Giller and Calhoun launch new blog, the Business of Benefits

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Crunch Time Series , 403(b) Plans , Pension Protection Act of 2006 , Public Employee Plans
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Independent contractor or employee? Employee classification still a high priority enforcement matter

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

But it's not a game. The misclassification of a worker can have serious financial consequences. Penalties and interest involving payroll taxes can pile up if someone is incorrectly treated as an independent contractor. And in the case of a retirement plan, the employer would have to make up the benefits the individual would have received.

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , About Us , Employee Stock Ownership Plans
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What Americans want from a retirement plan

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

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

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

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

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

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

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

Are you listening plan sponsors and retirement industry?

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans , Public Employee Plans , Publications , Social Security
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Il Buono, il brutto, il cattivo: The 2008 Retirement Plan Year in Review

That's the title of Sergio Leoni's 1966 movie considered the greatest of the Italian spaghetti westerns. We know it in this country, of course, as The Good, The Bad, and The Ugly.

The movie starred Clint Eastwood (the Good), Eli Wallach (the Bad), and Lee Van Cleff (the Ugly). And just like the movie,  the year 2008 had The Good, The Bad, and The Ugly for retirement plans.

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

The Good

My vote goes to the Pension Protection Act of 2006 ("PPA") as it plays out for 401(k) plans through Department of Labor and Internal Revenue Service regulations. In our December, 2006 Client Briefing, we discussed how the PPA:

  • Eliminated the sunset provisions for benefit and contribution limits due to expire in 2010.
  • Extended the Roth 401(k) provision also due to expire in 2010.
  • Encouraged employee savings through automatic enrollment.
  • Expanded hardship provisions.
  • Required faster vesting of employer contributions.
  • Mandated more frequent benefit statements with more disclosures
  • Required diversification of investments in employer stock for participants in certain plans.

And now two years after passage of the PPA, the new provisions are continuing to enhance 401(k) plans for employees.

The Bad

The Bad is in the form of two disturbing trends.

  • Reduction or elimination of employer matching contributions.
  • Increased layoffs.

Disturbing because of the possible long-term implications for retirement savings. With the decline of defined benefit plans, 401(k) plans have become "it" as the method by which employees save for retirement. Most employees are behind now, and if these trends continue, "catch-up" will be difficult or even impossible.

The Ugly

Hands down, Ugly goes to the impact of the stock and bond market meltdown on employees' 401(k) accounts. Top Gold News recently described the current situation as financial chaos undermines 401(k) plans. Add that to concerns about Social Security funding, and we're beginning to see a rethinking of our retirement system.

Both the academics and the politicians have begun to examine how the system can be improved in which most of the risk now is in the hands of employees who are feeling extremely vulnerable.  Expect this issue to go public after President-Elect Obama is inaugurated and the new Congress convenes.

So for 2008, that's a wrap. Now queue the trailer with that great theme music by Ennio Morricone

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans , Public Employee Plans
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Sociopaths in business

Parking spaces as a leading indicator of customer and client services

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

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Employee Stock Ownership Plans , Posts on SLATE
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December 2008 Client Briefing: FAQs on Fiduciary Liability Insurance

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

Introduction

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

Executive Summary

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

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

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , 403(b) Plans , Employee Stock Ownership Plans , Public Employee Plans , Publications
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Year-end ERISA fidelity bond reminder

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

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , 403(b) Plans
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BizBox by Slate, a blog for business owners

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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2009 Dollar Limits on Contributions and Benefits

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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I've seen the future, and it's "Joe The Plumber"

“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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The bailout bill, the stock market, and 401(k) plans: what's ahead for us?

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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Bailout bill is like a Christmas tree - something for everyone including retirement plans

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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Timing now is really everything for defined benefit pension plans

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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Dilbert (and others) on public employee pension funding

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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Which way to the best retirement plan?

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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It may be the dog days of summer, but sooner rather than later may be better for setting up a retirement plan

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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Defined benefit plan seminar handout available for download



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 New 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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Will Form 5500s reveal outdated fidelity bonds or retirement plans without bonds at all

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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"Why do spouses have to be the automatic beneficiary of a retirement plan?"

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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Defined Benefit Pension Plan Seminar for Financial Advisers

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 law of unintended consequences as applied to a business owner's retirement plan

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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National Institute on Retirement Security, new national organization, launches website and issues first Research Brief

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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"Should I stay or should I go?" The factors influencing an employee's decision to retire



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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The case of "The Employee Who Never Was"

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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Enough already about the Baby Boomers, what about Generation X?

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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Pension Dumping: The Reasons, The Wreckage, the Stakes for Wall Street by Fran Hawthorne (Book Review)

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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Who has the richest retirement plan in America, the CTA or the MBTA?

cta t logoIf 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.





Posted In Pension Plans , Public Employee Plans
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Investors, brokerage firms, and mandatory arbitration: so how has that worked out?

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.


Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts
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What every fiduciary should know about their brokers ... and also their custodial banks, and financial contracts

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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U.K. defined contribution plan sponsors trying to offload fiduciary risk

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."



Posted In 401(k) Plans , Pension Plans , 403(b) Plans
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Good news: "Household wealth rises as retirees age", or is it?

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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Divorce: the next Boomer frontier and its impact on retirement

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.
Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans , Employee Stock Ownership Plans
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ERISA. It's not elementary

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".
Posted In 401(k) Plans , Cash Balance Plans , Pension Plans
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April 1 is deadline for RBD for RMD

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.



Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts , 403(b) Plans , Employee Stock Ownership Plans
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"Decumulation": a concept about which you will hearing more

See full-size image.

“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.


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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Boomerang employees? No worries if employers keep ERISA rules in mind

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. 





Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , 403(b) Plans , Employee Stock Ownership Plans
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In the shadow of LaRue, Department of Labor issues a directive on fiduciary responsibility for collection of delinquent contributions

See full-size image.

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.

Posted In 401(k) Plans , Pension Plans , 403(b) Plans
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Memo to future retirees: plan on working a few years longer

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.
Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Individual Retirement Accounts
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Wading through the alphabet soup of financial service designations

See full-size image.

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

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

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

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

It will help.

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




Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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"Just the facts" used to determine independent contractor or employee

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.

Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Employee Stock Ownership Plans
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Cash balance plans and retirement security

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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"Subprime" is landslide winner of American Dialect Society's 2007 Word of the Year award

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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New Pension Protection Act rules can make two retirement plans better than one

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

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

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

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

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





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Year end tax planning to die for

"Taxman"



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

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

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

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

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

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

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

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

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

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

And you're working for no one but me.

Taxman!

 



 



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Still time for self-employed to establish retirement plan for 2007

See full size image.

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

So let’s assume that for personal financial and tax reasons the answer is yes. And further to keep it basic, let’s assume that only one individual is involved, and that person is “in business for himself or herself”. This means for retirement planning purposes, it’s someone who has self-employment income from a trade or business – so called “sweat of the brow” income rather than income received as dividends for example. And it can also include individuals with supplemental self-employment income such as:
  • Independent members of corporate boards,
  • University professors with consulting income,
  • Writers or others with royalty or licensing income, or
  • Anyone who otherwise receives any fees from sources other than his or her primary employment
For the self-employed, the tax laws have never been better to save money for retirement on a tax-deferred basis using a choice of retirement plans. And so again to keep it basic, let’s take a self-employed individual who has net earnings before the retirement plan deduction of $100,000. His or her options from a contribution standpoint could be these:

Profit Sharing $18,587.05
401(k) $15,500.00
401(k) Catch-Up   $5,000.00
Maximum Profit Sharing/401(k) $39,087.05
SIMPLE IRA $13,206.85
SIMPLE Catch-Up   $2,500.00
Maximum SIMPLE IRA $15,706.85
Maximum SEP $18,587.05

And this is even before a defined benefit plan with larger potential contributions can be factored into the equation. But as Joe tells us while the contribution doesn't have to be made until the due date of the income tax return including the extension, the plan must be in place by year end. And there's still time.

T-shirt version of the picture above is available through MindSpeaker.
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The short and unhappy life of the Michigan service tax

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

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

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

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

Photo credit: redgoldfly on Flickr.
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The deannuitization of defined benefit pension plans

I've written about the "annuity puzzle" before. That's the investment industry term for the disconnect between the economic arguments of annuitizing a lump sum amount and the investor’s aversion to doing so. Most of the retirement plan industry attention recently has been focused on the "annuitization" of 401(k) plans. That is, adding annuity options to 401(k) plans in response to retirees and pre-retirees who are significantly underestimating how long they need to make their retirement savings last.

Whether that effort is successful is a topic for another day. But let's not forget that there are still defined benefit plans out there. A recent study by Gary R. Mottola, Stephen P. Utkus at the Vanguard Center for Retirement Research, Lump Sum or Annuity? An Analysis of Choice in DB Pension Payouts, adds to the understanding off the annuity puzzle in a defined benefit environment.

They examined distributions from two Fortune 500 defined benefit plans and one cash balance plan. In brief, their study indicated that many married participants chose to “deannuitize” their benefit in their defined benefit plans. In other words they chose a lump sum over the ERISA-mandated joint and survivor annuity default by submitting the required written, notarized waiver.

Here is what Mr. Mottola and Mr. Utkus say about the implications of their findings:
 

The desire among married participant in their 50s and 60s to “deannuitize” a DB plan distribution appears to be quite strong, and stands in sharp contrast to the inertia typically displayed by defined contribution participants in the accumulation phase. As a result, plan design and policy efforts that rely on inertia and default choices to encourage annuitization within retirement plans are likely to have only modest effects. Meanwhile, the fact that annuitization rates rise with age suggests that the demand for traditional annuities may arise later in life, at an age when many participants have already retired and left their employers’ retirement plans. Also, annuity demand may increase in tandem with the broader trend toward taking a later retirement.

Here is a link (PDF) to their study.

Hat tip to the Financial Page blog.by Barry Barnitz.
 

Posted In Pension Plans , Annuities
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"So now, exactly what is "reasonable compensation?"

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

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

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

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

ABC7 Eyewitness News in New York has been reporting the story of planes at New York area airports landing low on fuel. On Thursday, the station reported they were given a memo by a Continental Airlines pilot that was sent by Continental's senior flight operations director to the airlines 4,500 pilots. According to ABC7, while telling pilots that management will "respect their authority and judgement" on how much fuel they decide to carry, the memo then warns that "adding fuel indiscriminately... ultimately reduces profit sharing and possibly pension funding."

Click here to go to the video.

Hat tip to Dave Baker at BenefitsLink.
Posted In Pension Plans , Pension Protection Act of 2006
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IRS announces key retirement plan limits for 2008

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

                            



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Retirement? What retirement say Baby Boomers?

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

Now what about the generation that follows?
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"America's Silver Tsunami" begins with "First" Boomer applying for Social Security benefits

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

And now it's up to the politicians.

Here is a link to the story carried by Yahoo with a hat tip to Mario Cinardi, World Financial Group.
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Department of Labor releases interactive ERISA Fiduciary Advisor program

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

Here is the link to it.

Posted In 401(k) Plans , Pension Plans
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The new billion dollar advisors? It's the CPAs

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

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

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

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

Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts
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The changing retirement plan system

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

 

 

 

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Plan Administrator between rock and hard place when plan document and Summary Plan Description conflict

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

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

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

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

Now about those employee handbooks....

Picture credit: Ken Camp.

Posted In 401(k) Plans , Pension Plans , Employee Stock Ownership Plans
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"A lie keeps growing and growing until it's as plain as the nose on your face"

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

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

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

And, of course, there are two obvious questions:

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

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

Posted In 401(k) Plans , Pension Plans , Public Employee Plans
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Not my generation that nobody seems to want

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

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

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

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

 

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TANSTAAFL, seniors, and the SEC

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

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

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

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

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

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

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


Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts
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Dividing retirement benefits on divorce, and what ERISA has to say about it

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

Mr. Verner's perspective, of course, is that of the attorney representing one of the two parties in the divorce. So here's a QDRO viewed from the perspective of the Plan Administrator - the individual or individuals responsible for the administration of the retirement plan and a fiduciary. The Plan Administrator would look to see that the domestic relations order contains certain information to qualify as a QDRO under ERISA:
  • The name and last known mailing address of the participant and each alternate payee.
  • The name of each plan to which the order applies.
  • The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee.
  • The number of payments or time period to which the order applies.
The Plan Administrator would also look to see that the QDRO not contain certain information:
  • The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan.
  • The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value).
  • The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO.
  • The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.
Pretty basic, but ERISA being ERISA, pretty complicated. Fortunately, the three federal agencies charged with ERISA oversight have published comprehensive guidance.

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

Posted In 401(k) Plans , Pension Plans , Employee Stock Ownership Plans
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The real game of Jeopardy

 

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

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

Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Public Employee Plans
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The big data security question: Have we met the enemy and is it us?

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

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

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

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

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

Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Employee Stock Ownership Plans , Public Employee Plans
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Franchises and IRAs

Rush Nigot on his Rush on Business Blog provides valuable information for franchisees. But how do you finance it? There are a small number of trust companies that can help facilitate that process if you use self-directed IRA assets to invest in private equity, e.g., a franchise. It's not just publicly traded securities that IRAs can invest in. There's also real estate, secured loans, unsecured loans, and private placements. But caveat emptor twice. Failure to follow the tax rules can result in adverse tax consequences, and the investment may not pan out. Remember, these are retirement funds so consult with your advisors first. This is another one of those "kids don't try this at home" situations. Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts
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Solving the "annuity puzzle"

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

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

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

Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Annuities , Employee Stock Ownership Plans , Public Employee Plans
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The traders' story: a modern morality tale

It seems that there were these 2,500 traders surveyed by Traders Monthly who were asked whether they would parlay some insider information into a guaranteed $10 million trade. If they had a 50% chance of getting arrested, 93% said no; if they had only a 10% chance of getting arrested, 72% said no; and if they had no chance of getting arrested, 58% said yes. An anonymous trader was quoted as saying: "It can't be that wrong if I can't get caught."
Posted In 401(k) Plans , Pension Plans
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Cash may be king, but some kings are more protected than others

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

Do you know where your cash is?
Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Public Employee Plans
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Is a vulture fund coming to your retirement plan soon?

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

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

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

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

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





Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Public Employee Plans
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Retiring to Tibet

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

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

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

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

Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts
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The great debate: employee vs. independent contractor

Employee or independent contractor? Attorney Rush Nigot warns us about making the mistake of treating employees as independent contractors. It's an issue about which the IRS has sacked the NFL and caused Microsoft to reboot. Penalties and interest can pile up if someone is incorrectly treated as an independent contractor. And in the case of a retirement plan, the employer would have to make up the benefits the individual would have received as an employee. And it can be expensive.

But what if you do make a mistake, and that independent contractor is really an employee. How do you fix it? Here's how. There's two aspects to the fix. From the payroll tax standpoint, Accounting Web provides valuable tips for reporting misclassified employees (registration required). And from a retirement plan standpoint, you can use one of the correction programs offered by the Internal Revenue Service as part of their Employee Plans Compliance Resolution System (EPCRS). Better to get to them before they get to you.
Posted In 401(k) Plans , Pension Plans
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S corporations, owner compensation, and qualified retirement plans

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

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

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

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


Posted In 401(k) Plans , Pension Plans
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Benefits among those issues that need to be addressed up front in sale of a business

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

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

  • Is the retirement plan “qualified” for purposes of receiving tax favored treatment under the Internal Revenue Code?
  • If the seller maintains a defined benefit plan, what is its funded status?
  • If the seller contributes to a multi-employer, collectively bargained retirement plan, is there a withdrawal liability?
  • Are there any welfare benefit liabilities, e..g, post-retirement medical benefits.
The due diligence process for both environmental and benefit and compensation issues can be quite involved, the results of which often dictate how the deal is structured: stock sale or asset sale. So as Rush Nigut suggests: address the issues upfront. Posted In 401(k) Plans , Pension Plans , Employee Stock Ownership Plans
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ERISA agencies have full regulatory plate with Pension Protection Act

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

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

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

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


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

Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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ERISA plan record retention: how long is long enough?

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

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

What are the legal requirements?

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

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

Who is responsible for retaining plan records?

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

What are best practices?

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

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

Posted In 401(k) Plans , Pension Plans , Employee Stock Ownership Plans , Public Employee Plans
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You're only as old as you think except the IRS has something to say about it for retirement plan purposes

Normal retirement age is not just a state of mind. For ERISA purposes, it’s the lowest age specified in a pension plan at which a participant may retire without the consent of the employer and still receive retirement benefits.  The IRS has something to say about it since a lower age than the traditional age 65 can accelerate funding.

The IRS issued final rules effective as of May 22, 2007 for employer sponsored plans that clarify that a safe harbor age is 62. However, earlier ages can be used. If a pension plan has a normal retirement age that is between 55 and 62 years, deference will generally be given to a good faith effort to determine the typical retirement age for the industry, as long as that effort is reasonable with respect to the facts and circumstances.

However, a normal retirement age of less than 55 years is presumed to be earlier than would be reasonably representative of the typical industry retirement age for the industry unless facts and circumstances that demonstrate otherwise are presented to the Commissioner. 

And here is one example about why the IRS is concerned about using a lower age to accelerate funding. Depending on funding methods, assumptions, compensation, etc., a 45-year old retiring at age 62 would cost approximately $75,000 but would be approximately $160,000 at age 55. And it's because of numbers like this, defined benefit plans are alive and well for closely-held companies.


Posted In Pension Plans
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Got the Pension Tension Blues?

If dealing with pension and fiduciary issues are getting you down, then you've got the Pension Tension Blues. Dr. Susan Mangiero, founder and President of Pension Governance, and Steve Zelin, the Singing CPA, have co-written a satirical song on the current state of affairs for retirement plan sponsors and participants. I'll never see them on stage at Buddy Guy's Legend's, but pretty good for a Ph.d. and a CPA.  Take a listen here. Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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Will 403(b) plans ever be subject to ERISA?

A few months ago, I wrote about the possibility that a class action law suit might be filed against the National Education Association (NEA). Well, now it's happened. The law suit claims that the NEA accepted payments from the 403(b) providers to endorse those retirement plans, and  that the fees and expenses charged by the provider were far higher than those charged by comparable and better-performing plans available on the market.

One of the interesting arguments the plaintiff attorneys is making is that the NEA’s active endorsement of the annuity products made it a plan sponsor and subject to ERISA’s fiduciary standards. As I understand ERISA (and I’m not an attorney) Title I which includes the fiduciary requirements applies to "employee benefit pension plans" which do not include Section 403(b) salary reduction plans.

Steve Rosenberg in his article, High Cost Investments, Payments to Sponsors, and the National Education Association, on his ERISA and Insurance Litigation Blog comments on the ERISA argument:
With regard to this problem, concerning the plaintiffs’ need to figure out the best manner to structure their lawsuit, what you are really seeing is the problem of forcing a square peg into a round hole. I have argued in other posts that, as we move decisively from a defined benefit plan world to a defined contribution world, and thereby make plan participants the bearers of all the risks of their retirement investments, we need to simultaneously provide those plan participants with the legal protections and tools to manage those risks, including the types of risks alleged in this case, of misleading investment recommendations, undisclosed payments, and excessive costs.
Steve further goes on to say:
I hope to keep an eye on this case going forward, as it may provide an excellent window on the question of whether, and if so how, the law can evolve to deal with these changes in the real world environment in which people now must prepare for retirement.
It's an important social issue with an estimated $650 billion in 403(b) plans. The legal evolution that Steve discusses may take a while. But the regulatory evolution is about to happen January 1, 2008 when proposed IRS 403(b) regulations become effective. This evolution includes a new regulatory requirement that employers create a plan document that includes the plan’s rules. And maybe the evolution will become a revolution if employers are made responsible for managing and operating the plans. Round peg in a round hole?

Posted In Pension Plans , 403(b) Plans , Public Employee Plans
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Investment seminars for seniors make Top 10 List for first time

No, it's not a David Letterman list. It's more akin to the FBI's Ten Most Wanted List. The list that "investment seminars" made for the first time is the annual  list of Top 10 Traps for Investors put out by the North American Securities Administrators Association (NASAA), the oldest international  organization devoted to investor protection. The NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico. Here's what NASAA had to say about investment seminars:
Promoters of unsuitable investments are increasingly seeking potential investors, particularly seniors, by offering seminars, many of them promising a free meal along with “higher returns and little or no risk.” Unfortunately, in many of the cases that securities regulators see, it’s just the opposite: high risk and no returns, just disastrous losses. Remember: There’s no such thing as a free lunch.
The vast majority of advisors are, of course, honest. But with 77 million Americans reaching age 55 between now and 2020, the amount of money available for investment is staggering. And promoters do follow the money. Whether the regulators can keep up will be the challenge.

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



Posted In 401(k) Plans , Pension Plans
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Defined benefit pension plans vanishing quicker than expected

Here’s some financial juxtaposition to consider. As the stock market reached a new high which makes 401(k) participants happy, a survey released this week shows a speed-up in the decline of defined benefit pension plans. The survey (32 pages, PDF) by industry-supported Employee Benefit Research Institute (EBRI) and Mercer Human Resources Consulting  of 162 employers, some of which are the country's largest, reveals that nearly two-thirds of employers that offer traditional pensions have closed their plans to new hires or frozen them for all employees -- or plan to do so in the next two years.

The survey results brings the issue of whether the Boomers will have adequate retirement income to the forefront. Some analysts have said that Boomers with a combination of pensions, 401(k), home equity, and Social Security will be financially ready to retire. It’s time to run the numbers again.
Posted In Pension Plans
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Are 401(k) plans transforming into defined benefit plans?

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

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

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

Posted In 401(k) Plans , Pension Plans , Annuities
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No phone, no email, no fax, no worries. Priceless

More green on green

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

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

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

Posted In 401(k) Plans , Pension Plans
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Pension funding relief for airlines lands in Iraq funding bill

Earlier this month I asked the question Technical Corrections to the Pension Protection Act of 2006. Another bite of the apple? Would special interest groups be able to accomplish now what they couldn’t accomplish in the PPA? Right question, wrong bill. The just passed Iraq spending bill included a provision giving funding relief to American Airlines and Continental Airlines. (The bill also included a provision that increases the minimum wage by $2.10 a hour, the first increase in almost 10 years.)

The rationale was that airlines like American and Continental which are financially struggling were being treated unfairly compared to United Airlines and US Airways who received approval from the bankruptcy courts to terminate their pension plans.

The Iraq funding bill allows the airlines to assume an 8.25% rate of return on their investments over the next 10 years, instead of 6% required by the PPA. The White House estimated that airlines may reduce their pension contributions $2 billion over 10 years, spokesman Tony Fratto said.

Sen. John Cornyn, Republican Senator from Texas where both airlines are located, who  supported the change was quoted as saying:
Passage of this provision will be of enormous benefit to the thousands of citizens who are depending on this nest egg when they retire.
We'll see whether this will result in a smooth landing.


Posted In Pension Plans , Pension Protection Act of 2006
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"Ten-shun, ten-shun, please. Have your pencils and scorecards ready for the correct lineup."

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

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

  • Investment advisors who are regulated by the Securities and Exchange Commission, and are subject to a fiduciary duty;
  • Brokers who are regulated by the NASD and the New York Stock Exchange, and are subject to a suitability requirement; and
  • Financial planners who are not separately regulated as planners but are regulated depending on the services they provide, e.g., investment advice or sale of securities.
  • Insurance brokers who are regulated by the individual State Insurance Commissioners, and are subject to those rules and regulations.
It's not that clear, of course, since different standards can apply when investment providers serve as both investment advisors and brokers. Well, they used to be. The SEC's 2005 rule exempting brokerage firms that charge asset-based fees from investment advisory regulations under specified conditions was recently overturned by in a 2-1 decision by the U.S. Court of Appeals for the District of Columbia Circuit in Washington.


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

Understand now?


The picture above is that of Pat Pieper gathering straw hats showered by fans on September 1, 1932. This was before the Wrigley field bleachers were built. He started his career in the first Wrigley season in 1916, and announced the lineups with a megaphone until the public address system was used starting in 1932. Let's treasure these pictures of Wrigley field since as a result of the Tribune ESOP transaction, the team will be sold and not the ballpark which may wind-up as a real estate development.
Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts
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Technical Corrections to the Pension Protection Act of 2006. Another bite of the apple?

On May 3, 2007, the House of Representative's Education and Labor Subcommittee on Health Employment, Labor, and Pension held a hearing to consider technical corrections to the Pension Protection Act of 2006 (PPA). Technical corrections are designed to fix mistakes and inconsistencies that were inadvertently included in original legislation. Subcommittee Chairman Rob Andrews (D-NJ) indicated that the hearing was to be the first of a series, and invited other groups and individuals to identify other technical corrections that Congress should make to the PPA. In the past, it hasn't been unusual for substantive tax changes to be included in technical corrections acts - particularly for those special interest groups that didn't get their legislative objectives accomplished the first time around. We'll see what happens here.
Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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Another laptop theft. This time personal data on 160,000 current and former Neiman Marcus employees

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

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

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

It's 10:00 in the evening. Do you know where your 401(k) plan is?  Savannah accounting firm has laptop with employee data stolen during trip to New York. Go figure!

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

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

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

 





Posted In 401(k) Plans , Pension Plans
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NFL gets sacked by IRS on employee/independent contractor issue

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

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

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

What to do when an independent contractor is really an employee
Posted In 401(k) Plans , Pension Plans
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Institutional investors want today and every day to be Earth Day

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

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

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

Here is a link to Ceres' press release.

Posted In 401(k) Plans , Pension Plans , Public Employee Plans
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Hockey, maple syrup, and dueling public employee pension funds

Just one week after reports that the largest investor in Bell Canada was putting together a consortium to take the company over, BCE, Bell Canada’s parent, announced that it was talking about going private with another investor group.

BCE, which is widely held, has a market value of about US$26.5 billion. A buyout of the 127-year-old company would be the largest ever attempted in Canada and could cost about $US45 billion.

What makes this situation so interesting is that the rival investor groups are led by public employee retirement plans. On one side is the Ontario Teachers’ Pension Fund, the largest investor in Bell Canada, which owns 5.3%. The Fund has been openly critical of BCE's management. On the other side is a group led by The Canada Pension Plan board which manages the funds held by Canada's national public pension program wants a friendly takeover.

The latest negotiations may not mark the end of bidding for BCE. The Ontario Teachers’ fund said that it was still considering "leading an alternative Canadian consortium." This could include several other large Canadian funds, including one that invests for municipal workers in Ontario.


Posted In Pension Plans , Public Employee Plans
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Identity theft made simple. Just leave employee retirement plan data on a laptop

The recent theft of two laptops containing information on 40,000 current and former Chicago Public School employees is another reminder that benefit plan sponsors should be asking their service providers how safe is their data. Just how vulnerable is employee payroll and benefit data? Well, if it could happen to Scotland Yard, one the world's preeminent law enforcement agencies, from whom someone stole 3 laptops with payroll and pension data on 15,000 Met police officers, it could also happen to your retirement plan's data.

And how did the Chicago Public School caper happen? The laptops were taken from an empty conference roome where two accountants had used them to review the payment history to the Chicago Teachers Pension Fund.

It's almost like someone didn't want the Pension Fund to feel slighted. Last November, personal information including names, addresses, and Social Security numbers for 1,740 former employees was revealed in a staff mailing about health insurance programs. Then, like now, the Chicago Board of Education is offering a year of credit protection for those at risk. Phew, now the 41,740 current and former employees can feel safe!


Posted In Pension Plans
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How not to hire an auditor for your ERISA plan

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

  • Don’t go through a competitive bidding process, but automatically go with your corporate auditor. Employee benefit plan auditing is a specialized field, and many otherwise capable accounting firms don’t have the necessary experience.
  • Always select the one with the lowest price. While cost is an important factor, it should not be the only reason an auditor is hired. Sometimes the old adage is true, “you get what you pay for.”
  • Don’t ask what training your auditors receive and what continuing education they get. Consider whether they are involved with the Employee Benefit Plan Audit Quality Center at the American Institute of Certified Public Accountants (AICPA).
  • Don’t be concerned about continuity of your audit team. Accounting firms, like all firms, have employee turnover. You don’t want to be charged for “training” a new plan auditor every year.

Your fiduciary responsibilities don’t end after the selection process. You also have a duty to monitor. The law does not permit the Department of Labor (DoL) to take direct enforcement action against the plan auditor for a “bad audit”, substandard work. The DoL can, however, take indirect enforcement action against the plan administrator, the person who engages a plan auditor, by imposing civil penalties. An experienced ERISA auditor is good insurance for you to meet your fiduciary responsibility, and to have a better managed retirement plan.

Posted In 401(k) Plans , Pension Plans , Employee Stock Ownership Plans
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After the pension plan freeze, then what? Will IBM's $50 million investment education program be the new benchmark?

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

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

Will this be the new benchmark?
Posted In 401(k) Plans , Pension Plans
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Welcome back public employees

My very first client was a municipality whose retirement plans covered uniformed police and firefighters with collectively bargained benefits and the civilian employees covered by civil service rules. Somewhere along the line, we drifted away from public employee retirement plans, but now some years later here we are again - working with benefit plans in the public sector. So I opened up a new blog topic, Public Employee Plans, as the archive for the posts about this very challenging and unique benefit area.

Challenging and unique for a number of different reasons. First, these plans are subject to quite a different regulatory scheme than plans in the private section. Then add to the mix the collectively bargained element, the political area in which these plans operate, and funding issues which impact taxpayers, and it’s certainly not dull work. Stay tuned. Posted In Pension Plans , Public Employee Plans
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Is Fidelity's decision to eliminate its pension plan the tipping point for defined benefit pension plans?

Morton M. Grodzins who was a professor of political science at the University of Chicago is credited with coining the term “tipping point”. Malcolm Gladwell later popularized the term in his 2000 bestselling book The Tipping Point: How Little Things Can Make a Big Difference. In common parlance, the term is applied to any process in which beyond a certain point, the rate at which the process proceeds increases dramatically.

Have defined benefit pension plans reached that point now with the announcement that Fidelity has made the decision to eliminate its pension plan for roughly 32,000 of its employees?

While other healthy companies have been freezing or terminating their pension plans, Fidelity’s decision is significant. The giant investment company has been a visible player in corporate America’s transition from defined benefit pension plans to defined contribution plans. Will this encourage more companies to place the responsibility of retirement on their employees?


Posted In Pension Plans
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Mike Ditka and Jerry Kramer team up to fight for disabled retired NFL players

A few weeks ago a senior producer from ESPN called me after seeing my post that I wrote the day before Media Day during Superbowl Week, Super Bowl teams in the spotlight, NFL retirees in the background. We talked for about 45 minutes as I gave him some background on the NFL Players Association negotiated benefit program in the context of ERISA and the Taft-Hartley Act. At the end of our conversation, I made the observation that the real battle was not the legal one, but rather a PR one.

And now that PR battle for the hearts and minds of NFL fans as leverage to increase benefits for the retired players is heating up. The Bears Hall of Famer, Mike Ditka and Packers great, Jerry Kramer (who many say should be), are teaming up to fight for the retirees. They held an auction last Thursday at Ditka's restaurant in Chicago to raise money and continue to pester both the league and the Players Association to "do what's right".

Both of them are extremely media savvy so stay tuned. This issue isn't going away.
Posted In Pension Plans
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Pensions: A World View

The retirement issues affecting our aging population are not unique to the U.S. The American Association of Retired Persons, commonly referred to as AARP, has a Policy and Research group that specializes in a vast range of topics relating to older adults and aging both domestically and globally. They put together  a collection of recently released international comparative resources on public, private and occupational pensions. Here is the link to it.
Posted In Pension Plans
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Do you know where your pension is?

You can lose many personal items in your lifetime - your gloves, your keys, or your  glasses. They're small and replaceable items. But your pension benefit is another matter. What if you lose your pension. Not because someone will take it away from you, but because you can lose track of it. It’s not unusual in an economy in which workers change jobs frequently, employers go out of business, move, or are acquired. Martha M. Hamilton writes in the on line addition of the Denver Post that tracking down pensions can be tricky for participants who have lost track of pension benefits owed to them. 

The Pension Benefit Guaranty Corporation does have its Pension Search database, but it’s only useful to assist employees whose defined benefit pension plan the PBGC has taken over. There are other resources out there which Ms. Hamilton discusses, but the bottom line is you’re on your own.

So what’s the solution? One to consider is the approach taken by the U.K. and Australia. Each country has a central registry for the purpose of helping people find lost pensions. This approach is the subject of a discussion paper published by The Pensions Institute, Lost Pensions, Lost Pensioners: Is a National Registry of Pension Plans the Answer? (PDF)  The Pensions Institute is the first and only academic research center focused entirely on pensions in the U.K.

The discussion paper written in 2001 by David Blake of the Pensions Institute and John Turner of AARP preceded the wave of defined benefit plan terminations and freezes. And with the shift to 401(k) plans - and automatic enrollments - there will be an increasing number of lost benefits. It's time to address the matter.
Posted In Pension Plans
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Two classes of retirees emerging: those having government pensions and those that don't

More and more, retirees are finding that it pays to have worked for the government instead of the private sector. That’s the headline of a recent article in USA Today reporting that retired government workers are twice as likely to get a pension as their counterparts in the private sector with a benefit more generous. Much has been written about the cost of these public sector plans and the decline in private sector pension plans. Two sides, of course, to the issue. Is it because of the decline in corporate pension plans or because of what public employee unions have been able to achieve? Or maybe both?


Posted In Pension Plans , Public Employee Plans
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What to do when an independent contractor is really an employee

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





Posted In 401(k) Plans , Pension Plans
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Big increase in pensions for former NBA players part of NBA All-Star Weekend hoopla

Last night's media coverage in Las Vegas for the NBA's All-Star weekend had it all: the Skills Competition, the Charles Barkley-Dick Bavetta race for charity ($50,000 going to the Boys and Girls Clubs of Las Vegas), optimistic talk of a NBA team coming to Vegas, legends of the game, celebrity sightings, etc. But there was little coverage of a significant event in professional sports on at least two levels: a significant increase in pension benefits for retired players and a contribution by the Players Association in paying for it.

Here is what was announced by NBA Commissioner David Stern in company with Billy Hunter, Executive Director of the Players Association. The joint plan gives a 50% increase in pension benefits to players who retired before 1965. Players with three and four years in the league are now eligible, instead of the previous five-year requirement. The plan is retroactive to July 1, 2005, and allows for a lump sum catch-up of $20,000 for the players who had three or four years in the league.

Quite a contrast to Super Bowl week.
Posted In Pension Plans
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It's not just us getting older. So are 401(k) and pension plans

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

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

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

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

And with the new tax laws, retirement plans are not only getting older, they can get better.
Posted In 401(k) Plans , Pension Plans
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Breaking up is hard to do - and more complicated when retirement benefits are involved

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

If, in the determination of the administrator, the order is not a QDRO or if there are competing claims, then the order issued by a state court can’t be honored. And that’s where it gets complicated. Steve Rosenberg in his Boston ERISA and Insurance Litigation blog writes about competing claims in his post, ERISA, Interpleader and Qualified Domestic Relations Orders. In the case he discusses, the ex-wife and the girl friend of a deceased participant are both claiming insurance proceeds under an ERISA plan. So what happens now. Steve writes:
And then what happens next of course, is that the plan administrator, quite rightly, files an interpleader action asking the court to figure out which one of the two should get the proceeds. A plan administrator would err if it did anything else, as ERISA preemption and the plan’s terms would suggest that the girlfriend should get the proceeds, but this would be in direct contradiction of a probate court order; there is no reason for the plan and its administrator to be stuck between the rock of the plan and the hard place of the probate court order. And avoiding being stuck in this type of position is exactly why federal law allows interpleader in this situation.
Steve’s post is a reminder that plan administrators must have QDRO procedures in place to determine the qualified status of domestic relations orders and to administer distributions pursuant to qualified orders. Administrators are required to follow the plan's procedures for making QDRO determinations.

Translated into practical terms, plan administrators should have the phone number handy of a qualified ERISA attorney.
Posted In 401(k) Plans , Pension Plans
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NASCAR drivers are on their own at retirement

Once a year - or so it seems - as part of Super Bowl week, media coverage is given to stories about meager pensions provided to the older retired NFL football players. A major part of the reason is that these guys are not represented by the Player Association. But at least, they have pensions. And you'd think that all major professional sports have retirement programs. All do - except for NASCAR drivers.

Unlike the other professional sports - with one exception - the drivers are independent contractors. Their status isn't unique to NASCAR. It’s the same in most every form of motor sports. Crew members who work for teams are employees who are provided benefits including 401(k) plans. That other exception as independent contractors is professional golfers.

But PGA members do have a retirement plan in the form of a deferred compensation plan in which part of their prize winnings are used to fund their retirement benefits. Nick Price has been quoted in Business Week as saying that golfers now in their mid-20s who have a career like his could have $30-$40 million in their pensions. Click here for the Business Week story on how the PGA plan works but you'll have to navigate through the ads.

The difference between the two? Racing has been described as a sport that celebrates rugged individualism and personal responsibility. Drivers are on their own. Posted In Pension Plans
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Left out of the game. What to do when an employee isn't offered 401(k)

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

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

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

A partial termination of a retirement plan is one of those things that you know  now what you didn’t know then. If it happens, then all plan participants must be fully vested. But there is no clear objective test as to when it happens. What got me thinking about this subject was yesterday’s article by Jon McLaughlin, Extinguishing Pension Plans By Partial Termination & Aggregation, that appeared in the The Business Law Society, a publication of students of the University of Illinois College of Law. Mr. McLaughlin writes:
This article explores the question of when successive reductions in plan participants should be aggregated for purposes of determining whether a partial termination occurred. The best guidance that the case law can currently render is that multiple reductions in force are aggregated, for purposes of determining whether a partial termination occurred, when they are related, meaning that they have spawned from the same “major corporate event”.
And non-lawyer that I am, I put the issue in the context of retirement plan administration. That is, if the partial termination occurs as a result of aggregation as written about by Mr. McLaughlin (rather than by a single event), then prior non-vested amounts of terminated employees may have been forfeited and reallocated to current employees or used to pay plan expenses. The result of which will require the plan sponsor to contribute money to restore the forfeitures which could be a sizeable amount.

So what’s a plan sponsor to do? Two things come to mind:
  • Consider the partial termination rule in the context of planning for a sale of part of the company, downsizing that will affect participation in the plan - and plan accordingly.
  • Determine whether it would make sense to submit the plan to the IRS for a ruling as to whether a partial termination occurred.
Now doesn’t this clarify the matter?
Posted In 401(k) Plans , Pension Plans
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Super Bowl teams in the spotlight, NFL retirees in the background

Baltimore doesn’t forget its Colts. And one of those former Baltimore Colts, Bruce Laird, (Baltimore Colts' defensive back from 1972 to 1981 and a San Diego Charger in 1982 and 1983) wants to make sure that his former teammates and other retired NFL players are remembered in a more tangible way than street signs. Specifically, retirement benefits.

There are more than 400 retired NFL players that receive a very small pension and have no medical or disability benefits from the NFL. These former players have no power at the bargaining table because the NFL Players Association does not represent them. They did receive an increase from the Players Association recent ratification of the new Collective Bargaining Agreement, the subject of one of my recent posts.

Mr. Laird, running back Tom Matte, and other Baltimore Colts' alumni are spearheading efforts to make the situations of the retired players a higher priority of the League and the Players Association as well as to educate the public and the media. These efforts include the formation of a new group announced by Mr. Laird in his recent post on the NFL Former Players blog:
We are pleased to announce the formation of a 501(c)(3) organization – legally designated as Baltimore Football Club, Inc., and operating nationally as either Fourth & Goal or Defending Champions – to advocate for pension and disability benefits, representation and other issues affecting retired players; and to raise funds on behalf of and to assist retired players in need.
And so while its Media Day tomorrow during this Super Bowl Week, it’s a story that most of the media haven’t been covering. One member who has is Ron Snyder of the Baltimore Examiner, and here’s a link to his coverage of these former NFL players.

Posted In Pension Plans
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They're back! Retirement plan bad boy clauses

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

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

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

And what about those 20 lawmakers referred to above who were convicted of crimes and may be collecting benefits? They’re exempt because both versions of the bill are not retroactive. Surprised? Posted In 401(k) Plans , Pension Plans , Public Employee Plans
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Supreme Court to hear important fiduciary case

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

Now today, both Rich Bales at Workplace Prof Blog and Steve Rosenberg in his Boston ERISA and Insurance Litigation Blog report that the U.S. Supreme Court has agreed to hear a case that will decide the extent to which, if at all, fiduciary responsibilities attach to the decision to terminate a retirement plan and the implementation of that decision. Again timely-and very important-in a business environment in which employers are terminating and freezing defined benefit pension plans. I expect that we will see more ERISA-related litigation involving significant issues such as these that will impact a large number of both plan sponsors and participants.
Posted In 401(k) Plans , Pension Plans
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Focus on the NFL: tomorrow's games and pension increases



While sports fans are looking forward to tomorrow's NFL games (for me the Beloved Bears vs. the Saints) that wil decide the two Super Bowl contestants, the retired NFL players are looking forward to receiving their pension increases under the new Collective Bargaining Agreement which I wrote about last year. (While agreement on the new CBA was reached last year, it was just radified at the end of the season by a vote of the NFL Players Association).

As to what this means in dollar terms for the retired player, here is a link to a letter on the Retirement Players Discussion Forum blog from Jeff Nixon, Vice President of the Buffalo Bills Alumni Chapter, to his guys that includes examples of the increases.
  • For a player currently receiving a pension: If he had 6 credited seasons from 1965 to 1970 , his previous monthly pension benefit was $1,200 . His new monthly pension will be $1,500.
  • For a player not yet receiving a pension. If he has 6 credited seasons from 1998 to 2003 his monthly pension benefit would have been $2,550. His new monthly benefit, if he starts receiving pension benefits at age 55 will be $2,805.

There's a lot that could be written about on the subject - perhaps at a later time.

Posted In Pension Plans
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Future looks bright for cash balance pension plans

The U.S. Supreme Court on Tuesday upheld the 7th U.S. Circuit Court of Appeals’ decision regarding IBM’s cash balance pension plan. In addition, the IRS has begun to review moratorium cash balance plans, i.e, those cash balance plans that were converted from defined benefit plans before June 29, 2005. And with the Pension Protection Act of 2006 clarifying the legality of new cash balance plans, it looks like they are here to stay. Indeed, cash balance pension plans will become a more significant tax planning technique in designing retirement plans for closely-held business and professional firms. Much more on this topic to follow here in the future.
Posted In Pension Plans
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Looking under the brim of Top Hat plans









Steve Rosenberg in his article today on his Boston ERISA and Insurance Litigation Blog, Top Hat Plans and ERISA, brings into focus one of the inherent problems with Top Hat plans. At least from the standpoint of the employee. That is, Top Hat plans are exempt from the participation, funding, vesting and fiduciary responsibility rules of ERISA.

What’s a Top Hat plan for those of you not familiar with “pension speak?” It’s the descriptive label that is used for retirement plans for a select group of management or highly compensated employees. Top Hat plans are designed to make up for benefits that would otherwise be limited by law. For 2007 that would be a retirement benefit of $180,000 per year in a defined benefit plan and up to $49,000 in a defined contribution plan.

Cases like Steve writes about arise because the Department of Labor has never issued regulations on exactly what is a "select group" that defines these plans. When a participant does not receive what he or she expected from the plan, the participant sues the employer claiming that the plan is not a Top Hat plan because participation was not limited to a “select” group. Thus, says the participant, the plan was required to comply with all the requirements of ERISA.

This "select group" issue is not the only inherent problem with Top Hat plans. Again, from the standpoint of the employee. These plans are usually unfunded which means it’s simply a promise to pay. An employer may refuse to pay benefits owed under the plan because of a merger, acquisition, insolvency, or other reason.

Now here’s the irony in all this. An employee who is part of this select group gets there because of performance. Now it will be the company’s performance that will determine what the employee gets.
Posted In Pension Plans
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No goody bag now goes untaxed

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

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

Now this story doesn't have a whole lot to do with retirement plans - actually nothing at all to do with retirement plans. But I like it because it is a good example of the Two Part Theory of Political Economics ascribed to Nobel winning economist Milton Friedman.
  • Part One: “Them what has gets”.
  • Part Two: “Ain’t no free lunch”.

 


Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts
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Retirement planning for 2007 begins now



Last minute tax planning is like cramming for a final exam. You don’t always get the best results. Starting now to do 2007 retirement planning can make a big difference. Here are some of the situations we saw in late December, 2006:
  • Not enough compensation for a shareholder-employee of an S corporation. Many owners will minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.
  • Not enough time to maximize 401(k) contributions. Adopting a 401(k) in the latter part of the year may not give an employee enough time to maximize his or her own contributions. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral.
  • Timely notice not give to employees. Tax planning is a time-sensitive activity, and sometimes notices to employees must be made in order to achieve desired results. For example, an employer sponsoring a SIMPLE must give its employees notice of the plan provisions and employer contribution levels, including any plan changes, at least 60 days prior to the start of the next calendar year. An employer who did not give the requisite termination notice by November 1, 2006 meant no profit sharing/401(k) plan for 2007. An employer with a SIMPLE should keep November 1, 2007 in mind if a different plan type is intended in 2008.
  • Employer contributions made early in the year. While it can be advantageous from an investment standpoint to get the money working as soon as possible, this can sometimes cause problems. For example, if an employer has already made its profit sharing contributions for the current plan year, those contributions may practically preclude a defined benefit plan from being adopted for the year. It may also eliminate the adoption of a profit sharing plan whose allocation method might better favor a Highly Compensated Employee if contributions to a SEP have already been made.
These are just a few of the situations that could have been avoided by not waiting until the last minute to adopt a retirement plan. Studying for that final 2007 retirement planning final exam should begin now. Posted In 401(k) Plans , Pension Plans
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Remembering Gerald R. Ford


President Ford signing the Employee Retirement Income Security Act (ERISA) on September 2, 1974.
Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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The 2006 retirement plan year in review: the Good, the Bad, and the Ugly



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

And so with apologies to Mr. Leone and Clint Eastwood, here are my 2006 choices for the Good, the Bad, and the Ugly in Pensionland:
  • The Good: The passage of the Pension Protection Act of 2006 (PPA). The new law makes significant changes to practically every retirement plan in which approximately 44 million people are participants. The 900 page bill affects all types of retirement plans including defined benefit plans, profit sharing and 401(k) plans, cash balance plans, and employee stock ownership plans (ESOPs). Most of the changes are effective in 2007 and 2008 but some are retroactive or delayed. The PPA significantly enhances 401(k) plans - now the retirement plan of choice by corporate America.
  • The Ugly: the increasing number of scams and outright thefts from retirement plans. Sizeable account balances and the Boomers starting to retire have become targets. While the numbers are relatively small, they can have a profound impact on plan participants and retirees. The regulatory agencies - the National Association of Security Dealers, the New York Stock Exchange, and the Department of Labor - are ramping up their enforcement activities to deal with this growing problem. 
That's it. For 2006, it's a wrap.





Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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Who's your employee: inquiring minds and the IRS want to know

 

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

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

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

Penalties and interest can pile up if someone is incorrectly treated as an independent contractor. And in the case of a retirement plan, the employer would have to make up the benefits the individual would have received as an employee. And it can be expensive as Microsoft found out.

Whether an individual is an independent contractor or an employee is a factual matter based on the extent of behavioral control, financial control, and relationship of the parties. The IRS publication, Independent Contractor or Employee, provides an explanation.


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

 

 

 

 

 

Posted In 401(k) Plans , Pension Plans , Publications
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Time running out for calendar year employer to adopt retirement plan



If you are a business owner/employer with a calendar fiscal year, you still have time to adopt a qualified retirement plan for 2006. Here’s what you have to do:

Before December 31, 2006, you need to:
  • Sign adopting resolutions and a plan document, and
  • Deposit a de minimis amount, e.g., $100 in a trust account to establish corpus.
After December 31, 2006, you need to:
  • Fund the balance of the deductible contribution no later than the time your tax return is filed including extensions, and
  • File Form 5500, if applicable
And if this is your first retirement plan, check with your accountant to see if you are eligible for the tax credit for pension plan start up costs.


Posted In Pension Plans
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Can you take credit for your retirement plan?

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

Here are some questions and answers  about the tax credit:

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

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

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

What plans are eligible for the tax credit?

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

How do you claim the tax credit?

You must file IRS Form 8881 - Credit for Small Employer Pension Plan Startup Costs.

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






Posted In 401(k) Plans , Pension Plans
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For Business Owners and Their Advisors: FAQs on 412(i) Pension Plans Updated for the Pension Protection Act

Questions and Answers on 412(i) Defined Benefit Pension Plans Updated for the Pension Protection Act of 2006

Executive Summary:

A 412(i) defined benefit pension plan, referred to in IRS regulations as an "insurance contract plan", is the only defined benefit plan that is exempt from the minimum funding requirements of Section 412 of the Internal Revenue Code. This type of plan, therefore, enjoys certain advantages over the traditional defined benefit plan and is worth exploring if you are the owner of a small business.

These advantages create a plan that, compared to a traditional defined benefit plan, will produce:
  • Larger initial deductions;
  • More stability in the contribution level;
  • Simpler plan administration; and
  • A secure promise of future benefits guaranteed by an insurance company.
Posted In Pension Plans , Publications
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Yes, but what does it mean?



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

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

And it’s quite obvious why not. Despite the regulatory requirement that SPDs should be written to be understood by the average plan participant, they are written by attorneys for attorneys. And why that is so should also be obvious. Despite such disclaimer clauses in an SPD as
This Summary Plan Description is a brief description of your Plan and your rights and benefits under the Plan. This Summary Plan Description is not meant to interpret or change the provisions of your Plan. A copy of your Plan is on file at your Employer’s office and may be read by you, your Beneficiaries, or your legal representatives at any reasonable time. If you have questions regarding your Plan or this Summary Plan Description, you should ask your Plan Administrator. If any discrepancies exist between this Summary Plan Description and the actual provisions of the Plan, the Plan shall govern.
attorneys have told me that courts often permit employees to rely on the SPD when it conflicts with the terms of the plan document.

And so what’s a plan sponsor to do?

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






Posted In 401(k) Plans , Pension Plans
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It's Bond. Fidelity Bond



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

Overview

A fidelity bond is required to protect the assets in a retirement plan from misuse or misappropriation by the plan fiduciaries. In other words, intentional acts of fraud or dishonesty by a fiduciary who is a trustee and  any person who has:
  • Physical contact with cash, checks or other Plan property.
  • Power to transfer or negotiate Plan property for a price.
  • Power to disburse funds, sign checks or produce negotiable instruments from the Plan assets.
  • Decision making authority over any individual described above.
The fidelity bond must be at no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. And like all aspects of ERISA, there are important exceptions. Here are two:
  1. Maximum Amount. The new Pension Protection Act of 2006 increases the maximum bond amount to $1 million for retirement plans that hold employer stock or other employer securities. A retirement plan would not generally be considered to hold employer stock or other employer securities if these assets are part of a broadly diversified group of assets such as mutual funds. The new bonding provision is effective for plan years beginning on and after January 1, 2007.
  2.  Non-Qualifying Assets. If more than 5% of the plan assets are in limited partnerships, artwork, collectibles, mortgages, real estate or securities of "closely-held" companies and are held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code Section 408, the plan sponsors need to do one of two things: a) make certain that the bond amount is equal to 100% of the value of these "non-qualified" assets or b) arrange for an annual full-scope audit, where the CPA physically confirms the existence of the assets at the start and end of the plan year.
Consequences for Not Maintaining the Fidelity Bond

There can be serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond.
  1. It can be a red flag to the DoL that they need to take a closer look at the plan.
  2. In cases where a retirement plan has more than 5% in non-qualified assets, a serious underwriting risk may arise if the non-qualified assets are not properly listed on the bond application. This is because non-qualifying assets carry a higher level of risk for loss. If the non-qualified assets are not listed on the bond, the underwriter would have cause to deny coverage if there was a loss due to misuse or misappropriation by a plan fiduciary. Under those circumstances, the loss may be denied and the trustees could be liable for the losses to the plan.
Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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Employers out of sync with employees on compensation and benefits



Some employers just don’t get it.

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

The survey of 262 large U.S. companies and 1,100 workers carried out by consultants Watson Wyatt Worldwide and WorldatWork, the association for human resources professionals, indicates that
  • While none of the companies surveyed think health care coverage is a key reason that staff quit, almost a quarter (22%) of top employees cite it as an important reason; and
  • 17% of employees see retirement benefits as a factor in retention compared to only 2% of employers.
This disconnect at a time when employers are redesigning health care plans and restructuring retirement programs.


According to Laura Sejen, director of strategic rewards consulting at Watson Wyatt:
Those employers that understand what drives commitment — particularly among top performers — and act on it will be best positioned for success.
Here is the link to the article, Disconnects see talent heading for the door.


Posted In 401(k) Plans , Pension Plans
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Defined benefit pension plans: going, going, ... redux

In an earlier post with the same headline, I cited the decline in the number of defined benefit pension plans from 1985 to 2005: from approximately 112,000 to 29,000.

I'm certainly not the only one who has commented on the passing of defined benefit pension plans. Today Robert Pozen, Chairman of MFS Investment Management, in a speech to the Society of Professional Recordkeepers and Administrators in Palm Beach, Florida predicted the demise of defined benefit pension plans. Precipitated, he said, by law changes, new accounting rules, and funding shortfalls.

But Mr. Pozen expressed the situation in a manner to which we could all better relate. Where will retirement income come from:

  • In 1974, 56% of retirement income came from Social Security and defined benefit plans.
  • By 2030, only 24% of retirement income will come from Social Security and defined benefit plans.

Starting saving Gen X!

Source: Investment News, November 6, 2006.

Posted In Pension Plans
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IRA is not a kid anymore



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

In just 5 short years since the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, we have seen some significant - and positive - changes in the tax laws that affect IRAs with more to take effect between now and 2010. These include:
  • Portability between IRAs and qualified retirement plans.
  • Increased IRA contribution limits including the addition of a catch-up.
  • Roth 401(k) option starting in 2006.
  • IRA distribution to charity for donors over age 70½ for 2006 and 2007.
  • Rollover to an IRA from a qualified retirement plan by a non-spouse beneficiary beginning in 2007.
  • Direct transfer of tax refund to an IRA starting in 2007.
  • Direct rollover to a Roth IRA from a qualified retirement plan beginning in 2008.
  • Elimination of the Roth IRA income restriction for converting a traditional IRA to a Roth IRA starting in 2010.
You’ve come a long way IRA.


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




Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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Ice Age descends on Pensionland



Right after the Pension Protection Act of 2006 was passed, I read comments that the new Act would help employees by removing uncertainty about funding, and it would avoid pension plan terminations and freezes.

Not!

A Quick Poll recently released by SEI revealed that almost a third (29%) of the employers polled said that they will either close, freeze or terminate their pensions by the end of 2007. If that were to occur, 52% of all US and Canadian plans polled will be closed, frozen or terminated by the end of 2007.

We can expect to see freezes become much more common in the last quarter of 2006 as employers prepare to comply with new accounting rules that put pension obligations directly on their balance sheets.

The emergence of pension plan freezes (a cessation of future benefit accruals in an existing pension plan) apparently engendered the Pension Villain's Elegy on the Pensions & Benefits Weblog.
The risk’s not worth the burden. Time to freeze.
But not to worry: we have a great 401(k)!
This cut will benefit our employees.

FAS 158 gives our balance sheet the squeeze
While our cash projections wobble from PPA.
The risk’s not worth the burden. Time to freeze.

Our workers need to be their own trustees.
Just educate them; they’ll learn to find their way.
So this cut will benefit our employees.

Our old plan’s tangled up in legalese.
The DB pension system’s seen its day.
The risk’s not worth the burden. Time to freeze.

Our competition’s boosted their DCs,
And what works for Wall Street’s good for the U.S.A.
This cut will benefit our employees.

We know you thought we promised more, but please,
Eventually as a hybrid plan we may.
The risk’s not worth the burden. Time to freeze,
And this cut will benefit our employees.
Should we benefit people start using the term 401(k)world instead of Pensionland?



Posted In Pension Plans , Pension Protection Act of 2006
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IRS announces 2007 benefit and contribution limits



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

Highly Compensated Employee Definition $100,000
Annual Compensation Limit $225,000
401(k) Contribution Limit   $15,500
Annual Defined Contribution Limit   $45,000
Annual Defined Benefit Limit $180,000

Click here for  the full IRS announcment.
Posted In 401(k) Plans , Pension Plans
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Hersey pension plan announcement brings out punsters



Headline writers last week took advantage of Hershey's announcement that it would be closing its defined benefit pension plan to new hires.

Here are a few examples:

CANDY: Hershey blows pension plan a goodbye kiss: St. Louis Post Dispatch

Hersey to phase out DB plan, sweeten 401(k) plan: Business Insurance

Pension Cuts Not So Sweet: Hamilton Spectator

Hershey Kisses Off Pensions: TheDay (subscription)

Most of us, I am sure, looked beyond the puns to see yet another example of the continued erosion of  defined benefit plans with increased reliance by employees on defined contribution plans to fund their retirement.
Posted In Pension Plans
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ERISA and the law of physics



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

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

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

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

Posted In 401(k) Plans , Pension Plans
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Department of Labor Releases 5-Year Strategic Plan

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

Here are the DoL's national projects for that goal in 2006:
  • The Employee Contributions Project is aimed at ensuring the timely deposit of participant contributions to 401(k) plans and health care plans.
  • The Employee Stock-Ownership Plans (ESOP) project focuses on the unique violations arising from ESOPs, the most serious of which generally involve the incorrect valuation of employer securities.
  • The Health Fraud/Multiple Employer Welfare Arrangements (MEWAs) project, through which EBSA investigates abusive and fraudulent MEWAs created by unscrupulous promoters who sell the promise of inexpensive health insurance, but default on their obligations.
  • The Rapid ERISA Action Team (REACT) project responds in an expedited manner to protect the rights and benefits of plan participants when the plan sponsor faces severe financial hardship or bankruptcy, which may put the assets of the employee benefit plan in jeopardy.
  • The Consultant/Advisor Project (CAP) focuses on the receipt of improper, undisclosed compensation by pension consultants and other investment advisers.
Here is the link to the full DoL Strategic Plan (94 pages, PDF).


Hat tip to Workplace Prof Blog. Posted In 401(k) Plans , Pension Plans
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Defined benefit pension plans going, going, ....

Number of single employer defined benefit plans covered by the Pension Benefit Guaranty Corporation:
  • 1985: 112,208
  • 1995:   53,589
  • 2005:   28,769

Posted In Pension Plans
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Investment Returns: Defined Benefit vs. 401(k) Plans

That 's the title of a just published study by The Center for Retirement Research (CRR) at Boston College. The study compared defined benefit pension plan investment returns with 401(k) plan investment returns. Using data from 1988-2004, the study reports that:
  • Defined benefit plans outperformed 401(k) plans by one percentage point.
  • Part of the explanation may be because of higher fees in 401(k) plans.
  • Another part of explanation may be that more than half of the participants do not follow the prudent investment strategy of diversifying their holdings.
  • The available data suggests that IRAs produce even lower returns than 401(k) plans.
As someone who has been involved with both types of plans during this time period and before, I am not at all surprised at all by the results. That 401(k) plans have underperformed defined benefit plans raises serious concerns for the adequacy of retirement income. The IRA data, by the way, increases these concerns.


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

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

Hat tip to Barry Barnitz's Financial page.
Posted In 401(k) Plans , Pension Plans
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Department of Labor seeks comments on guidelines for ERISA auditor independence



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

Background

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

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

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

DoL Guidelines

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

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

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

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

(3 Maintain financial records for the employee benefit plan.

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

DoL Interpretative Bulletin 75-9 (PDF)

DoL Announcement in Federal Register (PDF)

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

 

 


Posted In 401(k) Plans , Pension Plans
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What do employees really want?



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

Then these companies better figure it out quickly because there is a whole different workforce than ever before with a war for talent going on. A new workforce that is characterized by:
  • Mobility. The average 34-year old has already worked for nine different companies in his or her brief career.
  • Distance. Approximately 10 million people work away from their corporate office at least 3 days a month.
  • Aging. There will be a growing group of retirees as the workforce shrinks.
  • Diversity. Most of the net increase in the workplace are women, minorities and immigrants.
The recent MetLife Study of Employee Benefit Trends provides some insight into what employees really care about. The MetLife Study has two interesting findings:

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

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

So maybe "what we got here is a failure to communicate." Communication that now has functionally oriented communication objectives:
  • How to communicate flexible benefit plans
  • How to communicate investment concepts for 401(k) plans
  • How to relate profit sharing plans to productivity and profitability
  • How to make employees better health care consumers and how to integrate wellness into  health care plans to impact upon costs
The challenge then is not just  find out what benefits employees want but to also make them relevant for this 21st Century workforce.


Click here for the link to Mr. Goldman's article and click here for the MetLife Survey (52 pages PDF). Posted In 401(k) Plans , Pension Plans
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It's morning again in Pensionland



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

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

The new Pension Protection Act of 2006 (PPA) now makes permanent the EGTRRA rules. One result of which is to allow participants in defined contribution plans to make larger contributions in the future. Such as:
  • 401(k) limit now $15,000 in 2006 would have been reduced to $13,500 in 2011.
  • 401(k) catch-up (age 50+) now $5,000 in 2006 would have been totally eliminated in 2011.
  • IRA limit now $4,000 in 2006 would have been reduced to $2,000 in 2011.
  • IRA catch-up (age 50+) now $1,000 in 2006 would have been totally eliminated in 2011.
  • SIMPLE IRA limit now $10,000 in 2006 would have been $8,000 in 2011.
  • SIMPLE IRA catch-up (age 50+) now $2,500 in 2006 would have been totally eliminated in 2011.
In other words, if the EGTRRA rules had been allowed to expire, the contribution limits would have reverted to pre-EGTRRA (2001) levels, adjusted for inflation.





Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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Baby boomers start to turn 60 and have new retirement plan distribution options



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

While the financial industry is getting ready to capture those retirement dollars, the new Pension Protection Act of 2006 liberalized distribution and payment options. Some of which are:
  • Direct Rollover to Roth IRA. Distributions from a qualified retirement plan generally can not be rolled over to a Roth IRA. The rollover had to be a 2-step process. First, from the qualified retirement plan to a traditional IRA and then to the Roth IRA. Beginning in 2008 a distribution from a qualified retirement plan can be rolled over directly to a Roth IRA provided the current Roth conversion rules are met.
  • IRA Distribution to Charity. Amounts distributed from IRAs are generally taxed as ordinary income with charitable contributions deductible under special rules. For 2006 and 2007, a tax free distribution of up to $100,000 per year can be made from an IRA directly to charity if three conditions are met: 1) the donor is over age 70 ½ , 2) the distribution would otherwise have been taxable, and 3) the donation cannot be used to increase the allowable deduction for charitable contributions on an individual’s tax return.
  • Hardship Rules. Hardship distributions from qualified retirement plans can only be made on account of a financial hardship of the participant. Under the new law hardship distributions from qualified retirement plans can be also be made on account of hardship of the participant’s spouse or dependent. The new law directs the Treasury Department to effectuate this change 180 days after the enactment of the law.
  • In-Service Distribution. Pension plans cannot generally make distributions unless the participant terminates employment or reaches the plan’s normal retirement age which is usually age 65. Beginning in 2007, in-service distributions can be made to a participant who attains age 62 and continues to work.
  • Rollover by Non-Spouse Beneficiary. Prior law did not permit a non-spouse beneficiary to rollover the participant’s benefit into an IRA. Beginning January 1, 2007, a non-spouse beneficiary can transfer inherited qualified retirement plan benefits into an inherited IRA and adopt tax treatment of the inherited IRA.
And many of the sunset provisions of the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) that otherwise would expired in 2010 have been made permanent. So for the foreseeable feature, there should be no uncertainty about the distribution rules. More about the provisions that are here to stay at a later date.
Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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IRS rolls up red carpet on celebs receiving Oscar goody bags

 

The Internal Revenue Service announced an agreement yesterday with the Academy of Motion Picture Arts & Sciences resolving outstanding tax responsibilities with respect to Academy Awards gift baskets.

The agreement marks the beginning of an IRS effort to reach out to the entertainment industry with reminders that award show gifts and promotional giveaways are considered taxable income. The practice of thanking presenter and performers has escalated to the point that the gift basket for the 2006 Oscar awards has been estimated at $100,000.

Now you may ask what does this have to do with retirement plans? Actually, nothing. But it is a good example of the Two Part Theory of Political Economics ascribed to Nobel winning economist Milton Friedman. Part one of which is “Them what has gets”.

The Tax Prof Blog has a post that links to releases issued by both the IRS and the Academy and press coverage.

The Second Part of the Theory? “Ain’t no free lunch”. Posted In Pension Plans
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Gambling on retirement, part deux



In an earlier post, Gambling On Retirement, I cited a survey done for The Tax Foundation that indicated that 21% of the respondents believe the lottery is a practical way to save for retirement.

The Tax Foundation went on to assert that contrary to many people’s beliefs—and to state governments’ claims—the money that states raise from lotteries is tax revenue; and that lotteries exemplify poor tax policy as a regressive tax. That is, it takes a greater percentage of income from the poor than from the wealthy. Here's more evidence says The Tax Foundation on the regressive nature of the lottery.


Posted In Pension Plans
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The State of Taxes, New York that is

In what could be called a New York state of mind, Congress passed into law H.R. 4019, signed by the President on August 3,  which amends a 1996 federal law that bars the states from taxing certain retirement income received by non-residents. Retirement income was defined to include income from both qualified retirement plans and non-qualified deferred compensation plans.

Not exactly, said New York which took the position that the law did not prevent the state from taxing non-qualified retirement benefits paid by a partnership to its retired non-resident partners. The law, New York said, only applied to employees and not partners.

Not now. The new law is retroactive for amounts received after December 31, 1995. Amended tax returns may be in order.



Posted In Pension Plans
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Congress passes pension reform legislation



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

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

The Act includes the following provisions:

Defined Contribution Plans
  • Encourages automatic enrollment in 401(k) plans
  • Permits employees to diversify their company stock accounts among other investments
  • Removes the scheduled expiration of increased contribution limits, Roth contributions, and the saver’s credit
  • Requires faster vesting of employer profit sharing contributions
  • Allows non-spouse beneficiaries to rollover their distributions to IRAs
  • Adds new requirements for notice to participants
  • Changes the rules for 401(k) providers to provide investment advice to participants
  • Resolves major controversies surrounding cash balance plans on a prospective basis
Defined Benefit Pension Plans
  • Requires faster funding of pension obligations
  • Allows larger tax deductions based on funded status of the plan
  • Changes the method of calculating the lump sum equivalent of annuity benefits
  • Requires additional survivor option
  • Changes the basis of calculating PBGC premiums
  • Allows participants age 62 and older to take in-service distributions
  • Permits certain small employers to have defined benefit pension plans with 401(k) provisions
I will be providing more detailed analysis and comments on the Act’s provisions in the future.

Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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One retirement program that isn't getting sacked

While Congress grapples with legislation to prolong defined benefit pension plans including those in ailing industries, there is at least one industry whose retirement program is quite healthy.

That industry, or game depending on your point of view, is professional football. Yesterday the National Football League (NFL) and the NFL Players Association announced that they had reached agreement on increases in benefits for retired and current players. These  increases will cost approximately $120 million per year, bringing the annual cost of NFL player benefits to $700 million per year. Retired players now receive nearly $60 million per year in retirement benefits.

So I got to thinking which group of professional athletes has the best retirement plan. Is it the NFL, the National Hockey League (NHL), the National Basketball Association (NFL) or Major League Baseball (MLB). The answer is none of the above. 

According to Business Week Online, PGA Tour Members have the most lucrative retirement plan of all professional athletes. Nick Price is quoted in the article saying that golfers now in their mid-20s who have a career like his could have $30-$40 million in their pensions. Someone like Shaquille O'Neal, on the other hand, could have $55,000 a year in pension benefits if he plays 15 years.

The difference is in how the respective retirement plans are funded. The retirement plans for players in the NFL, NHL, NBA, and MLB are all funded through television revenues. The PGA retirement program works like a deferred compensation plan.

For more on the NFL retirement program click here , and for more on the PGA Tour Members retirement program click here which will require you to navigate through advertising.
Posted In Pension Plans
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Sweet Home Chicago: "Big Box" wage and benefit bill passes

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

Time to move on. Posted In 401(k) Plans , Pension Plans
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Sweet Home Chicago, Part 2

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

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

Click here to read the press release issued by the Brennan Center for Justice that provides an overview of the two studies.
Posted In 401(k) Plans , Pension Plans
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Sweet Home Chicago?

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

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

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

Roger, that!

Posted In 401(k) Plans , Pension Plans
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They call it "Pension Reform"

Susan Mangiero in her Pension Risk Matters blog writes about a recently introduced bill in California that would  prohibit a company from paying out dividends or buying back shares until all required defined benefit plan payments have been made. The proposed bill - and the politics behind it - conveniently ignores the massive unfunded pension liabilities in California, e.g, the California State Teachers' Retirement System faces a $24 billion unfunded pension liability.

But we got them beat in my home state of Illinois which at $35 billion has the largest unfunded pension obligation in the country. The Fitch Rating service released a “negative outlook” for Illinois finances – one of only three negative outlooks issued by the rating service in its review of the states. The other two? Louisiana dealing with the aftermath of Hurricanes Katrina and Rita and Michigan dealing with massive problems in the automobile industry.

Um! Should there should be a law that no more salary increases for state legislators until pension liabilities are met?


Posted In Pension Plans
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It's Official: 401(k) Rules

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

Posted In 401(k) Plans , Pension Plans
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Defined Benefit Plans, Where art thou?

It seem like every day we learn about another company that is freezing or terminating its defined benefit pension plan. And it’s not just the troubled automakers, airlines and steelmakers. It’s also healthy companies such as Verizon and IBM who have also moved to reduce or eliminate their pension plans as they shift more of the responsibility to employees through 401(k) plans.

Indeed, the number of active, private-sector workers covered by defined benefit plans has been on the decline for several years. The number of PBGC-insured plans peaked at more than 114,000 in 1985, declining to 31,238 in 2004, according to the Employee Benefit Research Institute.

But defined benefit pension plans are on the rise for a certain segment of the business community - small businesses. Defined benefit pension plan appeal to those business owners who have not saved enough for retirement or want larger tax deductions than those available through a profit sharing plan.

Recent tax law changes have encouraged the adoption of defined benefit pension plans by small businesses:
  • In 2006 the limit for an annual benefit increases to as much as $170,000.
  • A pre-retirement benefit funded through life insurance may be part of the plan design (not new, but rediscovered).
  • The deductible contribution can far exceed that for a profit sharing contribution.
  • The business owner may be able to contribute up to $15,000 to a 401(k) plan plus $5,000 catch-up if age 50 or older in addition to the pension plan contribution.
Who should adopt a defined benefit pension plan? No pat answer since it depends on the facts and circumstances of each employer. In future posts I'll be addressing a more appropriate question, "What type of retirement plan is right for you?" Posted In Pension Plans
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Gambling On Retirement

Two views on the impact of gambling on saving for retirement:

It's a problem.

The Tax Foundation's on-line publication, FISCAL FACTS, reported in January on a survey wihch showed that the lottery diverted income from retirement savings. The survey conducted by the Opinion Research Corporation for the Consumer Federation of America and the Financial Planning Association indicated that 21% of the respondents believe the lottery is a practical way to save for retirement. The Tax Foundation went on to assert that contrary to many people’s beliefs—and to state governments’ claims—the money that states raise from lotteries is tax revenue; and that lotteries exemplify poor tax policy.

It's Not A Problem.

Just recently Harrah's 2006 Survey:Profile of the American Casino Gambler reported that casino gamblers compared to non-gamblers are:

  • more likely to have increased their savings and decreased their debt over the past year;
  • more likely to be looking forward to their retirement years; and
  • more frequently putting aside money regularly for their retirement.

Who's right?



Posted In Pension Plans
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Will we call it TIPRA?

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

More importantly, there are two benefit provisions as part of TIPRA (or whatever). One involves changes to the income limitations on Roth IRAs, and the  the other imposes an excise tax on retirement plans that are parties to prohibited tax shelter transactions. More about both after reading the fine print. Posted In 401(k) Plans , Pension Plans
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Directors Fees and Deferred Compensation Plans

Fred Whittlesey in his Compensation Blog writes about 50 ways to pay your board. And the recipient of that compensation may be able to defer some or all of that compensation. While many companies have nonqualified deferred compensation arrangements under which independent directors can defer all or a portion of the fees otherwise payable to them for their services, many do not. In these situations, an independent director may be able to establish his or her own qualified retirement plan. The basis for contribution to such a qualified retirement plan is “earned income”, i.e., compensation derived from personal services. The plan type? Defined benefit or defined contribution depending upon one’s individual situation. Posted In Pension Plans
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