Retirement Plan Blog

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.

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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 daily valuation 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.

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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?

 

 

 

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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.

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“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?

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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.

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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. 

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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.

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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.  

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"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.

 

 

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Venn diagram template via GraphJam. 

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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.

 

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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.  

 

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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.
 

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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.  

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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.

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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.

 

 

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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.

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That’s a question posed to me the other day in an email from one of this blog’s readers. It’s an interesting question, both from a historical standpoint and in the current political environment in which women’s issues are an important component. So here’s the answer for all to see.

Let’s set the dial on the ERISA  Wayback Machine to 1984, a year (aside from the obvious reference) in which there were many memorable events. One of which occurred on October 5, the day that Astronaut Kathryn D. Sullivan, Ph.D. became the first U.S. woman to walk in space.

And that’s an intentional segue to get to the question at hand. 1984 was the year in which women’s issues were paramount in the nation’s political consciousness. It was the year in which Geraldine Ferraro , the Democratic Representative from New York, became the first - and, to date, only - female Vice Presidential candidate representing a major American political party.

Rep. Ferraro was one of the driving forces behind the passage of the Retirement Equity Act of 1984 (REA) which amended ERISA to include important economic protections for women. Under prior law, a widow may have found herself without continuing benefits because her husband signed away her rights without informing her. At that time, an employee could legally opt out of survivors' benefits without informing his or her spouse.

This would increase the payments to the retiree during his lifetime, but offered no security for the surviving spouse. REA amended Title I of ERISA to require written consent of both the employee and his or her spouse to waive the survivors' annuity option in a defined benefit plan. Under certain conditions, this rule also applies to defined contribution plans.

If you’re interested in economic history, here is a link to the booklet, The Retirement Equity Act of 1984: Its Impact on Women, published in 1986 by the Education Resources Information Center (ERIC), the world’s largest digital library education literature. ERIC is sponsored by the U.S. Department of Education, Institute of Education Sciences (IES).

So thanks, kind reader, for the question. I hope I've answered it to your satisfaction. Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , 403(b) Plans
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Two recent 401(k) plan terminations in our little corner of the retirement plan world does not a trend make. But it's a sign that the economic slowdown is also affecting plan sponsors.

Two clients who had not made employer contributions for some time decided that because of the relatively few employees contributing, it simply was not worth the time, trouble, expense, and fiduciary responsibility to continue. Employee account balances will be distributed, and hopefully rolled over to IRAs.

So now what? Nick Curabba in his post, Ways and Means Committee to Discuss IRAs, on Baker & Daniels' Benefit Biz Blog discusses one public policy solution to the retirement savings issue.  Mark Iwry, a former Treasury Department official is advancing the new idea of requiring employers to default employees into an "automatic" payroll deduction IRA.

I blogged about Mark before in my post, 401(k) Automatic Enrollment or How to Overcome Employee Inertia. 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.

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.

But ten years is too long a time period as an answer to "now what?".
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The late Robert King Merton, the distinguished American sociologist, published an article in the December, 1936 issue of the American Sociological Review titled The Unanticipated Consequences of Purposive Social Action. It's since been popularized as The Law of Unintended Consequences. 

Kinda like, say, trying to drive through a flooded road in one of the storm ravaged parts of this country. Or in case of a business owner using the tax laws to exclude Non-Highly Compensated Employees (Non-HCEs) from his or her retirement plan if asset protection is a key objective.

Why? Because a retirement plan covering only the business owner and/or the owner’s spouse is not an ERISA plan, and does not  qualify for anti-alienation protections under Title I of ERISA. Put another way, what seems like a good idea at the time could turn out to be bummer.



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That's the Stock Broker, one of the many characters voiced by Wally Wingert on Family Guy, the animated television sitcom created by Seth MacFarlane and airing on Fox.

If you're not up on pop culture, the show centers on a dysfunctional family that lives in the fictional town of Quahog, Rhode Island. In the real world of small 401(k) plans and 403(b) plans, however, a broker/adviser/consultant is a critical element in the retirement plan's ultimate success. And in most cases, his or her compensation is in the form of commissions.

Bob Toth talks about this in the context of 403(b) plans in his recent post, 403(b) Commissions: In Defense Of (Reasonable) Compensation, on Baker & Daniels' Benefits Biz Blog:

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.

The impeding 403(b) changes to which Bob alludes means that 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.

And so what will evolve with 403(b) plans are a set of best practices provided by the the most professional 401(k) brokers. Those individuals who:

• 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

This ain't Quahog, Rhode Island.

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Pardon my generation gap, but I don't always effectively communicate the importance of saving for retirement to the Generation X employee. So the index card below is another way of "looking" at it. For us verbal folks, index cards are that old school analog method of organizing information. Jessica Hagy, however, uses the centuries-old 3-by-5 card (76 by 127 mm if you're on the metric system) as a canvas to express her creativity.



You can see more of her work on her blog, Indexed, on which she uses charts, graphs, and Venn diagrams drawn on index cards to make social commentary in her own humorous way. She has a new book of the same name, Indexed, in which she's taken 100 of her "greatest hits" and new material that expresses relationships better than most of us can express in words.
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Both modern art and a fund prospectus can be totally incomprehensible. 401(k) participants may not be exposed to modern art, but they sure are provided mutual fund prospectuses - at least by those plan sponsors looking for 404(c) protection.

Understanding modern art will have to wait for an Art Apprec course. The Securities and Exchange Commission ("SEC") is trying to do something about making the fund prospectus more user-friendly.

Last November, the SEC proposed changes to the prospectus that would make it more streamlined while still requiring the funds to make the more complete prospectus available to investors. The deadline for submitting comments was February 28, 2008. Most were favorable. The mutual fund industry as represented by the Investment Company Institute (“ICI”) supports the SEC proposal. Commentators have projected the proposal to be finalized as early as this summer.

Sounds good, doesn't it. But I'm a little bit concerned because of its name. It's called a Summary Prospectus like that ERISA document that also has the word Summary in its name as in Summary Plan Description (SPD). Hopefully, the Summary Prospectus will not get the sometimes response by a plan participant who upon receipt of the SPD asks, Yes, but what does it mean?

Photo by shutterberry via flickr of Autumn Rhythm (Number 30), 1950 by Jackson Pollack.
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We finally got clarity about when 401(k) contributions must be deposited when the Department of Labor (DOL) on February 28 announced a proposed safe harbor of 7 business days.  But it's the DOL's directive in Field Assistance Bulletin (FAB) No. 2008-01 on fiduciary responsibility for collection of delinquent contributions that will have more impact on fiduciaries.

I blogged about this FAB back in February in my post, In the shadow of LaRue, Department of Labor Issues a Directive on Fiduciary Responsibility for Collection of Delinquent Contributions. Looking back at it, it may have been a situation akin to someone asking me what time it was, and me telling them how to make a watch.

But Jim Farley, Director Retirement Research, Lord Abbett & Co., got to the heart of matter better than did I in his Guest Article, Contribution Timing and Collection Responsibility, a Q&A, for 401(k) Help Center. Here is an excerpt from about collection responsibility in Q&A format:

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."

You can read Jim's complete article by clicking here.





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They’re called Solo 401(k), Solo(k), and Individual 401(k). But by whatever name they are called, they provide an opportunity 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.

While 401(k) plans were introduced 30 years ago as part of the Tax Reform Act of 1978, the Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) made it possible for self-employed or small business owners to enjoy enhanced tax benefits. Staring in 2002, employers could contribute the maximum 25% tax deductible profit sharing contribution in addition to any pre-tax contributions made by an employee/participant. Pre-EGTRRA the employer had to reduce the profit sharing contribution by the amount of the 401(k) contribution.

The new rules applied to both incorporated and unincorporated businesses. Any business that employs only the owner and his or her spouse is a candidate-including C corporations, S corporations, single member LLCs, partnerships and sole proprietorships.

And now 8 years later, practically every major financial service company, e.g., insurance companies, brokerage firms, and mutual funds, offers a low cost Solo 401(k) plan. That’s the good news.

The trade-off is that a Solo 401(k) plan, like a regular 401(k) plan, must meet certain ERISA and Internal Revenue Code requirements. And one of those requirements is the obligation to file Form 5500-EZ if plan assets exceed $250,000. And here’s where there could be bad news.

But sometimes that requirement gets lost in translation, and a self-employed or small business owner whose plan exceeds that threshold doesn’t file the return. It may be because he or she missed the filing after being exempt for several years before the $250,000 threshold was crossed. Or it may be that the financial services firms at which these plans were established did not inform the self-employed or business owner of the filing obligation.

And here’s where the bad news can result. Delinquent Form 5500-EZ is not eligible for the Department of Labor's Delinquent Filer Voluntary Compliance (DFVC) program which caps penalties at $750 for one delinquent Form 5500 and $1,500 for more than one year, however many years are involved. Thus, there is a potential $15,000 penalty for each delinquent year which plans with at least one non-owner can avoid. And many such plans with lots of employees do take advantage of the DFVC program.

Doesn’t sound fair, does it? It isn’t, and Alex M. Brucker, an attorney with the ERISA law firm Brucker Morra, sent an open letter to the IRS, The Time is Now to Remedy the Inequity Applied to American Small Businesses Respecting the Filing of IRS Form5500-EZ. And according to Mr. Brucker, the IRS is reevaluating the application of the DFVC program to self-employed/owner-only retirement plans. One can only hope. Here is the link (PDF) to his letter by way of BenefitsLink.

Picture credit: The picture above is Lost in Translation which can be found on the Art Day Out on-line gallery. It is hand painted by Brisbane, Australia artist and gallery owner Ania Rigato using artist quality materials and is presented on quality canvas stretched around a 35mm thick wooden frame. The painting continues around the edges allowing a modern frameless look. Posted In 401(k) Plans
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It was 1982, and many of today’s baby boomers were listening to the song, “Should I Stay or Should I Go” that was on The Clash’s album, Combat Rock. According to NME, Mick Jones, the lead guitar on the song, wrote it about singer Ellen Foley, who sang the backing vocals on Meatloaf's Bat Out Of Hell LP. The lyrics seemed to reflect the ups and downs of their relationship and whether to stick with it or end it.

Now let’s fast forward some 25 years later. Many of those boomers are asking the same question, “Should I stay or should I go?” But the relationship in question is with their employers. Should they continue to work or should they retire?

Watson Wyatt, the international consulting firm, provides insight on this important matter affecting not only employees but also their employers in the firm’s recently published Technical and Policy Paper, Predictive Factors for Retirement Timing. Here are the key findings:

• 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).

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , 403(b) Plans , Employee Stock Ownership Plans , Public Employee Plans
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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.

Posted In 401(k) Plans , Individual Retirement Accounts
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The phrase,"What we've got here is (a) failure to communicate" is, of course, the famous line from the 1967 film Cool Hand Luke starring Paul Newman. The quote is attributed to "Captain, Road Prison 36," who was played by the late, great American character actor Strother Martin. It's become so much a part of the culture that it's #11 on the American Film Institute's list of the top 100 movie quotations in American cinema.

And that quote came to mind the other day after reading Rollover Systems' article in their Weekly Exchange, Terminated Employees Can Be Toxic to the Health of Your Plan, by way of BenefitsLink. The LaRue decision, they say, demonstrates again why plan sponsors should distribute benefits to terminated employees. They go on to explain that

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.

But the "What we have here is failure to communicate" situation goes beyond the non-receipt of documents. The grudge part that Mr. Benna alludes to has to do with the plan sponsor's integrity - or lack thereof as perceived by the terminated employee.

It's what Daniel P. Skarlicki, Laurie J. Barclay, and S. Douglas Pugh write about in their article, When explanations for layoffs are not enough: Employer's integrity as a moderator of the relationship between informational justice and retaliation, in the March 2008 issue of the Journal of Occupational and Organizational Psychology published by the British Psychological Society. They say in the Abstract:

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.

So if we translate their academic research into practical retirement plan communication practices, the origins of retaliation, i.e., lawsuits, don't begin with the employee's termination but in the context of the employer's past behavior. Effective, consistent communication and investment education can be good risk management.

Hat tip to our friend, Dr. Christian Jarrett, the Writer and Editor of the British Psychological Society's Research Digest Blog,

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Lost in the mass media focus on the Baby Boomers retiring is Generation X, the generation that follows. Depending on how they are defined, it's the people born between 1965 and 1985 (age 23 to 43). I've written about them before, Not my generation that nobody seems to want. The "nobody" referred to are financial advisers who don't seem to want them as clients.

And like the Boomers, Gen Xers also worry about their retirement prospects. But a new survey suggests Generation X is even more pessimistic. According to the survey published by Scottrade and BetterInvesting, over two-thirds of Americans aged aged 27 to 42 don't think they will ever be able to stop working. This is in contrast to more than the 64% of respondents aged 55 to 64 who said they could retire and not worry, even though this group is much closer to retirement age.

Michael Rubin, a CPA and CFP, comments upon this survey on his blog, Beyond Paycheck to Paycheck, in his post, Retirement for Gen X: Black Hole or Perfect Storm?   The analogies are those of Chris X. Moloney, Scottrade’s chief marketing officer, who commented upon the study when he said

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.

Mr. Rubin is an optimist. He says

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

Rachel is another optimist. She describes herself as "27 and working towards extremely early retirement".  Writing on her blog, Working for Rachel, she discusses the differences in the workplace causing The Financial Generation Gap. She writes

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.

Youth isn't wasted on the young.

Picture credit: Generation X, acrylic on linen, 30"x40" from Temple's TangleWave Art Gallery.







Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans , Employee Stock Ownership Plans , Public Employee Plans
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Last week Steve Rosenberg on his insightful Boston ERISA Law Blog tells us that Legal Rights That Are Protected In Courts, May Well Be Lost In An Arbitration. Steve comments on a recent Supreme Court case that parties may not contract among themselves for judicial oversight of an arbitration award under the Federal Arbitration Act. He says that

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.

But while arbitration is a choice for most parties to a commercial transaction, investors don’t have that option. Virtually all securities firms require investors dealing with them to resolve disputes by mandatory arbitration.

And since the 1987 Supreme Court case (Shearson/American Express v. McMahon) that held mandatory arbitration to be enforceable, the debate as to whether the investor gets a fair shake has raged on. And predictably, the industry says mandatory arbitration is fair while investor advocates claim the process is biased. A process that requires that one of the three arbitrators is affiliated with the securities industry, and the process itself is administered by the NASD rather an entity unaffiliated with the industry.

So how exactly has that worked out for investors? Not well according to a study, Mandatory Arbitration of Securities Disputes A Statistical Analysis of How Claimants Fare, released in June, 2007 by Edward S. O’Neal, Ph.D. and Daniel R. Solin. Their study was a statistical analysis of the results of the mandatory arbitration process during the 1995 - 2004 period.

They assessed almost 14,000 NASD and NYSE arbitration cases and found that claimant win rates and recovery amounts had declined significantly over time, and that claimants fared more poorly in large cases and in cases against larger brokerage firms. They estimated that that the expected recovery before legal fees and expenses in a large case against a top brokerage firm is only 12% of the amount claimed.

They concluded that

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.

The study was funded by the authors. Edward S. O’Neal, Ph.D, is a principal with Securities Litigation and Consulting Group, Inc. (SLCG) who completed the work while he was on the faculty at the Babcock Graduate School of Management at Wake Forest University. Daniel R. Solin is a securities arbitration attorney representing investors. He is also a Registered Investment Advisor and Senior Vice President of Index Funds Advisors, Inc..

You can download the complete report here (22 pages, PDF).

Hat tip to James J. Eccleston who publishes the FinancialCounsel blog. Jim heads heads the securities group at Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C. (SNSFE), a Chicago-based business law firm.

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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.
Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans , Employee Stock Ownership Plans , Public Employee Plans
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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.

I take that as typical British understatement as many smaller employers have already made this change with more expected in the future.

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."

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This is one of those Good News/Bad News stories. The Wall Street Journal on March 27 reported that “Household Wealth Rises as Retirees Age” citing a paper posted on the Federal Reserve’s website. The Journal quotes the authors as saying that adjusted for inflation,

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).

Good news, right? Well, maybe not. The authors defined “annualized wealth” as stocks and homes, the value of Social Security, defined benefit pensions, and transfer payments like Food Stamps.

Ain't government economics grand?

Here is the link to the story in the Journal.
Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans , Employee Stock Ownership Plans
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Add one more trend to Boomer demographics. Recent research has revealed that Boomers continue to push the limits regarding the prevalence of divorce. While just 33% of married adults from the two preceding generations has experienced a divorce, almost half (46%) of all married Boomers have already been divorced. They will