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.

Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Publications
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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.

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans
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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?

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans
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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. 

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

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , 403(b) Plans
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ERISA, of course, requires adherence to a host of deadlines, and the failure to meet some of them can have serious consequences for a retirement plan sponsor. Here’s a new batch of such deadlines added by the Pension Protection Act of 2006 (PPA) that could affect defined benefit pension plans for 2008 calendar year plans.

The PPA provides benefit accrual and payment restrictions for underfunded pension plans. I’ll neatly bypass the technical stuff because the point is that timing is everything with respect to when the actuarial valuation is performed. If it’s not done "timely", even a well funded pension plan can be swept under these restrictions.

For example, if the actuarial valuation of a pension plan is not performed before October 1 for a calendar year plan, then the plan is presumed to be less than 60% funded -regardless of actual funded status - and the most severe benefit restrictions would apply.

There are a number of administrative practices that a plan sponsor can do to avoid such adverse consequences. But everyone involved - the plan sponsor and advisors - have to stay in the moment.

Hat tip to Ron Willour, Enrolled Actuary, owner of Indianapolis-based Omega Retirement Plans, Inc. 

Picture by Chris Garrett on his DSLR Blog, Adventures in Digital Photography.

Posted In Pension Plans , Pension Protection Act of 2006
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The funded status (or lack thereof) of public employee pension plans doesn't get a whole lot of coverage by the mainstream media.

That's unfortunate because it's an important public policy issue with extremely significant long-term financial implications for all of us taxpayers. But leave it to cartoonist Scott Adams to weigh in on the topic via his Dilbert strip for August 8, 2008:

But via the internet, it is an area that is covered by several knowledgeable bloggers.Two who I follow regularly via my RSS reader are John Bury and Jack Dean.

John Bury's blog is NJ Voices. John's one of us. That is, he's in the retirement plan business. He's an Enrolled Actuary with his own firm in Montclair, New Jersey. He's also a community activist who writes regularly about state, county and local government including the New Jersey state pension plan. And if you read his posts, he is - with all due respect - an actuary with attitude. And, in my opinion, that's a good thing.

Jack Dean is on the other side of the country in California. He edits Pension Watch. He also edits PensionTsunami.com, a project of FACT -- the Fullerton Association of Concerned Taxpayers. FACT's primary focus is on California's public employee pensions and the state's funding issues.

Hat tip to Mr. Dean for his post about Dilbert, Unfunny Pension Issue Hits the Funnies. 

Posted In Pension Plans , Public Employee Plans
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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.
 

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

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans
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Here is the link to my presentation handout (43 pages, PDF) for the August 5, 2008 Seminar, Defined Benefit Pension Plans: What's Old is Now Again and better than ever. This was a 3 hour continuing education seminar sponsored by the Lanny D. Levin Agency, Inc., a General Agent for the Guardian Life Insurance Company.

If you're wondering about the picture up top, that's Fleetwood Mac ("new website coming soon") who after many years apart are getting back together and will be touring next year. And just like defined benefit pension plans: what's old is new again and better than ever.

Posted In Cash Balance Plans , Pension Plans , Publications , Seminars and Speaking Engagements
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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.

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans
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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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On Tuesday, August 5, 2008, I will be a co-presenter at the following seminar:

"GUARDIAN UNIVERSITY"
Tuesday, August 5, 2008
THE LANNY D. LEVIN AGENCY, Inc.

DEFINED BENEFIT PENSION PLANS:
WHAT’S OLD IS NEW AGAIN - And Better Than Ever!
(3 hours CE credit approved for Illinois Insurance Producers)

Speakers:
Jerry Kalish, National Benefit Services, Inc.
Lanny D. Levin, CLU, ChFC, LANNY D. LEVIN AGENCY, Inc.

Some of the topics:

• Legal and IRS update on 412(i) Plans [now 412(e)(3)]
• Larger deductions for traditional defined benefit plans under new funding rules
• The “green light” given to cash balance plans by the Pension Protection Act
• How profit sharing/401(k) plans can be combined with cash balance defined benefit plans to leverage significant benefits for owners and highly compensated employees
• How life insurance fits into all three types of defined benefit pension plans
• Case histories

Coffee & Rolls at 8:00 a.m.
Class begins promptly at 8:30 a.m. (ends at 11:30 a.m.)
Oakton College Business Conference Center, Golf Road, Des Plaines (just west of I-294)


Enroll here, or
FAX registration form (PDF), or
Call Allen Flynn (847) 266-2243 or Email allen_flynn@levinagency.com
(Your Associates and Professional Advisors are also welcome)
Posted In Cash Balance Plans , Pension Plans , Seminars and Speaking Engagements
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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.



Posted In 401(k) Plans , Cash Balance Plans , Pension Plans
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Retirement is not about the proverbial gold watch any more. Today, our focus is on retirement security, and the newly created National Institute on Retirement Security (NIRS) is adding to the dialogue. The NIRS was established in in 2007 by the Council of Institutional Investors (CII), the National Association of State Retirement Administrators (NASRA), and the National Council on Teacher Retirement (NCTR).

Their goal was to create an organization "dedicated to fostering a deep understanding of the traditional pension system in the U.S.", and they're off to a quick start. The NIRS has just launched their new website, nirsonline.org, and issued their first Research Brief, Retirement Readiness: What Difference Does A Pension Make?

The Brief written by Beth Almeida, NIRS' first Executive Director, 

... reviews the evidence on the role DB pensions play in ensuring that older Americans have the resources they need to be self-sufficient in retirement. It examines recent trends in pension coverage and discusses the effect these trends have had on the state of retirement readiness among American workers. Finally, it points in the direction of areas worthy of exploration for policymakers seeking to address specific retirement security goals.

You can download the Brief here (PDF).

Posted In Pension Plans , Public Employee 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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How many times have we all “seen” the invisible dog being walked? Maybe too many times. But you probably haven’t seen this situation very often. The case of what I call "The Employee Who Never Was". It seems that a plaintiff filed suit against the plan administrator after being denied the plan’s $2,500 monthly benefit. Problem was, he was never an employee of the plan sponsor. Michael K. Wilson writes about this case in his post, Claimant Denied Benefits From ERISA Plan Sponsored By Company He Never Worked For on The Laconic Law Blog.

Mr. Wilson writes

In a rather strange ERISA case, a plaintiff filed suit after the ERISA plan administrator denied his claim that sought retirement benefits pursuant to a Plan titled Kroger 30-And-Out even though he was never an employee of Kroger.

The case is Beckner v. American Benefit Corp., et. al. (4th Cir. April 10, 2008). The 4th Circuit affirmed the denial of benefits. Here is a link (pdf) to the case courtesy of Mr. Wilson.

This case may seem strange to you perhaps. But not if you’re from the Land of Lincoln. The great State of Illinois and its various political subdivisions has a long history of paying salaries and benefits to people who don’t do any work. Unlike the case discussed above, these folks are, in fact, employees. They just have so much clout they don't have to bother showing up for work. They even have a name. We call them “ghost payrollers” as for example “The Ghost with a Tan” whose move to Florida didn’t stop his city paychecks.

But if you want to get a job like this, don’t try myspace jobs$. Here’s what you get

No search results found. We couldn't find any jobs for Ghost payroller. Please check the keyword terms you entered. You can also try using some other keywords, or enter fewer words to expand your search.

It's the old adage. It's not what you know. It's who you know.

Note: Here's a link to The Laconic Law Blog referenced above with the great tagline, Pithy Commentary On Employment Law In Virginia And Beyond. It's published by Eric A. Welter, an employment lawyer and litigator with the Welter Law Firm, P.C. in Herndon, Virginia.

Another hat tip to BenefitsLink.
Posted In Pension Plans
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View larger image.

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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Fran Hawthorne is an accomplished journalist who over the last 20 years has specialized in finding and writing about the intersection of corporate America and timely and sometimes contentious social issues. She’s written articles for publications such as Fortune, Business Week, and Institutional Investor and has authored books on such issues as the dangers of obesity drugs, the trade-off between campaign contributions and state bond underwriting, and Medicaid manipulation.

Now Ms. Hawthorne has turned her attention to an important issue that in today’s economy isn’t going away anytime soon, pension plan terminations. In her new book, Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street, Ms. Hawthorne takes an in-depth look on what happens when financially troubled companies terminate their defined benefit pension plans through bankruptcy.

I had the opportunity to interview Ms. Hawthorne who has, no doubt, a point of view starting with the title of her book. She builds a case about why pension dumping (her term) has become an increasingly common practice in the wake of bankruptcy and how investors are profiting off the wreckage.

Agree or disagree with her, her well researched book which includes case studies and interviews provides analysis and insight on the complicated and competing dynamics involved with the termination of a defined benefit pension plan:

• Competing interests in bankruptcy court
• The choices that unions have to make
• The financial burdens assumed by the Pension Benefit Guaranty Corporation
• The risks that investors take and the returns they look for
• The issues that companies must deal with as they restructure

Ms. Hawthorne’s book should appeal to anyone involved with pension plans, e.g., CEOs, CFOs, HR professionals, union leaders, professional advisors, and policy makers. And if so, here is a link to Amazon.

Posted In Pension Plans , Book Reviews , Pension Protection Act of 2006
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If you're familiar with Chicago and Boston, then you'll know that the CTA is the Chicago Transit Authority and the MBTA (also known as the "T") is the Massachusetts Bay Transportation Authority. But I never really thought about whose retirement plan was the richest in America until I saw this story carried by the BostonHerald.com, Critics blast MBTA's costly pension plan.

So being a proud Chicagoan, my competitive nature kicked in when the story quoted Michael Widmer, president of the Massachusetts Taxpayer Foundation, as saying

It appears to be the richest retirement program in America. There's no way we can afford the pension and health care benefits.

It seems that T employees can retire after only 23 years of service, with full health insurance. And then work for the state with no restrictions. Most state employees, said the article, can't retire until they are 65 and are limited to where they can work afterwards.

But with all due respect to Mr. Widmer, let me invoke some civic pride here. Our CTA pension plan offers retirees premium-free health insurance, and allows some employees to retire at full pension in their 40s, after 25 years of service. The agency has tightened the requirements for those hired in 2002 and later, who must be 55 to retire.

Can these benefits be afforded? In 1993 the CTA pension plan was 99% funded, meaning it had funds available to pay nearly all of its projected expenses, according to the agency's annual pension plan reports. Now the CTA's pension funding ratio is the 34%, the lowest for any agency in the state.

And the fix? A tax increase, of course. As the result of protracted and contentious negotiations between the state legislators and the Governor, a funding package was passed earlier this year which included an increase in the sales tax that prevented massive service cuts. Part of the deal included a separate real estate transfer tax that will be used to help the CTA bail out its pension liabilities.

The tax, which used to be paid by buyers and now by sellers, will increase from $7.50 to $10.50 per $1,000 of sales price. Doesn't sound like much? Let me do the math. Someone selling a home in a Chicago neighborhood with an average price of $262, 268 would pay $2,360 under the current tax rate. After the increase, they would pay $3,147 -  a 40% increase in a recessionary economy seeing falling real estate prices.

And so while we can match Boston's costly transit retirement plan, I'll concede that Boston does have it over Chicago in at least one respect. Boston's transit system (which used to be called the MTA) - not Chicago's - has a man named Charlie. Take a look.





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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.
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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.
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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 be almost certain to become the first generation for which a majority has been divorced.

And a big part of the divorce, of course, is dealing with retirement assets acquired during a marriage which are considered marital property in most states. Consumer Reports/Money Adviser’s experts say that it is important to know the following:

• 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.

The complete report as covered by The Morning Call can be found here.

The ERISA part can be found in my post, Dividing retirement benefits on divorce, and what ERISA has to say about it.
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That's Basil Rathbone, of course, portraying Sherlock Holmes,  in one of the many reruns of the  Holmes' movies I used to watch as a kid on Sunday mornings on our non-flat screen, non-color TV set.

Little did I know that years later he would add to the growing research on expert behavior. It’s an important issue for fiduciaries who must select service providers to help manage their retirement plans. Tim Burns, writing in his Fiduciary Investor Blog, provides us some excellent direction in his post, Selecting Investment Experts-I. (Tim promises us a further post on the markers of investment expertise).

Sherlock Holmes fits into the search for excellence in an article in the February, 2008 issue of the British Journal of Psychology (Didierjean, André; Fernand, Gobet), Sherlock Holmes - an expert's view of expertise. The researchers use the Sherlock Holmes character to illustrate expert processes as described by current research and theories, and then discuss a number of issues that current research on expertise has barely addressed. They conclude that “although nearly 120-year-old, Conan Doyle's books show remarkable illustrations of expert behaviour, including the coverage of themes that have mostly been overlooked by current research.” Here is a link to the Abstract with the full text available for purchase.

See Mom, all that time watching TV wasn't wasted.

More on Basil Rathbone: Here is a link to information on the 14 films in the Sherlock Holmes' series featuring Basil Rathbone.  Also, here is a link to a wonderful video montage of Basil Rathbone as Sherlock Holmes, made by Julie, the Ravin' Maven of Classic Film.

Hat tip to our friend, Christian Jarrett, the Writer and Editor of the British Psychological Society's Research Digest Blog, "Cutting edge reports on the latest psychology research".
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One of those wonderful tax benefits that a qualified retirement plan and IRA provide is the tax deferral of contributions and earnings. But nothing lasts forever including the payment of benefits (and the taxes thereon).  So the tax laws require RBDs and RMDs. That’s tax talk for  “required beginning date” and “required minimum distribution” respectively.

The law requires that certain minimum benefits from a qualified retirement plan and IRA (the RMD)  must commence no later than the participant’s RBD which generally speaking means the April 1 of the calendar year following the calendar year in which he or she reaches age 70 ½. Got it? And except, of course, when it  isn't required.

Obviously, it’s a complicated set of rules, and taxpayers should always consult with a qualified tax adviser. Failure to meet the requirements can be expensive: an excess accumulation tax of 50%  of the required distribution that the participant didn’t take.

Here is a link to an excellent explanation of RBDs and RMDs by McKay Hochman.



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“Decumulation”, in definitional terms, means the conversion of pension assets accumulated during an employee’s working life into pension income to be spent during retired life. But in practical terms, decumulation embodies a significant new risk for the record number of future retirees moving from the accumulation phase of their lives to the distribution phase. The actuaries call it “longevity risk”. But those of us in the financial service industry simply call it “running out of money”.

It will require a major change in thinking for them. Away from concepts which have been discussed as part of most 401(k) providers investment education programs: asset allocation, dollar cost averaging, and the cost of waiting. But rather requiring them to think about having to make a whole new set of decisions such as:

• 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

So you'll be hearing more about "decumulation" as it becomes a major focus of future research, public policy, and financial services.


Picture credit: Water Secrets Blog.


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They're back! They're employees who back in the day we called "rehires", those former employees who were hired back. Now they're called "boomerang employees". Diane Stafford, the Kansas City Star's workplace columnist, writes about the trend for employers to re-hire former employees as reported by Management Recruiters International, an executive search and recruiting firm. In her blog, Workspace by Diane Stafford, Ms. Stafford offers advice to these rehired employees in her blog post, Are you a boomerang?

It's something I wrote about last year, "Boomerang" Workers and 401(k) Plans, from the employer's perspective,  and I suggested that employers rehiring former employees keep the following considerations in mind.

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

As  Ms. Stafford points out, boomerang employees can be a valuable resource for employers. But employers should should plan for the benefit matters in advance.


The picture above of traditional Australian boomerangs is from the website of Dr. Hugh Hunt, Unspinning the Boomerang . Dr. Hunt, who hails from Melbourne, is a Lecturer in the Department of Engineering at Cambridge University, and a Fellow of Trinity College. 





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It didn't get quite the attention that did the landmark Supreme Court ruling in LaRue v. DeWolff that defined contribution participants can bring fiduciary breach suits to recover individual damages. The "it" is the Department of Labor's recent Field Assistance Bulletin (FAB) No. 2008-01, and it's long-term implication may be as profound.

The Department of Labor (DOL) said that it issued its FAB after a number of pension plan investigations revealed:

• 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 issue, said the DOL, is "what are the responsibilities of named fiduciaries and trustees of ERISA-covered plans for the collection of delinquent employer and employee contributions?"  The answer, said the DOL, is that

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.

And so if plan language alone will no longer be sufficient to protect plan providers, where does it  leave them. McKay Hochman, a firm that provides products and technical services to retirement plan providers, offered their commentary on the matter:

• 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.
  

Here is a link to McKay Hochman's complete Commentary on this issue. This will not be, I am sure, the last word on this issue.


Picture above from the website, BLENDER-DOC.FR.

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

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

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

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

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

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

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

It will help.

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




Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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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.

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While cash balance litigation continues to wind its way through the courts, the long-term implications of these types of retirement plans have been generally ignored. That is until now. Richard W. Johnson and Cori E. Uccello have just authored a study, "Cash Balance Plans: What Do They Mean for Retirement Security?", published by the Urban Institute,  a nonpartisan economic and social policy research organization. Here is the abstract of the report:

The conversion of traditional defined benefit plans to cash balance plans is among the most controversial aspects of pension policy today. Because the controversy has focused on the treatment of older workers, however, the debate has generally ignored the long–term implications for retirement security. This article examines the potential impact of cash balance plans on workerswho spend their entire careers in these plans, and focuses on the implications for mobile workers and for labor supply at older ages. The evidence suggests that cash balance plans can often provide more retirement security than traditional defined benefit plans or defined contribution plans.

Here is a link to the entire study (PDF).

Posted In Cash Balance Plans , Pension Plans , Pension Protection Act of 2006
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The Iowa caucus voting results are in, and so is the American Dialect Society's 18th annual words of the year vote (PDF), and "subprime" won by a large margin. The vote, of course, reflects the  preoccupation of the press and public for the past year with a deepening mortgage crisis. The American Dialect Society (ADS) is an 118-year-old organization whose members include include linguists, lexicographers, etymologists, grammarians, historians, researchers, writers, authors, editors, professors, university students, and independent scholars.

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

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

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

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

Picture credit: Part of a series called BEST IN SHOW: The best and worst tradeshow displays at Calgary’s HomExpo 2007 by elboroom design via Flickr.
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Baseball fans and particularly Cub fans will recognize this picture of Hall of Famer Ernie Banks, "Mr. Cub". Banks became well known for his catch phrase of, "It's a beautiful day for a ballgame... Let's play two!" In retirement plan terms, it's the Pension Protection Act of 2006 (PPA) telling business owners that two retirement plans can be a beautiful thing. I know, I know that this is a stretch, but I'm trying to make tax stuff interesting.

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

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

And it gets even better for plan years starting in 2008. For employers with defined benefit plans covered by the Pension Benefit Guaranty Corporation (PBGC), these plans are no longer subject to the 25% combined defined benefit/defined contribution deduction limit rules. This means that an employer with a PBGC-covered pen