ERISA, take me back to 1982

I’m a big NBA fan, and I love those time traveling Kia commercials featuring Blake Griffin, the All Star forward of the Los Angeles Clippers.He’s in his Kia Optima and says,

"Kia, take me back to 1992."

There he meets himself and learns valuable life lessons.

I can also imagine time traveling. Not with a Kia but with ERISA; not to 1992 but to 1982; and not to learn valuable life lessons – though that wouldn’t be so bad.

Instead to go back to that year in which Congress passed tax legislation, the Tax Equity and Fiscal Responsibility Act (TEFRA) in which benefit reductions and other restrictions were added to the tax laws. The first such pull backs since ERISA was passed in 1974.

TEFRA was soon followed in 1984 by the Deficit Reduction Act (DEFRA) which added further restrictions.

So now let’s go back to the present when retirement benefits are a chip in the politics of budget reduction, tax reform, or whatever you choose to call it. Yesterday’s announcement of the President’s budget proposed a cap on retirement savings with the White House claiming that some people are saving 'more than is needed' for retirement.

Let’s not go there from either a political or philosophical standpoint. Consider the historical approach.

When tax reform and deficit reduction became part of the political debate in the early 1980s, many employers considering benefit increases or even whether to adopt a plan did so before the laws were changed.

If you're an employer in that situation today, talk to your tax advisor now.

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
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American Taxpayer Relief Act of 2012 can be beneficial to ESOPs

As planning opportunities continue to emerge from the American Taxpayer Relief Act of 2012 (ATRA), the increase in federal income tax rates and capital gains tax rates may make qualified plans more attractive to higher wage earners.

According to a PwC HRS Insights report, there is more likelihood the compensation may be subject to tax at lower marginal rates when it is received.

There's an ESOP aspect to the new law also. ATRA can favorably impact ESOPs in two ways.

  1. The higher capital gains tax rates can increase the value of Internal Revenue Code Section 1042. This Code Section allows sellers of stock to C corporation ESOPs to defer capital gains tax on the sale proceeds, subject to meeting certain requirements.
  2. ATRA's income tax rate may also increase the value of the S corporation tax benefit.
    The law provides that any profits attributable to the ESOP's ownership of stock in an S corporation are not subject to federal income tax.

For more information on ESOPs, here is a link to our ESOP Overview. 

Posted In Employee Stock Ownership Plans
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IRS announces 2012 dollar limits on contributions and benefits

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
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Comparing and contrasting retirement plans for business owners

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:

  • 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
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2010 retirement plan limits unchanged but have future implications

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
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2009 Form 5500 not just about new disclosures - it's also about electronic filing

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
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Increase in bankruptcies calls attention to creditor protection aspects of retirement plans

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
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It's Bond. Fidelity Bond ... revisited

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
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Retirement therapy

"I asked you what time it was, not how to make a watch"

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 and Retirement Income , Audio/Visuals , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Protection Act of 2006 , Public Employee Plans
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Independent contractor or employee? Employee classification still a high priority enforcement matter

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

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

It's 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 or Employee
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Two new ESOP blogs launched

The Tribune bankrupcy notwithstanding, ESOPs are doing very well in this country. Behind the headlines are the vast majority of sucessful ESOPs sponsored by closely-hald companies. You can follow what's happening with ESOPs through two new blogs that have just come on-line.

Hat Tip to Marc Mathieu, Secretary General, European Federation of Employee Share Ownership (EFES). 

Posted In Employee Stock Ownership Plans
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Sociopaths in business

Parking spaces as a leading indicator of customer and client services

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

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

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


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
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ESOP as an Exit Strategy: Presentation to Chicago Bar Association Financial Institution Committee

See full-size image.

Exit strategies for business owners - particularly the baby boomers - is a matter to which they are giving increased attention. And so are their attorneys. Yesterday I participated in a continuing education program sponsored by the Financial Insitution Committee of the Chicago Bar Association for its members on this topic.

Our particular focus was ESOP as an Exit Strategy. I was joined by Grant McCorkhill, a Partner at Holland & Knight who specializes in transactional matters; and David Blum, a commercial banker and Vice President of First American Bank, an ESOP lender. We discussed:

  • Exit Strategies for the Business Owners
  • ESOP Essentials
  • How an ESOP Gets Done

Click here to download a copy of our presentation (PDF, 20 pages).

Posted In Employee Stock Ownership Plans , Events , Publications
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Employee ownership in the global economy

It's a global economy, of course, and most of us - irrespective of size - are doing business outside the U.S. In our case, we have non-U.S. company clients with employees here. So I'm always interested what benefits non-U.S. companies are providing their employees in the home country.

I've posted before that employee ownership is not just for U.S. workers. The  European Federation of Employee Share Ownership (EFES), the leading voice of  employee ownership in Europe, has just published their first Annual Economic Survey of Employee Ownership in European Countries.

The main finding is that employee ownership is growing faster in Europe than expected. Projections are that employee ownership is going to double within the next 5-10 years, from 8.2 million employee owners to 16 million, from 26.2% of all employees in large European companies to 40-50%, and capitalization held by employees going to increase from 2.35% now to 4 - 4.5%.

Here is a link to subscribe to the EFES newsletter if you're interested in more information about employee ownership outside the U.S. It's also an opportunity for you to practice your Spanish, Italian, German, Dutch, Portuguese, Danish, Greek, Finish, Swedish, Hungarian, Polish, Bulgarian, Czech,Estonian, Latvian, Lithuanian, Romanian, Slovakian, Slovene, Turkish, Russian, Chinese, or Japanese.
Posted In Employee Stock Ownership Plans
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Indiana basketball season over, "ESOP Season" begins

Indiana State Treasurer Richard Mourdock announced last Thursday a new state program to encourage the formation of Employee Stock Ownership Plans (ESOPs) in the state. The new program, called Indiana's ESOP Initiative (ICI), will invest up to $50 million in state money in Indiana banks that specifically lower their interest rates in loans made to employee-owned businesses.

Here is the text of the Indiana State Treasurer's May 8, 2008 press release:
State Treasurer Richard Mourdock announced the designation of $50 million and the launch of IEI for the purpose of assisting Indiana businesses to become ESOP companies, which will preserve Hoosier jobs.

It's not only critical that the state continues to bring new jobs to Indiana, but it's absolutely essential that Indiana keeps the jobs it currently has, asserted Treasurer Mourdock. IEI's mission is to encourage Indiana businesses to become ESOP companies and preserve Hoosier jobs.

Treasurer Mourdock has placed the IEI within the Treasurer of States Office and has created an ESOP toolbox of information regarding current Hoosier ESOP companies, organizations that provide professional services to ESOP companies, and educational materials about ESOP governance.

The $50 million designated for IEI and its mission is set up as a linked-deposit program through the Treasurer of State's Office. In the ESOP Linked-Deposit Program, the Treasurer of State will purchase certificates of deposit from local financial institutions at reduced rates of interest, and in turn the financial institutions will provide loans at reduced rates of interest to Indiana businesses becoming Hoosier ESOP companies.

The initial rate financial institutions will be charging to Indiana businesses through the ESOP Linked-Deposit Program will be 4.25%. The State of Indiana will not be a guarantor or man any of the risk of default on loans made under this program.

ESOP companies have a track record of creating wealth, encouraging the entrepreneurial spirit, and increasing productivity, explained Treasurer Mourdock. Furthermore, no group of employee-owners has ever, ever, ever, ever moved their company to Mexico or China!
Treasurer Muourdock says that there are slightly more than  200 employee owned businesses in Indiana, and he is hoping to have 20 additional businesses each year become employee owned.

Nothing but net!
Here is the link to the IEI and ESOP Linked-Deposit Program. Posted In Employee Stock Ownership Plans
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"Should I stay or should I go?" The factors influencing an employee's decision to retire

It was 1982, and many of today’s baby boomers were listening to the song, “Should I Stay or Should I Go” that was on The Clash’s album, Combat Rock. According to NME, Mick Jones, the lead guitar on the song, wrote it about singer Ellen Foley, who sang the backing vocals on Meatloaf's Bat Out Of Hell LP. The lyrics seemed to reflect the ups and downs of their relationship and whether to stick with it or end it.

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

Watson Wyatt, the international consulting firm, provides insight on this important matter affecting not only employees but also their employers in the firm’s recently published Technical and Policy Paper, Predictive Factors for Retirement Timing. Here are the key findings:
  • Increases in all categories of wealth accumulation (e.g., retirement plan, housing equity and other financial wealth) increase the probability of retiring while good earnings prospects, implying high opportunity cost for retirement, induce continued employment.
  • The type of retirement plan available to workers has a significant impact on when they retire. Workers entitled to traditional DB plan benefits are more likely to retire than those who are not, while workers with significant assets from DC plans tend to significantly delay their retirement.
  • New evidence supports the hypothesis that business cycles (stock market booms and busts) increase the probability - and thus timing - of retirement for DC plan participants.
  • Health insurance (HI) has a large effect on the retirement decision. HI, if conditional on employment, strongly discourages retirement, while alternative sources of health insurance, such as employer-sponsored retiree HI, spouse’s HI or public HI, facilitate or encourage labor force exit.
  • The retirement behavior of older workers is significantly linked to Social Security policy. The ongoing increase in the normal retirement age for Social Security and the cohort-specific actuarial adjustment of SS benefits, as defined by the law, will encourage younger cohorts to work longer.

Here is a link to the page to download Watson Wyatt’s Paper (PDF, free registration required).

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Public Employee Plans
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"Bad boy" clauses aren't passe after all - but sometimes it takes a judge to do the right thing

Back in the day - before ERISA - retirement plans had 'bad boy" clauses. These were plan provisions under which a participant would forfeit his vested account balance if the participant was a "bad boy" for such actions as violating a non-compete clause or committing a criminal act. But ERISA did away with "bad boy" clauses. (See Susan Wynn's post in her Pension Protection Act Blog, Bad Boy Clauses in Plan Documents).

ERISA's prohibition against bad boy clauses generally precluded a court being able to order the retirement plan to pay out a participant’s benefits to a third party as restitution, even for a crime committed against the employer. But what if a crime was committed against the plan? Under these circumstances the Department of Labor or a Federal court could order the Plan Administrator to offset the plan's losses against the participant's account.

And now a recent case decided by the U.S. District Court for the Northern District of Alabama extended the circumstances under which a participant in an ERISA retirement plan could forfeit benefits because of his conduct. The case is Pension and Employee Stock Ownership Plan Administrative Committee of Community Bancshares Inc. v. Patterson, N.D. Ala., No. CV-04-BE-00531-S, 3/31/08. The Court allowed a bank ESOP committee to offset a participant’s account balance to repay damages to the ESOP.

The Court held that Kennon Patterson, former President and Chief Executive Officer of Community Bancshares, Inc. and Community Bank, breached his fiduciary duty to the bank’s ESOP by not disclosing his criminal acts against the bank to the ESOP committee of which he was a member  before the purchase of more company stock for the plan. Mr. Patterson used bank money to pay for building a 17,000 square foot home. The court said that Patterson not only committed fraudulent acts but also
knowing the Plan’s investment had been impaired by [his] own fraudulent acts, . . . failed to take any steps to protect the Plan’s assets. . . .
The case was reported by PlanSponsor (free registration required) by way of BenefitsLink.

Note: For an excellent discussion of qualified plan protection from creditors, see McKay Hochman's commentary on the subject with a click through to an update for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Posted In Employee Stock Ownership Plans
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Enough already about the Baby Boomers, what about Generation X?

View larger image.

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

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

Michael Rubin, a CPA and CFP, comments upon this survey on his blog, Beyond Paycheck to Paycheck, in his post, Retirement for Gen X: Black Hole or Perfect Storm?   The analogies are those of Chris X. Moloney, Scottrade’s chief marketing officer, who commented upon the study when he said
Gen X is in the middle of a 'retirement perfect storm' of very high expectations, low retirement savings and massive concern about the future of Social Security. It's a black hole to them.
Mr. Rubin is an optimist. He says
I like the black hole analogy. But I’m glad we know about it now, when we can still do something about it.
Rachel is another optimist. She describes herself as "27 and working towards extremely early retirement".  Writing on her blog, Working for Rachel, she discusses the differences in the workplace causing The Financial Generation Gap. She writes
I've painted a grim picture here, but I'm not complaining--I think I've accepted all of the facts above without resentment. I haven't ever known the world to be any other way. I'm still a cockeyed optimist. I believe that younger people still have a good chance of getting out of debt, buying real estate, retiring comfortably, and even retiring early. But for our generation, financial security requires total independence and total responsibility. We are the only ones we can count on when it comes to our financial futures.
Youth isn't wasted on the young.

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
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What every fiduciary should know about their brokers ... and also their custodial banks, and financial contracts

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

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

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

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

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

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

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

A key to evaluating whether your assets and financial contracts with a broker, custodial bank or counterparty are sufficiently protected is to know your contractual and statutory remedies. As shown above, these vary with:
  • The type of broker: U.S. or offshore;
  • The type of security-holding arrangement: “customer name” or street name;
  • The amount of leverage on a securities account: fully paid or on margin;
  • The existence of other contracts with a broker and its affiliates, which might be cross-collateralized by the same assets;
  • The type of assets covered: securities or other types (commodities, currency, etc.);
  • The type of contract: securities brokerage or other types (repos, swaps, etc.);
  • Whether the broker carries “excess SIPC” insurance, and if so the coverage limits;
  • Whether assets and cash at a bank are held in a trust or fiduciary capacity;
  • Whether a financial contract is the type that qualifies for the “safe harbors” from the automatic stay in a bankruptcy or an FDIC receivership or conservatorship;
  • Whether your institution is the type that qualifies for exercising termination remedies under the “safe harbors” from the bankruptcy stay.
This list illustrates that the degree of exposure for financial arrangements with brokers, custodial banks and counterparties can vary widely. Some assets and contracts will be entitled to greater protection, in terms of distribution priorities, account insurance and termination remedies. Others may be more vulnerable and risk a lower percentage recovery in the event of an insolvency. Each asset and contract must be evaluated separately to determine where it lies on that continuum.

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Fiduciary Issues , Individual Retirement Accounts , Public Employee Plans
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Good news: "Household wealth rises as retirees age", or is it?

This is one of those Good News/Bad News stories. The Wall Street Journal on March 27 reported that “Household Wealth Rises as Retirees Age” citing a paper posted on the Federal Reserve’s website. The Journal quotes the authors as saying that adjusted for inflation,
The median’s household’s wealth declines more slowly than its remaining life expectancy, so that real annualized wealth actually tends to rise with age over retirement (emphasis mine).
Good news, right? Well, maybe not. The authors defined “annualized wealth” as stocks and homes, the value of Social Security, defined benefit pensions, and transfer payments like Food Stamps.

Ain't government economics grand?

Here is the link to the story in the Journal.
Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts
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Divorce: the next Boomer frontier and its impact on retirement

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

And a big part of the divorce, of course, is dealing with retirement assets acquired during a marriage which are considered marital property in most states. Consumer Reports/Money Adviser’s experts say that it is important to know the following:
  • Find out who has what. figuring out what retirement assets an individual owns should be easy, but finding the spouse's might require some digging.
  • Get documents in order.
  • Consider tax ramifications.
  • Protect survivor's benefits.
  • Change beneficiaries.
  • Monitor any distributions.
The complete report as covered by The Morning Call can be found here.

The ERISA part can be found in my post, Dividing retirement benefits on divorce, and what ERISA has to say about it.
Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts
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April 1 is deadline for RBD for RMD

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

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

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

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

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

See full-size image.

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

It will require a major change in thinking for them. Away from concepts which have been discussed as part of most 401(k) providers investment education programs: asset allocation, dollar cost averaging, and the cost of waiting. But rather requiring them to think about having to make a whole new set of decisions such as:
  • Whether to continue to work
  • When to apply for Social Security benefits
  • What to do, if anything, about housing
  • What choices to make about insurance and health care
  • How financial assets should be invested
  • What distribution options to take from employer retirement plans and IRAs
So you'll be hearing more about "decumulation" as it becomes a major focus of future research, public policy, and financial services.

Picture credit: Water Secrets Blog.

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
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What do employee ownership and hedge funds have in common?

Employee owners in Europe and the U.S. now hold approximately 1.260 billions Euro (1.934 billion US Dollar) quite similar to the global capitalization of all hedge funds across the world in 2007 (1.160 billions Euro (1.780 billion US Dollar). Any further comparisons are a matter of opinion.

Hat tip to our friend Marc Mathieu, Secretary General of the European Federation of Employee Share Ownership.
Posted In Employee Stock Ownership Plans
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Boomerang employees? No worries if employers keep ERISA rules in mind

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

It's something I wrote about last year, "Boomerang" Workers and 401(k) Plans, from the employer's perspective,  and I suggested that employers rehiring former employees keep the following considerations in mind.
  • Make sure that your plan and your Summary Plan Description clearly spell out how returning workers are treated. It’s ERISA, and everyone has to be treated the same.
  • Review how their vesting and forfeitures were handled when they left. Those same ERISA rules govern how non-vested benefits should be treated when an employee returns.
  • Use the appropriate eligibility rules to bring these employees back into your 401(k) plan. Those ERISA rules referenced above may - or may not - allow them to come in immediately.
  • Keep the recent changes to the Pension Protection Act in mind. The Act made changes to vesting schedules that may affect these employees.
As  Ms. Stafford points out, boomerang employees can be a valuable resource for employers. But employers should should plan for the benefit matters in advance.

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
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"Just the facts" used to determine independent contractor or employee

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

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

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

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

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

Posted In 401(k) Plans , Cash Balance Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
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ESOPs aren't forever, and neither is the ownership culture

ESOPs like other qualified retirement plans do terminate. For those of us who have been administering ESOPs for some time, we had the anecdotal evidence as to why. But not until recently has there been an actual study as to why ESOPs do terminate. The Employee Ownership Foundation today released the second phase of a final report on the reasons why companies terminate ESOPs. Phase I of the report found that while the most common reason for termination may be acquisition, and Phase II was conclusive that an attractive acquisition offer was the primary reason for ESOP termination.

For many of our ESOP clients, the offers were too good to turn down. The employee-shareholders received substantial financial benefits on the sale of their ESOP shares. These ESOP companies were successful because they combined employee ownership with participatory management. The buyers were larger companies with different cultures. And for some of these selling companies, it was the day the music died.

Posted In Employee Stock Ownership Plans
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IRS announces key retirement plan limits for 2008

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


Posted In 401(k) Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
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Plan Administrator between rock and hard place when plan document and Summary Plan Description conflict

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

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

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

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

Now about those employee handbooks....

Picture credit: Ken Camp.

Posted In 401(k) Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
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Tax deduction for ESOP was twice as nice in IRS Private Letter Ruling

Conventional wisdom says that a plan sponsor cannot generally deduct more that 25% of eligible compensation to a qualified retirement plan. But “generally” means in ERISA terms that there are exceptions. And here's a very interesting one. A C corporation – let’s call it “C” for short - that sponsored an ESOP wanted to deduct more than 25% of compensation. In fact, it wanted to make three types of contribution.

  • The first to pay the principal on the ESOP loan.
  • The second to pay the interest on the ESOP loan.
  • The third would be been unrelated to the ESOP loan (that is, the ESOP would not have used the third contribution to pay either the principal or interest on the ESOP loan).

So taxpayers do what taxpayers do when they want assurance that they will not suffer adverse tax consequences from a specific transaction. They apply for a Private Letter Ruling - a written decision by the Internal Revenue Service in response to taxpayer requests for guidance. In C's case, the IRS ruled in Private Letter Ruling 2007320028 (PDF) that: 

  • Tthe first contribution to pay the ESOP loan principal is deductible provided it does not exceed the aforementioned 25% of eligible compensation limit.
  • The second contribution is deductible to pay the interest on the ESOP loan.

So far “conventional wisdom”. Now here’s that real interesting part. The IRS also ruled that C may deduct the third contribution that is unrelated to the ESOP loan as long as the contribution does not exceed the 25% of compensation limit. Useful, for example, if an employer wanted or needed to pay off terminating participants who elect cash while the ESOP is paying off an ESOP loan.

Thus, contributions of up to 50% of eligible compensation could be deductible in addition to the unlimited deduction for interest. Another example of why we should “never assume”.

Note: Private Letter Rulings are not considered as precedent for use by taxpayers other than for the taxpayer who requested the ruling, but they do give an indication of the IRS's current attitude as to a particular type of transaction.

Posted In Employee Stock Ownership Plans
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Dividing retirement benefits on divorce, and what ERISA has to say about it

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

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

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

Posted In 401(k) Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
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The big data security question: Have we met the enemy and is it us?

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

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

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

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

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

Posted In 401(k) Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
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Solving the "annuity puzzle"

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

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

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

Posted In 401(k) Plans , Annuities and Retirement Income , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Public Employee Plans
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It's not just defined benefit plans that are being terminated

Most of the media attention has been on the decline of defined benefit pension plans. That is, for large companies. Defined benefit plans are alive and well for small business owners. And in the same vein - but at a much faster pace - large publicly traded companies are terminating their ESOPs.

According to Corey Rosen, Executive Director of the National Center for Employee Ownership in his recent Employee Ownership Update, one third of the largest 900 companies that had ESOPs in 2004 (the Fortune 500 and the Russell 400) had reduced the stock held in the plan to zero or close to it by the end of 2005. Corey thinks that this a direct result of concerns about legal fallout from the Enron, WorldCom, RiteAid, and other "stock drop" lawsuits that began earlier in the decade.

But as with defined benefit pension plans, ESOPs are alive and well in privately held companies,  particularly as an exit strategy for Baby Boomer business owners.

Posted In Employee Stock Ownership Plans
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Steve Nash, maple syrup, and ... ESOPs

We have much in common with our friends, neighbors, and allies up north. And not surprisingly, both Canada and the U.S. have the common problem of our respective Baby Boomer business owners looking for an exit strategy. Old friend Perry Phillips, President of ESOP Builders, Inc., a Canadian valuation and ESOP consulting firm, cites studies that show 70% of Canadian Baby Boomers currently running small and medium- sized businesses will want to exit by 2015. And as in the U.S., ESOPs are an effective exit strategy.

But our ESOPs are not like the ESOPs with which Perry works. U.S. ESOPs (Employee Stock Ownership Plans) are very structured programs governed by U.S. tax laws and ERISA which provide attractive tax benefits to the selling shareholders, the corporation, and the employees.

ESOPs in Canada, on the other hand, have a broader connotation. Canadian ESOPs can be a combination of three types of equity compensation arrangements: out-right share purchase, stock options, or phantom stock. And unlike U.S. ESOPs which are governed by federal law, Canadian ESOPs will vary in design and structure based on Provincial law.

But one thing Perry and I do have in common with our ESOP clients. ESOPs work best when combined with an "ownership culture".  Here is a link to the supporting research compiled by the National Center for Employee Ownership, the non-profit employee ownership research and education organization. 

Posted In Employee Stock Ownership Plans
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Benefits among those issues that need to be addressed up front in sale of a business

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

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

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

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

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

What are the legal requirements?

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

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

Who is responsible for retaining plan records?

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

What are best practices?

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

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

Posted In 401(k) Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans , Public Employee Plans
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The tax cost of ESOPs (and other benefits)

The term "tax breaks" was used in a few instances in commentary on the Tribune/Sam Zell ESOP. We know that the major tax advantages include a deduction for principal and interest to payoff the ESOP debt, a tax free rollover for the selling shareholder, and the non-taxability of the ESOP's share of corporate profits for S corporation ESOPs. All, of course, subject to specific limitations under the tax laws. So ignoring the public policy reasons for ESOPs for purposes of this discussion, how much exactly did these "tax breaks" cost the Treasury?

The answer which may surprise you is less than the cost of the exclusion from tax of reimbursed employee parking expenses. The Office of Management and Budget has calculated the cost of special ESOP benefits at $1.89 billion for 2007, rising to $2.67 billion by 2012. In comparison, the exclusion of reimbursed employee parking expenses will cost $2.89 billion while 401(k) plans will cost $42.4 billion and IRAs $5.7 billion.

Hat tip to Corey Rosen, Executive Director of the National Center for Employee Ownership (NCEO).

Posted In Employee Stock Ownership Plans
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No phone, no email, no fax, no worries. Priceless

What's old is new again. ESOPs in mergers and acquistions

First, the Chicago Tribune, and shortly thereafter financier Kirk Kerkorian has proposed using an ESOP as part of an effort to buy Chrysler.  ESOPs are now being promoted as a tax efficient way to finance leveraged buyouts. The attraction, of course, is the ability to deduct principal (and interest) and "reasonable" dividends. There was a surge of large company ESOP leveraged buyouts in the 1980s such as:

  • Avis
  • Simmons Mattress Company
  • Dan River
  • Burlington Industries
  • Polaroid

Some of these ESOPs worked. Some didn't.  It's too soon, of course, to see if we will return to those thrilling days of ESOP yesteryear. Corey Rosen, Executive Director of the National Center for Employee Ownership, puts these old transactions and the new transactions into perspective in his article, ESOPs in Mergers and Acquisitions: Wave of the Future?  I also included another of Corey's commentaries in my recent post  Understanding the Tribune ESOP .

Posted In Employee Stock Ownership Plans
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ESOPs in newspapers, what's been the experience?

The other day I wrote about Understanding the Tribune ESOP considering the multi-faceted aspects of employee ownership. But what about the Trib’s ESOP in the context of other newspaper ESOPs? In that light, the Chicago Tribune ESOP will be a unique venture. While there have been successful newspaper ESOP models, there have been none in large newspaper chains or large daily metro papers like the Trib.

One smaller newspaper ESOP success story is the Milwaukee Journal. Alan Mutter, a former journalist now consultant to communication technology start-ups writes about the Journal in his blog, Reflections of a Newsosaur. The Journal ESOP participants struck it rich when the paper did an IPO.

Newspaper ESOPs have been done in other countries. According to Marc Mathieu, head of the European Federation of Employee Share Ownership, some major newspapers in France had a controlling employee share ownership since the 1970s or even earlier. For instance, France’s paper of record, Le Monde and Libération. And like all newspapers, they are struggling to compete against the "new media", e.g., news enabled communication devices like iPod, cell phones and Blackberrys. At both papers, employee shareholders have had their say in the management and being represented on the Boards of Directors. Which will not be the case with the Tribune.

But it’s not just the financial aspects of the deal that are important. The success of this deal also depends on whether an ownership culture will be developed.
Posted In Employee Stock Ownership Plans
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Understanding the Tribune ESOP

The Tribune ESOP deal has generated a lot of discussion in the media. It's a complicated deal with lots of facets and ramifications. Most of the commentary and coverage has focused on the corporate finance part of the deal. Some of the coverage has been decidedly negative with the United Airlines ESOP still in people's mind.

However, Corey Rosen is someone who understands all aspects of the transaction which he explains in his article, An ESOP for the Tribune Company? Things to Know in Assessing the Transaction. Corey is Executive Director of the National Center for Employee Ownership, a private, nonprofit membership and research organization that serves as the leading source of accurate, unbiased information on ESOPs, equity compensation plans such as stock options, and ownership culture.
Posted In Employee Stock Ownership Plans
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How not to hire an auditor for your ERISA plan

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

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

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

Posted In 401(k) Plans , Defined Benefit Pension Plans , Employee Stock Ownership Plans
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Send lawyers, pens, and money. ESOP to become major shareholder in Tribune sale

The Tribune Company announced yesterday that an agreement was struck to take the company private in a complicated transaction with Sam Zell , the epitome of a contrarian investor. It's a fascinating deal with a number of different story lines. it's about the business of law with at least 9 major law firms involved in this substantial transaction. It's about the business of corporate finance with 3 investment banking firm that helped structure the complicated deal. It's about the significant changes taking place in the communications industry for traditional mass media.

The deal is a corporate transaction taking place in an ERISA environment. It will be the Tribune Company employees who through a new employee stock ownership plan will own the majority of the common stock. Big corporate ESOPs haven't always worked, and with the amount of leverage involved, it's going to take a lot of employee effort - not just corporate restructuring - to make it successful.

But for many Chicagoans and baseball fans all over, it's only about the Cubs: 99 years and still waiting!

Footnote: The title of the post is adopted from the 1978 hit song, "Lawyers, Guns and Money", by Warren Zevon, a Chicago-born guy who died too young in 2003 at age 56 of the same cancer that killed Steve McQueen. In 2006, Zevon's song was used as the theme song for producer Jerry Bruckheimer's short-lived TV series Justice, a program centered on the fictional exploits of high-powered LA-based attorneys. Posted In Employee Stock Ownership Plans
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Return with us now to those thrilling days of yesteryear. ESOP LBOs ride again.

The news that Chicago real estate mogul Same Zell was close to a deal to acquire media conglomerate The Tribune Company brought back some old memories. The proposed deal would take the company private, giving ownership to a partnership between Zell and an ESOP used as a financing arrangement reminiscent of the high-flying days of the 1980s. A time in which new and larger ESOPs were encouraged by increased tax benefits, a rising stock market, hostile takeover activity, and the availability of high-yield debt to purchase companies.

But more that anything else, it was the new tax benefits that Congress added in the 1980s:
  • 1984: an exclusion from gross income for 50% of the interest a qualified lender receives on a securities acquisition loan.
  • 1986: dividends paid on ESOP shares deductible when they were used to repay exempt loans in 1986.
Combined with the ability to deduct principal repayment on ESOP debt, large public companies used ESOPs to finance leveraged buyouts (LBOs) and as an anti-takeover device by putting stock in friendly hands, i.e., the employees.

This would be ESOP number 2 for The Tribune Company. It's first ESOP, started small in 1988, was later expanded to successfully thwart a hostile takeover by the billionaire Bass brothers of Texas. Newday (itself a Tribune company)  reported that if that ESOP existed today, its holdings - 18.6 million shares of common stock, according to a securities filing - would make it Tribune's third-largest shareholder, behind the Chandler family of Los Angeles, which owns 20 percent, and the McCormick Tribune Foundation with 13 percent.

Or in Shakespeare's words, what's past is prologue.

Posted In Employee Stock Ownership Plans
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New survey reports 20 million U.S. workers own stock through their benefit plans

The National Center for Employee Ownership (NCEO) reports on a recent survey from the 2006 General Social Survey that 20 million American workers own stock in their company through a 401(k) plan, ESOP, direct stock grant, or similar plan, while 10.6 million hold stock options. his? That means that 17% of the total workforce own stock through some kind of benefit plan, while 9.3% of the workforce hold options.

The General Social Survey, one of the largest national surveys on work and other issues, is a project of the National Opinion Research Center. Funding was received from the National Bureau of Economic Research, the Employee Ownership Foundation, the Beyster Institute, the NCEO, and the Profit Sharing Council of America. Posted In Employee Stock Ownership Plans
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How financial forensics uncovered the backdated stock option scandal

The backdated stock option scandal is one of those stories that continues to have legs. Last week two news stories appeared. The first was the publication of IR-2007-30, the announcement by the IRS of its initiative aimed to provide tax relief for those for rank-and-file employees affected by their companies' issuance of backdated and other mispriced stock options.

The IRS will be offering employers the opportunity for them to satisfy the tax obligations of these employees. This program, however, will not be available for backdated options exercised by most corporate executives or other insiders. Only fair, right?

The second and far more interesting story to me (and other CSI fans) was the post in CFO Blog by Marie Leone, Senior Editor of, Faster Than a Speeding 8-K. Ms. Leone reports on a speech by SEC Chairman Christopher Cox before members of the Practicing Law Institute on how the Enforcement Division used online reporting of stock option data to uncover the billions of dollars of backdates stock option awards. Ms. Leone also provides the interesting backstory and link to Chairman Cox’s speech.

Is there an ERISA connection? Well, the Department of Labor will require that Form 5500 be filed electronically for plan years beginning on and after January 1, 2008.

Posted In Employee Stock Ownership Plans
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ESOPs as seen from France

Indeed a small world., an on-line French publication for seniors/baby boomers carried this article today, "The employee stock-ownership plan : a way to save for retirement", that originally appeared in the Wall Street Journal on January 22, 2007. It's about the ESOP that the New York designer Eileen Fisher set up to diversify her net worth. The article is in English with the rest of the publication in French. Here is the link to the Google-translated web page, and here is the link to the original French web page for you Francophiles out there.
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Do ESOP companies perform better?

The National Center for Employee Ownership (NCEO), the leading source for research on employee ownership, has over the years compiled a substantial body of research on the relationship between employee ownership and corporate performance. Their conclusion: employee ownership combined with participatory management is a most powerful competitive tool.

A 2006 study they reported on is further compelling evidence to that conclusion. The study by Sam Houston State University professors Robert Stretcher, Steve Henry, and Joseph Kavanaugh looked at 196 publicly traded U.S. ESOP companies during the years 1998 through 2004. Each ESOP company was matched to a comparable non-ESOP company.

The ESOP companies had returns on assets that were higher than the matched non-ESOP companies in all seven years, net profit margins that were higher in all the five years where comparable data were available, and better operating cash flows in three of the five years where data were available. All of these findings were statistically significant (not likely to have occurred at random).

Here is a link to the NCEO’s summary of 21 years of research on employee ownership and corporate performance. Posted In Employee Stock Ownership Plans
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Employee ownership not just for U.S. workers

Employee ownership, either in the form of employee stock ownership plans (ESOPs) or stock options, is now recognized world wide. The leading voice of employee ownership in Europe is the European Federation of Employee Share Ownership which held its Sixth European Meeting of Employee Ownership in Brussels last month.

For those of you interested in what Europe is doing with employee ownership - we are after all in a world economy, here is a link to the Conference presentations. One of our neighbors, John Hoffmire at the University of Wisconsin - Madison, presented a paper on Employee Ownership Indices and Investment Funds in the USA, 1992 to present.
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