Retirement Plan Blog

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , Book Reviews , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , BenefitsPro Columns , Cash Balance Plans , Defined Benefit Pension Plans , Independent Contractor vs. Employee
Comments / Questions (0) | Permalink

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , BenefitsPro Columns , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , DB(k) Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Fiduciary Issues
Comments / Questions (0) | Permalink

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Social Security
Comments / Questions (0) | Permalink

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

The new Initiatives:

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Automatic Enrollment , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
Comments / Questions (0) | Permalink

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Posts on SLATE
Comments / Questions (0) | Permalink

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

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

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

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

Here's a summary of Bill's suggestions:

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

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

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

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

And the political will!

Posted In 401(k) Plans , 403(b) Plans , Audio Visuals , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts , Public Employee Plans
Comments / Questions (0) | Permalink

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Public Employee Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , EGTRRA Restatement Series
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , Independent Contractor vs. Employee , Posts on SLATE
Comments / Questions (0) | Permalink

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
Comments / Questions (0) | Permalink

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

Posted In 401(k) Plans , Audio Visuals , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Pension Protection Act of 2006
Comments / Questions (0) | Permalink

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 , Audio Visuals , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Protection Act of 2006 , Public Employee Plans
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006 , Public Employee Plans
Comments / Questions (0) | Permalink

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

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

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Independent Contractor vs. Employee
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , Individual Retirement Accounts , Public Employee Plans , Publications , Social Security
Comments / Questions (0) | Permalink

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 , Audio Visuals , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts , Public Employee Plans
Comments / Questions (0) | Permalink

  

 

 

 

 

 

 

 

 

       See larger image.

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
Comments / Questions (0) | Permalink

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Posts on SLATE
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Public Employee Plans , Publications
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

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

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

• The Changing Face of Small Business

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

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

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

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

• The Rise of Personal Businesses

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

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

 See?

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

See full-size image.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

Stay tuned for the details.

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

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

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

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

1. Not enough compensation for a shareholder-employee of an S corporation.

Many owners will minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. (Not always looked on kindly by the IRS who may say that isn't "reasonable compensation" as discussed in an earlier post, "So now what exactly is 'reasonable compensation?'). However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.

2. Not enough time to maximize 401(k) contributions.

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

3. Timely notice not given to employees.

Tax planning is a time-sensitive activity, and sometimes notices to employees must be made in order to achieve desired results. For example, an employer sponsoring a SIMPLE must give its employees notice of the plan provisions and employer contribution levels, including any plan changes, at least 60 days prior to the start of the next calendar year. An employer who does not give the requisite termination notice by November 1, 2008 means no profit sharing/401(k) plan for 2009. An employer with a SIMPLE should keep November 1, 2008 in mind if a different plan type is intended in 2009.

Timing can be everything.

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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

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

Posted In Cash Balance Plans , Defined Benefit Pension Plans , Publications , Seminars and Speaking Engagements
Comments / Questions (0) | Permalink

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

On Tuesday, August 5, 2008, I will be a co-presenter at the following seminar:

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

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

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

Some of the topics:

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

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


Enroll here, or
FAX registration form (PDF), or
Call Allen Flynn (847) 266-2243 or Email allen_flynn@levinagency.com
(Your Associates and Professional Advisors are also welcome)
Posted In Cash Balance Plans , Defined Benefit Pension Plans , Seminars and Speaking Engagements
Comments / Questions (0) | Permalink

The late Robert King Merton, the distinguished American sociologist, published an article in the December, 1936 issue of the American Sociological Review titled The Unanticipated Consequences of Purposive Social Action. It's since been popularized as The Law of Unintended Consequences. 

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

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



Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

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 , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Public Employee Plans
Comments / Questions (0) | Permalink

View larger image.

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

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

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

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

Mr. Rubin is an optimist. He says

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

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

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

Youth isn't wasted on the young.

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







Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
Comments / Questions (0) | Permalink

Last week Steve Rosenberg on his insightful Boston ERISA Law Blog tells us that Legal Rights That Are Protected In Courts, May Well Be Lost In An Arbitration. Steve comments on a recent Supreme Court case that parties may not contract among themselves for judicial oversight of an arbitration award under the Federal Arbitration Act. He says that

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

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

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

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

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

They concluded that

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

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

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

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Fiduciary Issues , Individual Retirement Accounts , Public Employee Plans
Comments / Questions (0) | Permalink

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

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

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

Ain't government economics grand?

Here is the link to the story in the Journal.
Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

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

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

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

The ERISA part can be found in my post, Dividing retirement benefits on divorce, and what ERISA has to say about it.
Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

That's Basil Rathbone, of course, portraying Sherlock Holmes,  in one of the many reruns of the  Holmes' movies I used to watch as a kid on Sunday mornings on our non-flat screen, non-color TV set.

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

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

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

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

Hat tip to our friend, Christian Jarrett, the Writer and Editor of the British Psychological Society's Research Digest Blog, "Cutting edge reports on the latest psychology research".
Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans
Comments / Questions (0) | Permalink

One of those wonderful tax benefits that a qualified retirement plan and IRA provide is the tax deferral of contributions and earnings. But nothing lasts forever including the payment of benefits (and the taxes thereon).  So the tax laws require RBDs and RMDs. That’s tax talk for  “required beginning date” and “required minimum distribution” respectively.

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

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

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



Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

See full-size image.

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

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

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

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


Picture credit: Water Secrets Blog.


Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
Comments / Questions (0) | Permalink

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

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

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

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


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





Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
Comments / Questions (0) | Permalink

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

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

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

Hat tip to Dave Baker and his BenefitsLink.
Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

The Urban Institute, a nonpartisan economic and social policy research organization, has just published a major study on cash balance plans. Here is the abstract from that study, Cash Balance Plans: What Do They Mean for Retirement Security?, authored by Richard W. Johnson and Cori E. Uccello:

The conversion of traditional defined benefit plans to cash balance plans is among the most controversial aspects of pension policy today. Because the controversy has focused on the treatment of older workers, however, the debate has generally ignored the long-term implications for retirement security. In fact, cash balance plans can often provide more retirement security than traditional defined benefit plans or defined contribution plans, especially for workers who change jobs frequently.

Here is the link to the complete study (PDF, 14 pages).

Posted In Cash Balance Plans
Comments / Questions (0) | Permalink

That's Jack Webb who played Sergeant Joe Friday of the LAPD, arguably the most popular police character in television history in the 1951-1959 series Dragnet. (The 1987 movie spoof of Dragnet in which Dan Aykroyd played the Joe Friday character didn't do the original justice). Friday's catch phrase used in his investigations, "Just the facts, ma'am," remains indelibly etched in the minds of television fans.

It's also the basis of determining whether a worker is properly classified as either an independent contractor or an employee. It's a topic I've written about before in my posts, Who's your employee: inquiring minds and the IRS want to know in 2006 and The great debate: employee vs. independent contractor in 2007. And it's an issue that's just always there.

Brian Hall in his firm's (Porter Wright Morris & Arthur) blog, Employer Law Report, warns us about The Hidden Costs of "Independent Contractors". Brian discusses a recent case in which the court found that the workers were employees and not independent contractors. The court's decision was based on "just the facts".

The financial implications of such misclassification can be enormous. Penalties and interest involving payroll taxes can pile up if someone is incorrectly treated as an independent contractor. And in the case of a retirement plan, the employer would have to make up the benefits the individual would have received.

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
Comments / Questions (0) | Permalink

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

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

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

Posted In Cash Balance Plans , Defined Benefit Pension Plans , Pension Protection Act of 2006
Comments / Questions (0) | Permalink

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

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

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

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

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

Picture credit: Part of a series called BEST IN SHOW: The best and worst tradeshow displays at Calgary’s HomExpo 2007 by elboroom design via Flickr.
Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Individual Retirement Accounts
Comments / Questions (0) | Permalink

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

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

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

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

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





Continue Reading Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Pension Protection Act of 2006
Comments / Questions (0) | Permalink