Retirement Plan Blog

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 , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans
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Pictured on the right is the cover of the soundtrack album for the 1985 movie by the late John Hughes, The Breakfast Club, which included Don't You (Forget About Me) written by the Scottish New Wave band Simple Minds. No, this is not a lead-in to a "Where Are They Now Segment" (they're still touring by the way).

Rather, this is about not being so involved with the more complicated retirement savings vehicles that we forget about good ole' Individual Retirement Plans, a/k/a IRAs.

IRAs are back in the financial news as part of President Obama’s budget for fiscal year 2011 which includes a provision for automatic IRAs. But that's what may be.

What's now with IRAs is that they continue to be an increasingly important tax planning vehicle for today's investor particularly for distribution planning made more attractive with new Roth IRA conversion rules. Beginning this year, the $100,000 modified adjusted gross income (MAGI) and tax filing status limits on Roth conversions has been removed.

The rollover rules are, of course, complicated but here is McKay Hochman's excellent 2010 portability chart updated for the Pension Protection Act of 2006. After all, this is the Age of Decumulation.

Posted In Individual Retirement Accounts
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That's the title of a press release I received this week from Cogent Research, a market research and strategic consulting firm based in Cambridge, Massachusetts about the results of their 2010 Investor Brandscape™ report.

According to Cogent, Fidelity Investments has forfeited its position as both the number one distributor and mutual fund provider to key rivals Charles Schwab and Vanguard. Cogent said it is because of significant shifts in brand perceptions, household penetration, as well as changes in investor loyalty.

The Cogent report which is based on a representative survey of 4,000 affluent and high net-worth investors in the United States reveals a decline in the number of investors using 401(k) plans. In fact, for the first time ever, affluent investors now report having more dollars allocated to IRAs than to employer-sponsored retirement plans.

In an interview Meredith Lloyd Rice, an author of the report, made the following key points.

• The proportion of investors that hold a 401(k) has gone down significantly. As of Oct. 2009, she said, only 59% of investors’ surveyed hold an employee-sponsored retirement account, down from 70% in Oct. 2008.
• The population is also aging and those closer to retirement are rolling over their employee-sponsored retirement plans into IRAs, another reason for the decrease in participation in 401(k) plans.
• Younger investors are more likely to start their own businesses or freelance and aren’t necessarily working in traditional full-time jobs that offer employee-sponsored retirement plans.
• High unemployment is also cutting into contributions.

In big picture terms, the results of this report aren't about market share or brand loyalty. Rather, It's how the intersection of our aging population, higher unemployment, and lower 401(k) participation is impacting retirement security - or lack thereof.

Posted In 401(k) Plans , Individual Retirement Accounts
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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 , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Social Security
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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 , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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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 , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Posts on SLATE
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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 , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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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 , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006
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Every once in a while I’ll start to wander off into “Pensionspeak” when I’m talking to a client. And when I do, I’ll catch myself by remembering what one of our important business partners once told me when I started to get too technical. Or even technical at all depending on the audience. He told me that when someone asks you what time it is, don’t tell them how to make a watch. 

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

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

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

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

Posted In 401(k) Plans , 403(b) Plans , Annuities , Audio Visuals , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006 , Public Employee Plans
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If you're a business owner that didn't quite get around to establishing a retirement plan for 2008, you still have time to establish a SEP. Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about SEPs with a comparison to IRAs. Check out Smart Retirement Investing for 2008 (You're Not Too Late!).

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

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

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

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

Posted In 401(k) Plans , 403(b) Crunch Time Series , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006 , Public Employee Plans
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With a new Administration and a new Congress about to take over, we’re going to start to see the think tanks and not-for-profit organizations issuing research and recommendations regarding public policy for retirement plans.

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

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

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

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

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

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

Are you listening plan sponsors and retirement industry?

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans , Publications , Social Security
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Over at Slate's BizBox blog, a special promotion by Open from American Express, I posted an article that discusses the financial advantages of a "Solo-K" for someone who is self-employed. 

In fact, "Solo-K" is not specifically mentioned in the Internal Revenue Code. It's a name given by some unknown, creative marketing person to describe a profit sharing plan with a 401(k) provision for the self-employed business person. Check out The Wonderful Solo-K.

Posted In 401(k) Plans , Individual Retirement Accounts , Posts on SLATE
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That's the title of Sergio Leoni's 1966 movie considered the greatest of the Italian spaghetti westerns. We know it in this country, of course, as The Good, The Bad, and The Ugly.

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

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

The Good

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

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

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

The Bad

The Bad is in the form of two disturbing trends.

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

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

The Ugly

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

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

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

Posted In 403(b) Plans , Audio Visuals , Cash Balance Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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I'm pleased to announce that I am now a regular contributing author for BizBox by Slate, a special promotion by OPEN from American Express.  I'm one of 5 contributors whose focus is helping business owners manage and grow their businesses. Come visit us.

Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Publications
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Every year the Internal Revenue Service releases cost of living adjustments to applicable dollar limits for retirement plans. Here is a link to a chart (pdf) that summarizes the most frequently used limits.

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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I was certainty premature yesterday in thinking the bailout bill was going to pass when I wrote the bailout bill is like a Christmas tree - something for everyone including retirement plans. And I wasn't alone. The stock market reacted with the largest one day drop in its history.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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Just recently, I thought that it might be the dog days of summer as far as setting up a retirement plan is concerned.

But it may be the “retirement plan season” is here after all - at least in the minds of our fellow bloggers at Slate magazine’s BizBox blog. Their post today is What Retirement Plan Should You Offer? 

So let me take a stab at answering. One way to answer it is to start with the types of retirement plans that are available:

• Payroll Deduction IRA
• Simplified Employee Pension (SEP)
• SIMPLE IRA Plan
• 401(k) Plan
• SIMPLE 401(k) Plan
• 403(b) Plan 
• Profit-Sharing Plan
• Money Purchase Plan
• Defined Benefit Plan

The Internal Revenue Service provides excellent thumbnail sketches on their website, Choosing A Retirement Plan: Retirement Plan Options. But that’s really taking the horse before the cart. The starting point, we believe, should be the business owner answering two questions:

1. What is my objective? Is it to maximize my own contributions, or is it to attract, motivate, and retain the high performing employees I need to grow my business? Or, is it a combination of both?
2. Where am I in the life cycle of my business? Is my business in a start-up, fast growth, stable growth, or transition/exit stage?

Then, he or she will be able to decide upon the “best plan” or combination of plans that fits their circumstances at this time. A decision that should be periodically reviewed on a regular basis once a retirement plan is put in place. 

Which Way? quilt pictured above via Doodle's Quilts.
 

Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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Two recent 401(k) plan terminations in our little corner of the retirement plan world does not a trend make. But it's a sign that the economic slowdown is also affecting plan sponsors.

Two clients who had not made employer contributions for some time decided that because of the relatively few employees contributing, it simply was not worth the time, trouble, expense, and fiduciary responsibility to continue. Employee account balances will be distributed, and hopefully rolled over to IRAs.

So now what? Nick Curabba in his post, Ways and Means Committee to Discuss IRAs, on Baker & Daniels' Benefit Biz Blog discusses one public policy solution to the retirement savings issue.  Mark Iwry, a former Treasury Department official is advancing the new idea of requiring employers to default employees into an "automatic" payroll deduction IRA.

I blogged about Mark before in my post, 401(k) Automatic Enrollment or How to Overcome Employee Inertia. Mark is now involved with helping make automatic enrollment happen and "simpler". He is the Managing Director of the Retirement Security Project (RSP) and Nonresident Senior Fellow at the Brookings Institution.

While serving in the U.S. Treasury Department, overseeing the regulation of the nation’s private pension system, Mark led the government’s initiative to define, approve, and promote automatic 401(k)s beginning nearly a decade ago.

But ten years is too long a time period as an answer to "now what?".
Posted In 401(k) Plans , Individual Retirement Accounts
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No, advisers themselves aren’t getting smaller, it's just that their numbers are. More of them are leaving the financial planning industry as reported by Plan Adviser citing a new report by Cerulli Associates, a research firm specializing in the financial service industry.  Cerulli's Edge Advisor Recruiting Edition says that the number of financial advisers in the U.S. declined from 256,569 in 2005 to 245,831 last year.

And those entering the industry are getting older – quickly. According to Cerulli more than 62% of advisers were under age 30 when they entered the industry in the 1980s. By 2007, only 3% of financial advisers were under the age of 30. The reason, Cerulli notes, is that the job of financial adviser is increasingly becoming a haven for second-career professionals.

So where are the new advisers coming from then? According to Investment News, from other investment firms who recruit for advisers from each other. In other words, it’s a zero-sum game. In practical terms, it means that the boomers have a declining universe of experienced financial advisers to help them manage their retirement assets. 

My friend, Dr. Susan Mangiero asked the question the other day on her blog,  Pension Risk Matters, Do You Have Your Own Fiduciary? If not, why not? Maybe part of the answer to Susan's question is that the good ones are just harder to find.

Picture credit: Grant Williams (August 18, 1930 - July 25, 1985) shown in his role of Scott Carey in the science fiction classic film The Incredible Shrinking Man. The film has become an existential cult classic. Released in 1957, and re-released in 1964, it was written by Richard Matheson. Here is a link to the trailer (ad preceeds) on videodetective.com.

Posted In 401(k) Plans , Individual Retirement Accounts
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Lost in the mass media focus on the Baby Boomers retiring is Generation X, the generation that follows. Depending on how they are defined, it's the people born between 1965 and 1985 (age 23 to 43). I've written about them before, Not my generation that nobody seems to want. The "nobody" referred to are financial advisers who don't seem to want them as clients.

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

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

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

Mr. Rubin is an optimist. He says

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

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

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

Youth isn't wasted on the young.

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







Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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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 , Individual Retirement Accounts , Pension Plans
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I've got that queasy feeling again in my stomach.

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

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

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

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

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

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

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

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

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

Here is a link to the complete K&L│Gates Financial Services Alert.
Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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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 , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans
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Add one more trend to Boomer demographics. Recent research has revealed that Boomers continue to push the limits regarding the prevalence of divorce. While just 33% of married adults from the two preceding generations has experienced a divorce, almost half (46%) of all married Boomers have already been divorced. They will be almost certain to become the first generation for which a majority has been divorced.

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

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

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

The ERISA part can be found in my post, Dividing retirement benefits on divorce, and what ERISA has to say about it.
Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans
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One of those wonderful tax benefits that a qualified retirement plan and IRA provide is the tax deferral of contributions and earnings. But nothing lasts forever including the payment of benefits (and the taxes thereon).  So the tax laws require RBDs and RMDs. That’s tax talk for  “required beginning date” and “required minimum distribution” respectively.

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

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

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



Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans
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“Decumulation”, in definitional terms, means the conversion of pension assets accumulated during an employee’s working life into pension income to be spent during retired life. But in practical terms, decumulation embodies a significant new risk for the record number of future retirees moving from the accumulation phase of their lives to the distribution phase. The actuaries call it “longevity risk”. But those of us in the financial service industry simply call it “running out of money”.

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

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

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


Picture credit: Water Secrets Blog.


Posted In 401(k) Plans , 403(b) Plans , Cash Balance Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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I had never heard the term "orphaned 401(k) accounts" until I came across the survey, Competing in the Retirement-Dominated Future, which I referenced last month in my post, Banks Lag Far Behind in Race for Boomers' Retirement Dollars. The survey used the term in referring to those 401(k) accounts still held in plans of previous employers.

The numbers are huge. According to the survey research, more than a third of mass affluent households have at least one orphaned 401(k) account with an average balance of over $100,000. Total amount of assets in orphaned 401(k) accounts: in excess of $1 trillion.

Does this put LaRue into perspective?

Note: The survey, Competing in the Retirement-Dominated Future, was conducted by BIA Research, a professional organization focused on enhancing employee and organizational performance, and Mercatus LLC, a financial services with  strategy and investment firm. They surveyed 2,997 "mass affluent individuals"– those with investable assets between $50,000 and $2 million who are between 35 and 70 years old - to better understand how they prepare for retirement and to provide banks with insights to reestablish their footing in the retirement marketplace.


Posted In 401(k) Plans , Individual Retirement Accounts
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I've written about IRAs in the past. (See IRA is not a kid anymore and IRAs are becoming increasingly important, but rules can be confusing). But those discussions were in the context of tax planning for distributions. IRAs are, of course, also a tax-advantaged investment vehicle. And as retirement dollars start to increasingly become available, you''ll start hearing more about "self-directed" IRAs particularly as a way to invest in "alternative investments".

So before going any further, here is some background. Of course, all IRAs can be "self-directed". It simply means that the IRA account holder can choose his or her own investments. And that's what most investment firms and banks offer, but they're limited to so-called traditional investments. That is, stock, bonds, mutual funds, money market funds, etc. But many of the Boomers who are retiring want to diversify their retirement funds beyond these traditional investments.

And it's axiomatic that if there is a need for specialized financial services, there will be service providers available to meet investors' needs. There is now a small segment of the financial service industry that allows an IRA holder to invest in "alternative investments". Penso Trust Company, one of those service providers, estimates that that while the self-directed component of the IRA market is only 3%-4%, it's the fastest growing segment at 25% annual growth versus 8% growth for the total IRA market.

What's considered an "alternative investment" is usually framed as anything except what the IRS does not allow IRAs to invest in. The except is a short list and includes collectibles, life insurance contracts, or stock in an  "S" Corporation.

The longer list includes what the approximately 20 companies in the marketplace who provide special asset custodial services do permit. They are usually regulated trust companies who will act as custodians for such assets as real estate in many of its forms, e.g., raw land, rental properties, commercial properties, and even real estate-related entities such as limited liability companies (LLCs) that invest in real estate. Some of these custodians also allow private placements that are used to fund a startup company, e.g., IRAs that are rollovers from an employer plan to start a new business.

Self-directed IRAs for alternative investments are not for all investors, of course, and should be established only with the help of experienced professionals. This is really one of those "kids, don't try this at home" situations.


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

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

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

Hat tip to Dave Baker and his BenefitsLink.
Posted In 401(k) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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The retirement market is in the trillions, but banks will have to play catch-up to acquire a significant share of those dollars. According to a recent survey, only 14% of “mass affluent consumers” cited their banks as primary providers of retirement services, compared to 53% for investment and brokerage firms. And in the past year, just 18% of 401(k) rollovers were captured by banks compared to 67% for investment and brokerage firms.

The survey was conducted by BIA Research, a professional organization focused on enhancing employee and organizational performance, and Mercatus LLC, a financial services with  strategy and investment firm. They surveyed 2,997 "mass affluent individuals"– those with investable assets between $50,000 and $2 million who are between 35 and 70 years old - to better understand how they prepare for retirement and to provide banks with insights to reestablish their footing in the retirement marketplace.

The study suggests that banks focus on three key opportunities:

1. Capture 401(k) rollovers
2. Capitalize on retirement asset consolidation
3. Establish a retirement dialogue with customers

But it's going to be a tremendous chanllenge. Banks have been focused on transactions instead of advisory services. Investment and brokerage firms have already figured out how to do that.


Here is a link to BAI's press release about their study. Posted In 401(k) Plans , Individual Retirement Accounts
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If you’re confused about the various types of designations in the financial service marketplace, you’re not alone. Even the financial service industry and the regulators are having a hard time making sense of the alphabet soup of designations. The American College, a non-profit institution that provides financial services education, has been tracking this matter.

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

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

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

It will help.

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




Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006
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While most investors these days are focusing on risk in terms of the market and its effect on their account balances, Tim Burns in his blog, Fiduciary Investor, says that they should pay attention to a larger risk. It’s longevity risk, or the risk of a retiree outliving his or her assets. Mr. Burns, in his post, Longevity Securitization, says that
 

The adoption rate of retirement annuities will however, be influenced by; investor perception, pricing, insurance industry risk retention models and the state of the structured investment markets.

Of all the factors that Mr. Burns mentions, investor perception will be the most difficult one with which to deal for two reasons.

First, most investors don't even think there is a longevity risk. According to a recent Fidelity Research Institute study, Structuring Income for Retirement: Addressing America's Emerging Retirement Income "Gap", retirees and pre-retirees are signicantly underestimating how long they need to make their retirement savings last.

Second, there is the annuity puzzle, the term given by the financial service industry to investor aversion to annuities. Some in the industry believe people say "no" to annuities because of: 

•  A desire to leave a legacy
• The complexity of annuities
• A lack of financial literacy
• An aversion to perceived loss
• A desire to maintain control

The need for annuities is certainly there, but it remains to be seen how well the financial service industry will deal with both the logic and the emotion of the matter.
 

 

Posted In 401(k) Plans , Annuities , Individual Retirement Accounts
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Wealth manager, Russ Bailyn, in his Financial Planning Blog asks employers to consider the benefits of a Roth 401(k). Russ looks at it from the standpoint of the employee. Ours is with the employer, and unfortunately, it's been slow  going with plan sponsors adding a Roth provision to their 401(k) plans available since 2006.

The big reason, we think, for employers to add Roth 401(k) is simply to allow employees to diversify. Just like allowing them to diversify their investments, a Roth 401(k) provides participants with an opportunity to diversify their future tax burden. Here is a link to our December 2006 Client Briefing, Roth 401(k): Giving Employees A Choice (PDF) that has FAQs on Roth.

And take a moment and check our Russ' recent book, Navigating the Financial Blogosphere: How to Benefit from Free Information on the Internet, available at a virtual bookstore near you. (Full disclosure: we're mentioned in the book but read the excellent reviews from others on Amazon).

Posted In 401(k) Plans , Individual Retirement Accounts
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Last year, I wrote that IRAs are becoming increasingly important, but rules can be confusing. And even more so when considering the rollover possibilities in moving benefits from one plan to another.  Portability of benefits between IRAs, SEPs, SIMPLE IRAs, Roth IRAs, 401(k) plans, profit sharing plans, defined benefit plans, 457 plans, and 403(b) plans can be wonderful thing - if you know the rules. So here's a link to a "scorecard" in the form of a Portability Chart as of 2008 prepared by McKay Hochman. But if there every was a situation of "kids, don't try this at home, this is it. Talk to a tax adviser first.

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

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

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

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

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

Picture credit: Part of a series called BEST IN SHOW: The best and worst tradeshow displays at Calgary’s HomExpo 2007 by elboroom design via Flickr.
Posted In 401(k) Plans , Cash Balance Plans , Individual Retirement Accounts , Pension Plans
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According to a recent survey (PDF) by Country Insurance & Financial Services, more people resolved to lose weight and exercise more (24%) or to spend more time with friends and family (23%) than plan to focus on improving money matters in 2008 (17%). Respondents also said that they’ll make better financial choices next year, although their actions may not be in line with their goals. While 75% said they are likely to make needed changes to their  finances in the year ahead, 40% claim they either do not have a financial plan (10%) or have not reviewed the one they have in the past year (30%).

Photo credit: ~~wv~~ via Flickr.
Posted In 401(k) Plans , Individual Retirement Accounts
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"Taxman"

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

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

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

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

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

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

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

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

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

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

And you're working for no one but me.

Taxman!

 

 

 

 

 

 

Posted In 401(k) Plans , Audio Visuals , Individual Retirement Accounts , Pension Plans
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It's that time of the year again. Yes, that time when tax advisers like Joe Kristen who writes the Tax Update Blog for Roth & Co., P.C., ask self-employed business people, Is A Qualified Plan a Good Move by Year End?.

So let’s assume that for personal financial and tax reasons the answer is yes. And further to keep it basic, let’s assume that only one individual is involved, and that person is “in business for himself or herself”. This means for retirement planning purposes, it’s someone who has self-employment income from a trade or business – so called “sweat of the brow” income rather than income received as dividends for example. And it can also include individuals with supplemental self-employment income such as:

• Independent members of corporate boards,
• University professors with consulting income,
• Writers or others with royalty or licensing income, or
• Anyone who otherwise receives any fees from sources other than his or her primary employment
  

For the self-employed, the tax laws have never been better to save money for retirement on a tax-deferred basis using a choice of retirement plans. And so again to keep it basic, let’s take a self-employed individual who has net earnings before the retirement plan deduction of $100,000. His or her options from a contribution standpoint could be these:

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

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

T-shirt version of the picture above is available through MindSpeaker.
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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A new and unpopular Michigan 6% service tax on business died on Saturday less than 17 hours after it had taken effect. The tax officially became law at 12:01 a..m. Saturday, but later in the day the Michigan legislature approved a bill repealing and replacing the tax which Governor Jennifer Granholm later signed that same day.

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

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

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

Photo credit: redgoldfly on Flickr.
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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That's a question many business owners ask as part of the tax planning process. That is, business owners who are also employees of their corporations. And the answer as to what "reasonable compensation"  - as determined by the IRS on audit - is based on the facts and circumstance based on IRS guidelines.

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

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

But the tradeoff to paying more employment taxes is that only compensation that appears on the owner's W-2 counts as compensation for purposes of determining a contribution to a qualified retirement plan. The larger the salary, the larger the potential retirement plan contribution.
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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Many employers adopt SEPs and SIMPLE IRAs because they think they're easy to use. They can be, but they still have to be operated properly. The IRS is now auditing SEPs and SIMPLEs, and more than half - yes, more than 50% - of the plans examined have operational errors. The Fall 2007 issue of the IRS publication Retirement News for Employers cites a number of common operational errors, some of which are the same as those made with qualified retirement plans:

• Failure to amend the plan for recent legislation
• Violation of the plan's participation and eligibility requirements
• Contributions made over the allowable limits
  
• Late deposits of employee deferrals

Click here to download (PDF) the IRS publication which beginning on page 2 discusses their audit results and has links to IRS resources on SEP and SIMPLE IRAs and how to fix operational errors. Posted In Individual Retirement Accounts
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With much of the attention focused on the major provisions of the Pension Protection Act of 2006 (PPA), there is a tax benefit available to low to moderate-income taxpayers that shouldn't be overlooked. 

It's the Saver's Credit slated to expire after 2006 which the PPA made permanent., and it provides an added bonus to the increasing number of employees that are being automatically enrolled by their employers in employer sponsored retirement savings plans. It provides an income tax credit of up to $1,000, $2,000 for married couples for employee contributions to an employer plan or IRA contributions.

It's not too late for eligible employees to make retirement contributions and get the saver’s credit on their 2007 tax return. They have until April 15, 2008, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2007. However, elective deferrals must be made by the end of the year to a 401(k), 403(b), or 457 plan.   

 Here is a link to an IRS News Release that provides more detailed information.

Picture credit: Wikipedia.

Posted In 401(k) Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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The table below indicates the newly released 2008 retirement plan limits for 2008.

                            



Posted In 401(k) Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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It was a big media event a few weeks ago when the "first" Baby Boomer, a retired school teacher from New Jersey, born one second after midnight on January 1, 1946, applied for Social Security benefits. But working beyond the traditional age 65 will be the reality even for affluent Baby Boomers according to a recent study by Spectrem Group, a consulting firm specializing in the affluent and retirement markets. Their study indicates that Baby Boomers expect to retire much later in life than their parents did. Nearly half (48%) of the Baby Boom generation expect to work until they reach at least 65, an age at which 76% of their parents had already retired.

Now what about the generation that follows?
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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That's what Social Security Commissioner Michael Astrue is calling the expected avalanche of applications from the post-World War II generation. The "first" Baby Boomer, a retired school teacher from New Jersey, born one second after midnight on January 1, 1946 ,applied for Social Security benefits Monday, signaling the start of an expected avalanche of applications from the post World War II generation. An estimated 10,000 people a day will become eligible for Social Security benefits over the next two decades, Commissioner Astrue said. The Social Security trust fund, if left alone, is projected to go broke in 2041.

And now it's up to the politicians.

Here is a link to the story carried by Yahoo with a hat tip to Mario Cinardi, World Financial Group.
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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CPA firms - we're aware - provide more than just traditional accounting and auditing services. And that includes providing investment and financial planning. So just how successful are they. In terms of money under management, pretty darn successful. You may be surprised to know that there are 11 firms that are have over $1 billion in assets under management and 41 more firms that have over $100 million in assets under management.

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

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

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

Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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Asset protection now isn't just about walling off assets from legal assaults. It's now about walling off sensitive data from technological assaults. I've written about this issue several times before.  

• Identity theft made simple. Just leave employee retirement plan data on a laptop.
• The big data security question: Have we met the enemy and is it us? 

But what about hackers? Someone who has had to deal with hackers is Ara Trembly, an insurance tech guru. Literally so in the form of his new blog, The Insurance Tech Guru. Ara knows. In his day job, he's Senior Editor, Technology, of the National Underwriter, an insurance industry news hub.

Ara raises the question, Security Breaches: When Do You Tell The Public?. It's an interesting one with legal, ethical, and public relations implications for a financial service company whose security is breached. He cites a recent article from Computerworld that on-line broker TD Ameritrade may have been warned about a security breach a year or more before it publicly acknowledged the problem and warned those customers who might be affected - as many as 6.2 million. And it's now the basis of a class action suit which was filed in May. The lawyers will sort it out, of course.

But if you appreciate irony, then click here. It will take you to TD Ameritrade's home page where you will be greeted by the company's spokesman, Sam Waterston. Yes, that same Sam Waterston who plays Jack McCoy, recently elevated to District Attorney, on NBC's long-running TV series, Law and Order after Fred Dalton Thompson, former Senator from Tennessee who played D.A. Arthur Branch resigned to run for the GOP nomination for President.

Thompson is up against, among others, Rudy Giuliani, former mayor of New York City and a former real prosecutor, the U.S.  Attorney for the Southern District of New York. Perception is reality or reality is perception. Take your pick.

Posted In 401(k) Plans , Individual Retirement Accounts
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I'm not talking about my generation, but rather Gen X; and the nobody who doesn't want them are financial advisers. According to a study commissioned by Edward D. Jones & Co., as reported by Investment News, advisers prefer older and wealthier clients. This despite the fact that younger workers are ahead of other generations when it comes to saving for retirement. Aside from the fact that the Gen X investor has fewer assets than the older, affluent investor that is the target client for most advisers, the advisers themselves have painted this generation with a broad brush. Some of the advisers:

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

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

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

 

Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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TANSTAAFL is an acronym for the adage "There Ain't No Such Thing As A Free Lunch. It was popularized by the Nobel economist Milton Friedman, but the phrase, "free lunch", has its antecedents in American literature from about 1870 through 1920. The phrase refers to a tradition once common in saloons in many places in the United States. These establishments offered "free" lunches, varying from the basic to the quite extensive, but required the patron to buy at least one drink who usually went on to order more. In other words, free things often have hidden costs.

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

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

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

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

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

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

Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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"What was the number of mortgage foreclosures in July?"

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

Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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I’ve written about retirement plan data security – or lack thereof – in the past, but always in the context of employee data on laptops that had been stolen. But as I read about a recent study cited by AccountingWeb.com, Pogo’s famous words came to mind, “We have met the enemy, and he is us.”

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

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

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

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

Posted In 401(k) Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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Rush Nigot on his Rush on Business Blog provides valuable information for franchisees. But how do you finance it? There are a small number of trust companies that can help facilitate that process if you use self-directed IRA assets to invest in private equity, e.g., a franchise. It's not just publicly traded securities that IRAs can invest in. There's also real estate, secured loans, unsecured loans, and private placements. But caveat emptor twice. Failure to follow the tax rules can result in adverse tax consequences, and the investment may not pan out. Remember, these are retirement funds so consult with your advisors first. This is another one of those "kids don't try this at home" situations. Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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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 , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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In volatile markets, investment managers go to cash. That's happening right now because of the prime mortgage meltdown. But not all money market funds are the same. Just as there are enhanced index funds, there are also enhanced money market funds.  "Enhanced" meaning the fund manager seeks higher returns by taking slightly more risk. And in the case of enhanced money market funds trying to get extra basis points, this may mean investing in asset-based securities like mortgage-linked bonds. According to HedgeWorld.com, some supposedly safe money market funds have shut down, while others are having problems meeting redemptions.

Do you know where your cash is?
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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They're called "vulture funds". They're financial organizations that specialize in buying securities in distressed environments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy.

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

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

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

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





Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Public Employee Plans
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I had to read this article twice. It says that Vanguard is requiring customers to have the same beneficiary for all their IRAs. Retirement Think pointed me to it on Financial Planning.com. It seems that Vanguard has sent out letters to 170,000 of their IRA clients who had different beneficiaries on their multiple IRA accounts that they had to have the same beneficiary. It's possible that someone could have an IRAs holding money rolled over from employer retirement plans, traditional IRAs (both pretax and aftertax), and Roth IRAs.

No matter. According to Forbes, if the client doesn't change the beneficiary, then Vanguard will do it for them. Forbes also made two customer service calls to Vanguard. One rep was quoted as saying that “There’s no way to override the computer,” and added that Vanguard is “a low-cost provider” and permitting different beneficiaries would increase its cost.

So much for personal financial planning.

Pardon me for showing my generation gap: Give the People What They Want is an album by the English rock group The Kinks released in August of 1981 in the US, but it was delayed until January of 1982 in Europe.

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

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

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

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

Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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Back in the day, I used to see Three-card Monte played on the Chicago "L". For the benefit of the uninitiated, Three-card Monte, also called Three-card shuffle, Follow the lady, Find the lady, or Follow the Bee, is a confidence game in which the victim, or mark, is tricked into betting a sum of money that he can find the money card, for example the queen of spades, among three face-down playing cards The hand is quicker than the eye and these guys are pros. You don't win.

In relative terms, what people lose playing Three-card Monte can be called "chump change" compared to the Securities and Exchange Commission's estimate that approximately 5 million seniors are victimized by some sort of financial fraud each year.  And there is no more tempting target than the huge amount of money in seniors' accounts in retirement plans and IRAs.

The enforcement agencies on both the state and federal level are ramping up to deal with the problem. The upcoming Senior Summit on September 10 sponsored by the SEC will bring together regulators, law enforcement officials, and community groups who have to deal with senior investment fraud to find some solutions - or better yet, help seniors avoid the Three-card Monte folks.

Posted In 401(k) Plans , Individual Retirement Accounts
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I've written that IRA is not a kid anymore. From its humble beginning in 1974 as part of the Employee Retirement Income Security Act of (ERISA), the Individual Retirement Account (IRA) along with cousins Roth, SEP, and SIMPLE, has grown up. It's now an increasingly important investment vehicle for retirement savings and tax planning. And it will become even more so as the Boomers start retiring, and the distribution phase begins. But, darn, the rules are complicated. So where do you go for help?  You can start at the source, IRS Publication 590, Individual Retirement Arrangements (IRAs). Or you reference, a handy Summary Table of Traditional IRA and Roth IRA Tax Rules on the Skilled Investor website. Or maybe, it's one of those "kids, don't try this at home" situations, and you should talk to a qualified tax advisor.

Posted In Individual Retirement Accounts
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Gone scrambling. Back in two weeks.

 

Posted In 401(k) Plans , Employee Stock Ownership Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006 , Public Employee Plans , Publications , Seminars and Speaking Engagements
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Individual retirement accounts, as I’ve written about before, are an increasingly valuable planning tool. One of the tax benefits that comes out of the Pension Protection Act of 2006 is the ability of a non-spouse beneficiary to rollover a lump sum distribution from the deceased participant’s retirement plan account tax free to an “inherited IRA”. The big advantage? It allows the beneficiary to take a deferred payout of the benefits over his or her lifetime.

I’ll skip the fine-print, but it’s important for you to know that it’s not a gimme. The IRS earlier this year said that retirement plans are not obligated to offer the non-spouse beneficiary option. My guess is that many plans will not bother to offer this distribution option because it complicates plan administration. But is “simple” plan administration, the real objective of the plan sponsor? Posted In Individual Retirement Accounts , Pension Protection Act of 2006
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Diehard Cubs fans will know who this is. It’s Pat Pieper, the legendary Cubs' field announcer, who for 59 years started each game with the announcement above. But that was back in the day when you could look at the number on the back of the uniform and know who that was and what position he was playing. Now let’s fast forward today to the “players” involved with retirement plans, that is, the individuals and firms that provide investment services to plan sponsors and employees. It's a little more difficult and got more so recently.

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

• Investment advisors who are regulated by the Securities and Exchange Commission, and are subject to a fiduciary duty;

• Brokers who are regulated by the NASD and the New York Stock Exchange, and are subject to a suitability requirement; and

• Financial planners who are not separately regulated as planners but are regulated depending on the services they provide, e.g., investment advice or sale of securities.

• Insurance brokers who are regulated by the individual State Insurance Commissioners, and are subject to those rules and regulations.

It's not that clear, of course, since different standards can apply when investment providers serve as both investment advisors and brokers. Well, they used to be. The SEC's 2005 rule exempting brokerage firms that charge asset-based fees from investment advisory regulations under specified conditions was recently overturned by in a 2-1 decision by the U.S. Court of Appeals for the District of Columbia Circuit in Washington.


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

Understand now?


The picture above is that of Pat Pieper gathering straw hats showered by fans on September 1, 1932. This was before the Wrigley field bleachers were built. He started his career in the first Wrigley season in 1916, and announced the lineups with a megaphone until the public address system was used starting in 1932. Let's treasure these pictures of Wrigley field since as a result of the Tribune ESOP transaction, the team will be sold and not the ballpark which may wind-up as a real estate development.
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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Business Week reports on a new study by consulting firm Cerulli Associates that large Wall Street firms are likely to capture a sizeable share of the $300 billion expected to roll out of 401(k) plans this year. Much of this money will come from the Baby Boomers, the first of whom reached age 60 last year. And this will be just be the start as they begin to retire over the next 10 to 20 years.

Cerulli predicts that it’s the ability of these brokerge firms to provide advice through their large network of financial advisors combined with their brand recognition, products, and marketing expertise that will cause many Boomers to move their retirement funds from their employers to IRAs with these firms.

But on the other hand, an independent survey commissioned by Retirement Corporation of America in May, 2006 indicated that more Americans rely on themselves and their friends for making critical investment decisions than financial advisors. According to the survey, the majority of investors:

• Believe "you've got to have money to make money" because top quality advice is reserved for the wealthy,
• Prefer to trust themselves, friends or family for good advice ahead of the experts, and
  
• Have a low opinion of commission-driven financial advisors

That’s the perception - not softened by stories in the mass media with headlines such as Unscrupulous brokers prey on 401(k) holders.


The industry has some PR work to do.
Posted In 401(k) Plans , Individual Retirement Accounts
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That's a picture of the Golden Globe award given each year by the Hollywood Foreign Press Association (HFPA). The "no goody bag now going untaxed" is the announcement today by the Internal Revenue Service that it reached an agreement with the HFPA  resolving outstanding tax responsibilities with respect to Golden Globe Awards presenter gift baskets. And these aren't just baskets. They include luxury trips, jewelry, and consumer electronic products that were estimated to be worth up to $100,000 at last year's Oscar awards.

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

Now this story doesn't have a whole lot to do with retirement plans - actually nothing at all to do with retirement plans. But I like it because it is a good example of the Two Part Theory of Political Economics ascribed to Nobel winning economist Milton Friedman.

• Part One: “Them what has gets”.
• Part Two: “Ain’t no free lunch”.

 


Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans
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President Ford signing the Employee Retirement Income Security Act (ERISA) on September 2, 1974.
Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006
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Just like Sergio Leone's classic 1966 movie, 2006 will indeed be memorable.

And so with apologies to Mr. Leone and Clint Eastwood, here are my 2006 choices for the Good, the Bad, and the Ugly in Pensionland:

• The Good: The passage of the Pension Protection Act of 2006 (PPA). The new law makes significant changes to practically every retirement plan in which approximately 44 million people are participants. The 900 page bill affects all types of retirement plans including defined benefit plans, profit sharing and 401(k) plans, cash balance plans, and employee stock ownership plans (ESOPs). Most of the changes are effective in 2007 and 2008 but some are retroactive or delayed. The PPA significantly enhances 401(k) plans - now the retirement plan of choice by corporate America.

• The Bad: The decline of the defined benefit plan system. While defined benefit pension plans were on the rocks prior to 2006, there was a “perfect storm” this year. A combination of new accounting regulations, rising interest rates, uncertainty in the financial markets and escalating premiums to the Pension Benefit Guaranty Corporation is causing an acceleration of defined benefit pension plans being terminated and frozen. Will 401(k) plans fill the void?

• The Ugly: the increasing number of scams and outright thefts from retirement plans. Sizeable account balances and the Boomers starting to retire have become targets. While the numbers are relatively small, they can have a profound impact on plan participants and retirees. The regulatory agencies - the National Association of Security Dealers, the New York Stock Exchange, and the Department of Labor - are ramping up their enforcement activities to deal with this growing problem. 

That's it. For 2006, it's a wrap.





Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006
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Individual Retirement Accounts have become an increasing important tool for retirement savings and tax planning, one of which is the charitable IRA rollover enacted as part of the Pension Protection Act of 2006. It’s one of those niche tax laws that only apply to a few taxpayers. And it has a very short shelf life – 2006 and 2007. It took the charitable community 10 years of active lobbying for Congress to change the law to provide tax benefits for transfers from retirement plans to charities.


It’s complicated, but in brief, the Pension Protection Act of 2006 allows donors to exclude up to $100,000 per year in gross income for what would otherwise be a taxable distribution from traditional IRAs and Roth IRAs for “qualified charitable distributions”. The new tax benefit is only good for 2006 and 2007 if made by an IRA owner who is at least 70½ years old on the date of the distribution to the charity.

As with all tax laws, there is lots of fine print. Marc D. Hoffman, Editor-In-Chief of the Planned Giving Design Center, provides an excellent guide to the new law in question and answer format in his article, The Pension Protection Act of 2006: A Guide to Charitable IRA Rollovers.

 

 

Posted In Individual Retirement Accounts , Pension Protection Act of 2006
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A few months ago, I wrote about promoters fishing for retirement plan dollars. I talked about the call of early retirement for the Boomers and retirement plan provisions that permit in-service distributions - all factors that are apparently attracting promoters to get at that cash. The NASD concerned about this danger to retirement plan participants issued an Investor Alert. 

Along a similar line, Sandra Block in last Friday's USA TODAY reports that rolled-over cash might not be secure. She discusses the recent memo that the NYSE's enforcement arm posted on its website reminding member firms that they are required to recommend investments appropriate for investors rolling over retirement  benefits.

So here is something to keep in mind. All of this takes place in a non-ERISA environment which means that brokers are not fiduciaries. Their obligation is only to recommend "suitable investments" while meeting certain disclosure and sales rules.

 
Posted In 401(k) Plans , Individual Retirement Accounts
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From its humble beginning in 1974 as part of the Employee Retirement Income Security Act of (ERISA), the Individual Retirement Account along with cousins Roth, SEP, and SIMPLE, has grown up. It's now an increasingly important investment vehicle for retirement savings and tax planning. And it will become even more so as the Boomers start retiring.

In just 5 short years since the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, we have seen some significant - and positive - changes in the tax laws that affect IRAs with more to take effect between now and 2010. These include:

• Portability between IRAs and qualified retirement plans.
• Increased IRA contribution limits including the addition of a catch-up.
• Roth 401(k) option starting in 2006.
• IRA distribution to charity for donors over age 70½ for 2006 and 2007.
• Rollover to an IRA from a qualified retirement plan by a non-spouse beneficiary beginning in 2007.
• Direct transfer of tax refund to an IRA starting in 2007.
• Direct rollover to a Roth IRA from a qualified retirement plan beginning in 2008.
• Elimination of the Roth IRA income restriction for converting a traditional IRA to a Roth IRA starting in 2010.

You’ve come a long way IRA.


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




Posted In 401(k) Plans , Individual Retirement Accounts , Pension Plans , Pension Protection Act of 2006
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The recently passed tax law, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA),  eliminates the $100,000 modified adjusted gross income ceiling and the joint filing requirement for married individuals for converting a traditional IRA to a Roth IRA for tax years after 2009.

While a conversion is treated as a taxable distribution, it is not subject to the 10% early distribution penalty. Taxpayers converting in 2010 can recognize the conversion income in that year or average it over the following two years. Why might this change be attractive to high income taxpayers? Earnings are distributed tax free, and there are no required distributions at age70 ½.  Click here to access MSN Money's Roth conversion calculator.  Posted In 401(k) Plans , Individual Retirement Accounts
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