting delinquent contributions) have been properly assigned to a trustee or investment manager.

• For Banks serving in the trustee role (directed or discretionary), are they not now responsible for forcing the employer to forward contributions due to the plan, not just participant deferrals; unless some other party is made responsible for that function.
  
• For TPA/Recordkeepers the answer would appear to be it is dependent on their actual role. If the TPA/recordkeeper is purely in the role of recordkeeper with no responsibility for asset investment, apparently nothing has changed.
• For TPAs/recordkeepers who are now acting in the investment advisory role, unless responsibility is specifically allocated elsewhere, it is their job to make sure contributions are made, especially for self-trusteed employer plans.
• A positive note about this change is that for an employer who is not timely depositing the employees' deferrals, there is now guidance that can be used to let the employer know that he or she may have to be reported to the DOL or sued if the contributions are not made.
• As to discretionary contributions, it appears that the rules will apply once the employer has declared that a discretionary contribution is being made. At that point, the contribution becomes due and owing to the plan.
  

02 | 17 | 2008 Posted By Jerry Kalish

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

02 | 3 | 2008 Posted By Jerry Kalish

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

The need for annuities is certainly there, but it remains to be seen how well the financial service industry will deal with both the logic and the emotion of the matter.
 

01 | 19 | 2008 Posted By Jerry Kalish

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.

01 | 12 | 2008 Posted By Jerry Kalish

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.

01 | 6 | 2008 Posted By Jerry Kalish

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.)

01 | 1 | 2008 Posted By Jerry Kalish

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.

And how do employees feel about auto-enrollment? Very positively based on a recent survey by Retirement Made Simpler, a Washington, D.C.-based coalition that provides resources that help employers simplify the auto-enrollment process. Their survey found that the nearly 700 surveyed adults enrolled in an automatic 401(k) plan, 98% said they were glad their companies offered the retirement plan. But most significant to me was that of those employee who were automatically enrolled only 7% opted out.

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".

12 | 27 | 2007 Posted By Jerry Kalish

"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!

12 | 23 | 2007 Posted By Jerry Kalish

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• 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
  

12 | 21 | 2007 Posted By Jerry Kalish

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

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

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

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

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

12 | 13 | 2007 Posted By Jerry Kalish

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• 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?

12 | 9 | 2007 Posted By Jerry Kalish

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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

12 | 5 | 2007 Posted By Jerry Kalish

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 .

Here’s an example of the financial impact of a 401(k) loan from T. Rowe Price. Assume that the participant has been making monthly contributions of $264 to his 401(k) account and has been earning annualized return of 8%. Now at age 40, he takes out a loan for $50,000 for 5 years at an interest rate of 7%. His after-tax monthly loan repayment would be $198 and he halts his monthly contributions to the plan.

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.

But if he doesn’t take the loan: 

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

Taking the 401(k) loan reduces the employee’s account balance by approximately 21% at the end of the 5-year payback period, and by approximately 19% at age 65.

Something to consider.

11 | 30 | 2007 Posted By Jerry Kalish

• "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.

11 | 27 | 2007 Posted By Jerry Kalish

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 2008. 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.

Here is some of the fine print: 

• 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.

Automatic enrollment plans wanting to use a safe harbor have another set of requirements which is a topic for another day.

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.

11 | 15 | 2007 Posted By Jerry Kalish

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.

11 | 13 | 2007 Posted By Jerry Kalish

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.

11 | 4 | 2007 Posted By Jerry Kalish

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

10 | 18 | 2007 Posted By Jerry Kalish

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.

10 | 16 | 2007 Posted By Jerry Kalish

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.

10 | 14 | 2007 Posted By Jerry Kalish

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.

10 | 7 | 2007 Posted By Jerry Kalish

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.

10 | 5 | 2007 Posted By Jerry Kalish

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.

09 | 23 | 2007 Posted By Jerry Kalish

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.

09 | 21 | 2007 Posted By Jerry Kalish

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.

09 | 19 | 2007 Posted By Jerry Kalish

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?

09 | 14 | 2007 Posted By Jerry Kalish

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).

09 | 12 | 2007 Posted By Jerry Kalish

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).

09 | 10 | 2007 Posted By Jerry Kalish

• 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.

09 | 7 | 2007 Posted By Jerry Kalish

"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.

09 | 5 | 2007 Posted By Jerry Kalish

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.

09 | 3 | 2007 Posted By Jerry Kalish

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).
 

08 | 29 | 2007 Posted By Jerry Kalish

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.

08 | 24 | 2007 Posted By Jerry Kalish

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.
 

08 | 22 | 2007 Posted By Jerry Kalish

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.

08 | 17 | 2007 Posted By Jerry Kalish

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".

08 | 15 | 2007 Posted By Jerry Kalish

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.

08 | 10 | 2007 Posted By Jerry Kalish

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.

08 | 8 | 2007 Posted By Jerry Kalish

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.

08 | 4 | 2007 Posted By Jerry Kalish

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.

07 | 30 | 2007 Posted By Jerry Kalish

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.

07 | 16 | 2007 Posted By Jerry Kalish

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.

07 | 9 | 2007 Posted By Jerry Kalish

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.

Here are some of the rules covered in the IRS regulation:

• 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.

These are all matter s that 401(k) plan sponsors have been dealing with since the beginning. But for many 403(b) plan sponsors who will be assuming administrative responsibility for these plans for the first time, it’s going to be a difficult process.

Tomorrow, I'll discuss the IRS compliance initiative.

06 | 28 | 2007 Posted By Jerry Kalish

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.

06 | 26 | 2007 Posted By Jerry Kalish

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.

06 | 13 | 2007 Posted By Jerry Kalish

Gone scrambling. Back in two weeks.

06 | 6 | 2007 Posted By Jerry Kalish

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.

06 | 4 | 2007 Posted By Jerry Kalish

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.

05 | 30 | 2007 Posted By Jerry Kalish

• 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.

05 | 29 | 2007 Posted By Jerry Kalish

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. 
 

05 | 23 | 2007 Posted By Jerry Kalish

• 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.

04 | 29 | 2007 Posted By Jerry Kalish

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.

04 | 25 | 2007 Posted By Jerry Kalish

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:

04 | 24 | 2007 Posted By Jerry Kalish

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
 

04 | 21 | 2007 Posted By Jerry Kalish

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.

04 | 6 | 2007 Posted By Jerry Kalish

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.

Your fiduciary responsibilities don’t end after the selection process. You also have a duty to monitor. The law does not permit the Department of Labor (DoL) to take direct enforcement action against the plan auditor for a “bad audit”, substandard work. The DoL can, however, take indirect enforcement action against the plan administrator, the person who engages a plan auditor, by imposing civil penalties. An experienced ERISA auditor is good insurance for you to meet your fiduciary responsibility, and to have a better managed retirement plan.

03 | 17 | 2007 Posted By Jerry Kalish

• 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.

03 | 13 | 2007 Posted By Jerry Kalish

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?

03 | 6 | 2007 Posted By Jerry Kalish

• 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.

02 | 19 | 2007 Posted By Jerry Kalish

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.