Retirement Plan Blog

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

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

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

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

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

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

The DOL safe harbor says that

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , EGTRRA Restatement Series , Pension Plans
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It's the age-old story: worker classification, or rather misclassification. I wrote about it this past February, Independent Contractor or Employee? Employee Classification Still A High Priority Enforcement Matter.That was about the IRS auditing employers to determine whether those "independent contractors" were actually employees with required tax withholdings and possible inclusion in benefit plans.

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Pension Plans , Posts on SLATE
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If you provide retirement plan services, here's a "must read" blog post by our fellow blogger, Bob Toth, Of Counsel to Giller and Calhoun. Bob writes about The SEC's and DOL's Cross Agency Retirement Plan "Compliance Waltz". Bob's post also includes a link to his article of the same name that appears in the May-June 2009 Issue of the Practical Compliance & Risk Management For the Securities Industry.

Posted In 401(k) Plans , 403(b) Plans , Pension Plans
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Every once in a while I’ll start to wander off into “Pensionspeak” when I’m talking to a client. And when I do, I’ll catch myself by remembering what one of our important business partners once told me when I started to get too technical. Or even technical at all depending on the audience. He told me that when someone asks you what time it is, don’t tell them how to make a watch. 

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

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

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

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

Posted In 401(k) Plans , 403(b) Plans , Annuities , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006 , Public Employee Plans , Visual Aids
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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 , 403(b) Crunch Time Series , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006 , Public Employee Plans
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The new 403(b) compliance picture seems to be getting clearer. Much needed light was provided on the new regulations at the February 6, 2009 Tax-Exempt and Government Entities Joint Council Meeting in Baltimore attended by senior IRS officials and tax practitioners.  

Attorney Bob Toth, of counsel at Giller and Calhoun was at that meeting. Bob, you may recall, was a guest contributor to our series of blog posts, the 403(b) Crunch Time Series, to help 403(b) plan sponsors get ready for the January 1, 2009 effective date for the IRS final 403(b) regulations.

We had intended to have the series run until year-end, but only got to #6 before the IRS issued IRS Notice 2009-3 (see Plop plop, fizz fizz, oh what a 403(b) relief it is: IRS Notice 2009-3) that extended the plan document requirement to December 31, 2009.

So now two months into the year, just exactly where are we regarding compliance with the new regulations. Here are some highlights of what the IRS had to say about compliance issues.
Plan sponsors were urged to use the extension of time to have the plan document in place by year-end constructively.

• Plan sponsors should adhere to the principles of universal availability and non-discrimination, and to retroactively correct and operational mistakes prior to December 31, 2009.
• While the voluntary correction program under Revenue Procedure, 2008-50 does not include specific correction procedures for 403(b) plan documents, a future release will include such procedures. In the meantime, Section 6 should be reviewed for the general principles of restoring appropriate benefits to participants who did not receive them during the year. 
• A revenue procedure is being drafted to create a determination letter program and prototype program for pre-approved Section 403(b) plans.

The tax practitioners had observations about some unresolved issues and how to resolve them. Bob Toth who was at this meeting commented that

• More guidance is required from the Department of Labor to determine when a 403(b) plan is covered by Title I of ERISA which generally governs disclosure, reporting, and fiduciary aspects of retirement plans.
• Employers should be very careful of adopting 401(k) language for a 403(b) plan since the operating rules are different and could inadvertently cause the plan to be covered under ERISA.

The compliance picture isn’t exactly hi-def yet, but then we don’t need rabbit ears either.

Posted In 403(b) Plans
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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 , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans , Publications , Social Security
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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 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans , Visual Aids
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Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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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 , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Pension Plans , Public Employee Plans , Publications
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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 , 403(b) Plans , Cash Balance Plans , Pension Plans
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Last month, my blogging buddy, attorney Bob Toth, and I started the 403(b) Crunch Time Series to help 403(b) plan sponsors get ready for the January 1, 2009 effective date for the IRS final 403(b) regulations. We had intended to have the series run until year end, but only got to #6 before the IRS last Friday issued IRS Notice 2009-3 (see Plop plop, fizz fizz, oh what a 403(b) relief it is: IRS Notice 2009-3).

The clock starts ticking again, but 403(b) plan sponsors aren’t home free. While the plan document requirement has been extended to December 31, 2009, plan sponsors must be mindful that

1. The 403(b) plan sponsor must have a written plan document retroactive to January 1, 2009;
2. During 2009, the plan sponsor mus operate the plan in accordance with a reasonable interpretation of Section 403(b), taking into account the final regulations; and
3. Before the end of 2009, the plan sponsor must make its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written Section 403(b) plan, with such correction to be based on the general principles of correction set forth in the IRS' Employee Plans Compliance Resolution System (EPCRS).

Here’s Bob’s take on what “relief” really means.

The relief is very welcome, but advisors and employers need to know what it REALLY means. It DOES NOT mean there is a delay in the compliance rules, it merely delays the requirement that a plan document be signed by January 1. When you think about it, the plan document was the most manageable of the new 403(b) risks that the employers were facing. This does not delay the requirement that the employer monitor contribution limits, loans and distributions. It only means that the plan document outlining all of this doesn’t have to be in place until the end of next year. It buys time to do that in a sane way.

Probably the biggest relief is the ability to use a “reasonable interpretation of 403(b) taking into account of the regulations.” I read this as meaning that you have the ability to figure out a reasonable answer to the tough technical questions for which we have few answers, based upon the statute itself-using the regs as a guideline. This will help immensely when trying to figure out what contracts will be “grandfathered” and in determining what a distribution will be when terminating a plan.

All in all, a very helpful act by the IRS which helps provide a way through some of the ambiguity created by the regs and various other pronouncements by the IRS.

 But what happens if 403(b) plan sponsors don’t meet the requirements of the regulations. Then there’s the above-mentioned IRS' Employee Plans Compliance Resolution System (EPCRS) which allows plan sponsors to correct certain errors in employee retirement plans, in some cases without having to notify the IRS. The advantage to correcting retirement plans in this way is, or course, to allows participants to continue receiving tax-favored retirement benefits and protects the retirement benefits of employees and retirees.

There are three levels of correction programs in EPCRS:

1. The Self-Correction Program (SCP) permits a plan sponsor to correct insignificant operational failures in plans such as qualified plans, 403(b) plans, SEPs or SIMPLE IRA plans without having to notify the IRS and without paying any fee or sanction. In many instances, a plan sponsor may correct significant operational failures without notifying the IRS and without paying a fee or sanction.
2. The Voluntary Correction Program (VCP) allows a plan sponsor, at any time before an audit, to pay a limited fee and receive the IRS’s approval for a correction of a qualified plan, a 403(b) plan, SEP or SIMPLE IRA plan.
3. The Audit Closing Agreement Program (Audit CAP) allows a sponsor to correct a failure or an error that has been identified on audit and pay a sanction based on the nature, extent and severity of the failure being corrected.

EPCRS was recently updated and expanded in Revenue Procedure 2008-50. The IRS continues to make it easier to use so that more plan sponsors will make submissions under EPCRS instead of waiting for an IRS audit to discover plan failures. and with no disrespect intended, 403(b) plan sponsors will get to know EPCRS better.

Here's a link to the entire 179 page PDF version of Revenue Procedure 2008-50.

Posted In 403(b) Crunch Time Series , 403(b) Plans
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The Internal Revenue Service provided relief to 403(b) plan sponsors today in the form of  Notice 2009-3. The Notice states that the IRS will not treat a 403(b) plan as failing to satisfy the requirements of Section 403(b) and the final regulations during the 2009 calendar year, provided that:

1. On or before December 31, 2009, the plan sponsor has adopted a written  403(b) plan that is intended to satisfy the requirements of  403(b) (including the final regulations) effective as of January 1, 2009;
2. During 2009, the plan sponsor operates the plan in accordance with a reasonable interpretation of Section 403(b), taking into account the final regulations; and
3. Before the end of 2009, the plan sponsor makes its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written Section 403(b) plan, with such correction to be based on the general principles of correction set forth in the IRS' Employee Plans Compliance Resolution System (EPCRS).

Sounds all good, right? Not necessarily. Here's what my blogging buddy, attorney Bob Toth, who has extensive 403(b) experience has to say about it:

Here's What It Does Do

It looks like it gives us leeway until the end of next year in dealing with some of the more difficult areas of the regs and of Revenue Procedure 2007-71. It may well mean that a plan termination can be effective if it distributes custodial accounts (because that what a reasonable interpretation of 403(b) would allow);

It allows us to adopt a reasonable interpretation of what is a grandfathered contract and what is not, helping us finally to apply some measure of reasonableness to Rev. Proc. 2007-71. We can more easily figure out what contracts plans will be responsible for and what they won't;

And, on the "dark side", reminds us that this relief is conditioned on operational failures occurring in 2009 being fixed using EPCRS principles by the end of 2009-which can be burdensome.

Here's What it Doesn't Do

The Form 5500 rules, complete with auditing requirements do not go away. How will the auditor now test for compliance with the plan document?

The employer STILL has responsibility for making sure that that the compliance rules are complied with. So, all those employers who consolidated because of their responsibilities, made good choices. It was not the plan document requirement which drove their efforts: it was, and still is, the new employer obligations.

I believe the bottom line is that this is helpful, as it relieves employers from the risk of disqualification because of the lack of a plan document. But the plan document risk was really the most manageable risk brought on by these new rules. The most significant risk did not go away-the requirement that the employer be responsible for compliance. It is unlikely that the IRS will view as reasonable (in most instances) a reliance on employee representations for compliance. 

Here's a link to IRS Notice 2009-3.

Posted In 403(b) Plans
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This is the sixth in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Monday, Bob Toth , our guest blogger, discussed 403(b) Service Agreements: “Harmonizing” the 403(b) Plan.

Now it’s my turn, and today’s post is about the Timing of Depositing Employee Contributions.

So let’s start with the rules before the final regulations. Hard to imagine in today’s environment, but the employer actually had until the end of the year as permitted by an old 1967 IRS Ruling,  Revenue Ruling 67-69. So to take the extreme example, if the employee had his or her salary reduced in January, the employer did not have to forward the contribution to the 403(b) provider until December.

Now for the first time, non-ERISA 403(b) plans will have to transfer employee money to the 403(b) plan within a strict time frame. In essence, the ERISA timing rules are effectively extended to cover all 403(b) plans. The final regulations require that plan sponsors transmit all contributions to 403(b) plans to the vendor as soon as is administratively feasible. The IRS considers that to be within 15 business days following end of month in which contributions are withheld from pay.

For plans subject to ERISA, there will not be any changes. The Department of Labor which oversees this matter requires that for “large plans” (those with 100 or more participants) employee contributions must be transmitted to the investment provider by the earlier of

• 15 business days following the month in which the amount was withheld from the employee's pay, or
• The earliest date on which it is administratively feasible to remit the contributions.

But what about “small plans” (those with less than 100 participants. On February 28, 2008, the Department of Labor (DOL) announced that employee contributions to a "small" retirement plan (one with less that 100 participants) will be deemed to be made in compliance with the law if those amounts are deposited with the plan within 7 business days of receipt or withholding.

The DOL said in its announcement that the department would not accuse a plan sponsor of an ERISA violation while the proposal is being finalized if 401(k) contributions are deposited within the 7-day time limit. Sounds reasonable doesn't it? Well, maybe not according to Bob Toth and his Partner Nick Curabba and in their blog post, A Potentially Dangerous 'Safe Harbor'. They caution that:

As with any safe harbor, of course, the seven-day safe harbor could easily become the expected standard practice. We might even expect future investigations by the Department to focus on whether contributions were forwarded within seven days, rather than attempt to determine when assets were reasonably segregable. In other words, everything outside of the safe harbor could become dangerous waters for plan sponsors.

And what happens if these time frames are not met? That’s a topic for another time.

That’s it for now. The afore-mentioned Bob Toth will be back next  Friday to discuss Church 403(b)(9) Retirement Income Accounts.

Posted In 403(b) Crunch Time Series , 403(b) Plans
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This is the fourth in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Monday, Bob Toth , our guest blogger, wrote about Terminating Tax Deferred Annuity Plans.

Now it’s my turn, and today’s post is about the Change in 403(b) Universal Availability.

The rules have changed for those employers who have excluded certain classes of employees from making elective deferrals to their 403(b) plans. Those employers now must check their plans before January 1, 2009 to make sure they are excluding properly.

Technically, the regs changed the Universal Availability rules. These are the rules that an employer must follow to determine which employees can and cannot be excluded from making elective deferrals to a 403(b) plan. Note that employer contributions are still subject to the discrimination rules under Section 401(m) and 401(a)4 of the Internal Revenue Code.

The current IRS interpretation of the Universal Availability rules go all the way back to Notice 89-23, issued by the IRS in 1989. That Notice permitted the following classes of employees to be excluded:

• Nonresident aliens with no US source income
• Employees eligible to defer to a 401(k) or 457(b) plan of the same employer
• Employees who will not make at least a $200 deferral per year
• Employees who are expected to work less than 20 hours per week
• Students performing services under a work-study program,
• Employees whose normal work week is less than 20 hours
• Employees covered by a collective bargaining agreement
• Visiting professors
• Individuals who make a one-time election to participate in a governmental plan
• Certain employees affiliated with a religious order who take a vow of poverty

The final regulations revoked several of the previous exclusions that were provided in Notice 89-23. The following four groups can no longer be excluded from making salary deferrals:

• Employees covered by a collective bargaining agreement.
• Visiting professors
• Individuals who make a one-time election to participate in a governmental plan
• Certain employees affiliated with a religious order who take a vow of poverty.

The final regulations also require that all eligible employees be given an “effective opportunity” to participate in the plan. This means that on an annual basis, employers should not only review their new employees to determine compliance with the Universal Availability rules, but are also required to provide to their employees another “effective opportunity” to participate notice.

It’s a little more complicated than that in practice so here are a few suggestions to help meet the new compliance requirements:

1. Make sure the plan document has the new exclusion rules.
2. Identify all employees eligible to participate.
3. Provide employees with a written notice when they are hired and at least once a year about their eligibility to participate.
4. Conduct employee educational sessions that review the plan provisions and available investment options.

That’s it for now. Bob will be back on Monday with 403(b) Service Agreements: “Harmonizing” the 403(b) Plan. Have a happy and safe Thanksgiving holiday,

Posted In 403(b) Crunch Time Series , 403(b) Plans
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This is the third post in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. I’ve been joined by Bob Toth as a guest blogger. Bob, a Partner in the Baker & Daniels law firm, has over 25 years experience advising 403(b) plans and service providers.

On Friday, I discussed Complying With The 403(b) Contribution Limit. Now it’s Bob’s turn, and here’s his post on Trouble Terminating Tax Deferred Annuity Plans.

Okay, okay, so I thought I would lighten the load some by trying a bit of alliteration with the "traditional" term for 403(b) contracts: the Tax Deferred Annuity (the "TDA"). Whether or not the alliteration works is one thing, but its pretty clear that many terminations may not work well.

The new regulations are causing advisors and employers alike to take pause and to assess whether or not its worthwhile to continue with their current 403(b) arrangements. Many are seriously considering terminating the 403(b) plan and replacing them (where possible) with a 401(k) plan.

Pretty straightforward, you would think, eh? After all, the regs allow for the termination of 403(b) plans, terminations which then become distributable events. The whole deal seems simple enough. The problem, however (as always seems to be the case with 403(b) plans), is in the details.

The rules require that all of the assets of the plan be distributed upon termination in order for the termination to be effective. IRS spokesmen have said that this distribution must occur within a 12 month period following the action terminating the plan. To facilitate this, the regs actually recognize that a terminating distribution can be in the form of a fully paid annuity contract. Sounds simple enough? Just terminate the plan, notify the insurance carrier to either distribute a fully paid annuity contract or to take the employer's name off of its files, and life is good.

Well , the IRS has complicated matters by taking the position that custodial accounts-in spite of statutory language apparently to the contrary- will not be honored as annuity contracts for termination distribution purposes.

Making matters even worse, Bob Architect, the IRS’ Senior Tax Law Specialist and the resident expert on 403(b) plans, has recently stated that even a conversion of group annuity contracts to individual contracts may not even be recognized upon termination as being valid. As Bob Stevenson, a Partner in the Stevenson Keppleman Associates ERISA law firm in Ann Arbor, MI said in a letter to his clients, "it may be that Mr. Architect spoke out of confusion."

All of this confusion has a real, practical effect: If a 403(b) plan has custodial accounts (or the type of annuity contracts to which Mr. Architect refers) within them, and the employer has no right to distribute the assets upon termination, AND some employees refuse to take a distribution of the cash from the contract, then the plan has never been terminated.

If the plan has not been terminated, then there has been no distributable event. If there has been no distributable event, any rollover to an IRA or another plan for those who HAVE taken a distribution will fail. Those attempted rollovers will become taxable because no distributable event has occurred. This sounds pretty draconian, but this is what happens.

So step carefully if you are attempting to terminate a 403(b) plan and distribute the assets. Check with the vendors to see if their contracts allow terminating distribution, and how it will be done. Without that kind of groundwork, you could be making a very expensive mistake for plan participants.

Thanks, Bob. Look for #4 in our 403(b) Crunch Time Series on Wednesday when I’ll be talking about The Change in 403(b) Universal Availability.
 

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This is the second post in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Tuesday, Bob Toth , our guest blogger, wrote about Avoiding Problems with Custodial Accounts.

Now it’s my turn, and today’s post is about complying with the 403(b) contribution limits. So let’s start with some background. One of the concerns that the IRS had in their audits over the last several years was cases in which the contribution limits were exceeded and corrections not being done.

Those contribution limits are governed by Section 402(g) of the Internal Revenue Code and are adjusted annually. For 2009:

• Elective deferrals are limited to the lesser of $16,500, or 100% of the participant’s includible compensation.
• Designated Roth contributions count toward the $16,500 402(g) limit.
• A catch-up contribution of $5,500 is available for participants age 50 and older.

In addition, there is a special life-time catch-up of $3,000 per year, not to exceed $15,000 for an employee of a qualified organization. If a plan participant is eligible for both types of catch-up contribution, then the special catch-up contribution limit is applied first to their accounts.

Sounds simple, doesn’t it, but it won’t be. The new regulations take the approach that the employer is generally responsible for compliance with the 402(g) limits and the correction of any excess that occur. This will be a big departure from the current 403(b) environment in which there is an individual relationship between the employee and the 403(b) investment provider.

Here’s two examples of potential problems for employers.

Monitoring Special Catch-Up Contributions. Pre-regulations, the employer could rely on the employee’s representations regarding his or her eligibility for and the amount of special catch-up contributions. It’s a complicated calculation based on the availability of extensive employee historical data. Many employers, I would think, would avoid this responsibility by not permitting the special catch-up.

Returning Excess Contributions. For those 403(b) plans in which there are individual contracts, the employer has no ability to direct the return of excess contributions. So what if the employee who must have contributions returns, simply doesn’t comply. That is, not notify the investment provider to return the excess funds. The answer, it would seem to me, would be for the employer to inform the provider who would then do the appropriate tax reporting to the IRS.

There are serious issues since the penalty for failure to comply with the contribution limits can be harsh – adverse tax consequences for both the employer and the employee.

The practical solution for those employers who decide not assume responsibility for this plan compliance is to do what 401(k) plan sponsors do - delegate the responsibility to a third party adviser or to the investment provider.

Coming Attractions: Bob will be back on Monday with with #3 in the 403(b) Crunch Time Series, Trouble in Terminating Tax Deferred Annuities.
 

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Yesterday, I introduced our forthcoming 403(b) Crunch Time Series. It will be geared towards helping 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations.

During this series, I’ll be joined by Bob Toth as a guest blogger. Bob, a Partner in the Baker & Daniels law firm, has over 25 years experience advising 403(b) plans and service providers.

And since it all starts with the new plan document requirement, here’s Bob with his guest post, Avoiding Problems With 403(b) Custodial Accounts.

The 403(b) Custodial Agreement. You know, that piece of paper you use in a 403(b) implementation that no one ever reads or understands, and is just signed because the Tax Code requires it? Heck, they’ve been used for years by the 403(b) vendors, so they’ve got to be pretty standard by now. How can they cause my 403(b) plan ANY problems at all?

Well, they generally still won’t cause you any problems in plans funded individual 403(b) custodial accounts. The problems are arising when folks are trying to set up 403(b) plans on a “401(k)-like” investment platform using a “group” or “master” custodial arrangement. Here, the “forms” are anything but settled.

There are two common errors:

Using a 401(k) Trust Document. The first common error occurs when you try to take a standard 401(k) trust document, change the word “trust” to “custodian,” place some gratuitous 403(b) language in the document, and think you are done.

This is almost right. But you need to make sure that the rules under 403(b)1(B)-(E) are also included in the document and, if the custodial account is also going to hold an annuity contract, have language which defers to that group contract (including the fact that the custodian won’t control the assets in the contract).

It is probably best for the custodial account NOT to hold annuity contracts; though its OK for the employer to hold that group annuity contract outside of the custodial agreement. By the way, collective trusts (often referred to in these 401(k) trusts) can’t serve as the “cash” holding account for the plan unless its “registered” as a “registered investment company.”

Using an Individual Custodial Document as a Group Document. The second common error is the “jury-rigged” use of the individual custodial account form with some modifications to try to make it serve as a group contract. This actually can cause you serious problems. Those custodial contracts DO have the necessary language that you wont find in the 401(k) trust. The problem is that they have too much language.

The individual custodial document was designed to serve the purpose of a plan document/service agreement, so they often have much language you would never otherwise find in a group trust document. There will often be language related to loans, hardships, distributions and the like, so that they almost look like a “quasi” plan document. And that is what causes the problem.

Plans using a group custodial document almost invariably also have a separate plan document-usually from a different vendor than who wrote that custodial document. So you have dramatically increased the probability of inconsistent terms, which can disqualify the document. You no more want your custodian having to monitor plan compliance than you would want your 401(k) trustee having that monitoring duty.

Thanks, Bob. Look for #2 in our 403(b) Crunch Time Series on Thursday when I’ll be talking about Complying With Contribution Limits For 403(b) Plans. 

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Much has been said and written about the new 403(b) regulations effective January 1, 2009, but most 403(b) plans haven’t even started to get ready for compliance. And so it’s crunch time for 403(b) plans.

Crunch time is nothing new for 401(k) plans who have been dealing with compliance deadlines since the passage of the Employee Retirement Income Security Act of 1974 (ERISA). But it’s a first time challenge for 403(b) plans. The IRS has constructed this challenge by providing comprehensive guidance for 403(b) plans for the first time in over 40 years. 403(b) plans will now have to deal with such issues as:

• Requirement for a plan document
• Rigorous application of the non-discrimination rules
• Employer responsibility for complying with contribution limits
• Timing of contributions. 
• Transfers to other 403(b) contracts 
• Employer responsibility for coordinating and tracking loans
• Plan termination

So between now and year-end, I’m going to be posting a series of articles on how to get ready for the January 1, 2009 deadline. We’re calling them the 403(b) Crunch Time Series. I’ll be joined by Bob Toth as a guest blogger. Bob, a Partner in the Baker & Daniels law firm, has over 25 years experience advising 403(b) plans and service providers.

And since it all starts with a new plan document, Bob will kick off the series tomorrow with his guest post, Avoiding Problems with 403(b) Custodial Accounts.

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Based on informal discussions with 403(b) providers.

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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If you’re one of the many 403(b) plan sponsors just getting started in dealing with the impact of the new 403(b) regulations on administration and compliance requirements, this post may provide you some guidance in focusing on the issues that need to be addressed by the rapidly approaching January 1, 2009 effective date. These are some of the major issues you will need to address:

• Requirement for a Plan Document. Both Non-ERISA and ERISA 403(b) plan sponsors must have a signed document in place by January 1, 2009.
• Non-Discrimination Rules. This requirement applies to both Non-ERISA and ERISA 403(b) plans.
• Contribution Limits. Plan sponsors will be responsible for the compliance of 403(b) contributions with the Internal Revenue Code including the correction of excess amount contributed.
• Timing of Contributions. Plan sponsors must deposit contributions to plan providers within a “reasonable period” of time.
• Transfers to Other 403(b) Contracts. New rules affect participants’ moving their assets to other 403(b) annuities or 403(b) custodial accounts.
• Plan Termination. The new rules permit 403(b) plan sponsors to terminate their plan and distribute the assets under specified conditions.

The IRS has constructed this "road" by providing comprehensive guidance for 403(b) plans for the first time in over 40 years. It doesn't have to be a Toll Road.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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The bailout bill working its way through Congress now has something for everyone - including retirement plans. The legislation is being called TARP, ("Troubled Asset Relief Program"), and it's an acronym that some retirement plans will get to know better. In addition to bailing out financial institutions, TARP also permits the Treasury to protect "the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan." Presumably that means both defined benefit and defined contribution plans. If passed, there will obviously be direct involvement by the Labor Department regarding the ERISA aspects, e.g., fiduciary and disclosure obligations.

Stay tuned for the details.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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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 , 403(b) Plans , Cash Balance Plans , Pension Plans
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That's the Stock Broker, one of the many characters voiced by Wally Wingert on Family Guy, the animated television sitcom created by Seth MacFarlane and airing on Fox.

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

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

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

The impeding 403(b) changes to which Bob alludes means that if it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b) - Part 1 and Part 2.

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

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

This ain't Quahog, Rhode Island.

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

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

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

What must a plan sponsor do to fulfill its responsibility?

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

What if the fiduciary has not assigned responsibility?

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

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

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

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

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

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

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





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

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

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

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

Mr. Rubin is an optimist. He says

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

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

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

Youth isn't wasted on the young.

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







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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

All of this is, of course, in marked contrast to ERISA’s requirement that fiduciaries are responsible for monitoring service providers. It takes me back to those thrilling days of yesteryear, pre-ERISA, during which most pension plans were individual policy plans purchased from life insurance companies. The remnant of which today are 403(b) plans. But that’s changing fast. (Here is a link to several 403(b) posts on Baker & Daniels BEC team's new and excellent Benefits Biz Blog and to two of my own from last year, If it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b), Part I and Part II).

Source: March 31, 2008 article in Pension & Investments by Thao Hua, "More U.K. companies turn to contract plans. But alternative to trust-based DC plan may not be safeguard."

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

The median’s household’s wealth declines more slowly than its remaining life expectancy, so that real annualized wealth actually tends to rise with age over retirement (emphasis mine).

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

Ain't government economics grand?

Here is the link to the story in the Journal.
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Add one more trend to Boomer demographics. Recent research has revealed that Boomers continue to push the limits regarding the prevalence of divorce. While just 33% of married adults from the two preceding generations has experienced a divorce, almost half (46%) of all married Boomers have already been divorced. They will be almost certain to become the first generation for which a majority has been divorced.

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

• Find out who has what. figuring out what retirement assets an individual owns should be easy, but finding the spouse's might require some digging.
• Get documents in order.
• Consider tax ramifications.
• Protect survivor's benefits.
• Change beneficiaries.
• Monitor any distributions.

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

The ERISA part can be found in my post, Dividing retirement benefits on divorce, and what ERISA has to say about it.
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One of those wonderful tax benefits that a qualified retirement plan and IRA provide is the tax deferral of contributions and earnings. But nothing lasts forever including the payment of benefits (and the taxes thereon).  So the tax laws require RBDs and RMDs. That’s tax talk for  “required beginning date” and “required minimum distribution” respectively.

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

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

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



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It starts tonight, the 2008 NCAA Men’s basketball tournament (the play-in game between Mt. St. Mary's and Coppin St. with the winner having the dubious honor of playing North Carolina on Friday). And a lot of money is going to be lost. No, not just by most of the bettors, but by employers whose employees will be focusing more on the games than on work.

However, according to a recent survey by the Lincoln Retirement Institute, a research arm of Lincoln Financial Group, employees will be spending more time thinking and planning for retirement than focusing on the tournament. Their survey indicated that 72% of those surveyed will spend less than one hour in making their picks while 87% said that they will spend up to 5 hours in March thinking about and planning for retirement.

But if I were a betting man, I'd put my money on Jim Challenger's view. Mr. Challenger, CEO of outplacement firm Challenger Gray & Christmas, Inc., estimates that the NCAA basketball tournament could cost employers $1.7 billion in wasted work time over the 16 days business days of the tournament. His estimate is based on 37.3 million workers in office pools and 1.5 million watching games online at their desks.

More time spent, I would guess, than checking 401(k) balances online.

 

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

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

• Whether to continue to work
• When to apply for Social Security benefits
• What to do, if anything, about housing
• What choices to make about insurance and health care
• How financial assets should be invested
• What distribution options to take from employer retirement plans and IRAs

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


Picture credit: Water Secrets Blog.


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

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

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

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


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





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

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

• Agreements that purport to relieve the financial institutions serving as plan trustees of any responsibility to monitor and collect delinquent contributions.
  
• Circumstances where no other trust agreement or plan document assigns those obligations to another trustee or imposes the obligations on a named fiduciary with the authority to direct a trustee.
  
• Plan documents and trust agreements silent or ambiguous on the matter.
  

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

The responsibility for collecting contributions is a trustee responsibility. If a plan has two or more trustees, the duty may be allocated to a single trustee. A plan may also provide that a named fiduciary may direct a trustee as to this responsibility or may appoint an investment manager to take on this duty. To the extent the nature and scope of the trustee’s responsibilities are specifically limited in the plan documents or trust agreement, it is generally the responsibility of the named fiduciary with the authority to hire and monitor trustees to assure that all trustee responsibilities with respect to the management and control of the plan’s assets (including collecting delinquent contributions) have been properly assigned to a trustee or investment manager.

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

• For Banks serving in the trustee role (directed or discretionary), are they not now responsible for forcing the employer to forward contributions due to the plan, not just participant deferrals; unless some other party is made responsible for that function.
  
• For TPA/Recordkeepers the answer would appear to be it is dependent on their actual role. If the TPA/recordkeeper is purely in the role of recordkeeper with no responsibility for asset investment, apparently nothing has changed.
• For TPAs/recordkeepers who are now acting in the investment advisory role, unless responsibility is specifically allocated elsewhere, it is their job to make sure contributions are made, especially for self-trusteed employer plans.
• A positive note about this change is that for an employer who is not timely depositing the employees' deferrals, there is now guidance that can be used to let the employer know that he or she may have to be reported to the DOL or sued if the contributions are not made.
• As to discretionary contributions, it appears that the rules will apply once the employer has declared that a discretionary contribution is being made. At that point, the contribution becomes due and owing to the plan.
  

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


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

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

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

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

Regardless of whether school districts receive an IRS letter, all school districts should be concerned about whether they satisfy the Universal Availability requirement in their 403(b) plans and the proposed 403(b) regulations slated to be effective at the end of the year . Accordingly, it may be prudent for a school district to conduct an internal compliance review to determine the level of compliance of its plan... and to get ready for the regulations.
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Major changes are on the way for 403(b) plans. Named after Section 403(b) of the Internal Revenue Code enacted in 1958, 403(b) plans are retirement annuity contracts, mutual fund custodial accounts for employees of certain tax-exempt organizations, public educational organizations, and retirement income accounts established by churches or church-affiliated organizations.

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

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

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

Here are some of the rules covered in the IRS regulation:

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

These are all matter s that 401(k) plan sponsors have been dealing with since the beginning. But for many 403(b) plan sponsors who will be assuming administrative responsibility for these plans for the first time, it’s going to be a difficult process.


Tomorrow, I'll discuss the IRS compliance initiative.

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

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


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