Retirement Plan Blog

ERISA, of course, requires adherence to a host of deadlines, and the failure to meet some of them can have serious consequences for a retirement plan sponsor. Here’s a new batch of such deadlines added by the Pension Protection Act of 2006 (PPA) that could affect defined benefit pension plans for 2008 calendar year plans.

The PPA provides benefit accrual and payment restrictions for underfunded pension plans. I’ll neatly bypass the technical stuff because the point is that timing is everything with respect to when the actuarial valuation is performed. If it’s not done "timely", even a well funded pension plan can be swept under these restrictions.

For example, if the actuarial valuation of a pension plan is not performed before October 1 for a calendar year plan, then the plan is presumed to be less than 60% funded -regardless of actual funded status - and the most severe benefit restrictions would apply.

There are a number of administrative practices that a plan sponsor can do to avoid such adverse consequences. But everyone involved - the plan sponsor and advisors - have to stay in the moment.

Hat tip to Ron Willour, Enrolled Actuary, owner of Indianapolis-based Omega Retirement Plans, Inc. 

Picture by Chris Garrett on his DSLR Blog, Adventures in Digital Photography.

Posted In Pension Plans , Pension Protection Act of 2006
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Fran Hawthorne is an accomplished journalist who over the last 20 years has specialized in finding and writing about the intersection of corporate America and timely and sometimes contentious social issues. She’s written articles for publications such as Fortune, Business Week, and Institutional Investor and has authored books on such issues as the dangers of obesity drugs, the trade-off between campaign contributions and state bond underwriting, and Medicaid manipulation.

Now Ms. Hawthorne has turned her attention to an important issue that in today’s economy isn’t going away anytime soon, pension plan terminations. In her new book, Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street, Ms. Hawthorne takes an in-depth look on what happens when financially troubled companies terminate their defined benefit pension plans through bankruptcy.

I had the opportunity to interview Ms. Hawthorne who has, no doubt, a point of view starting with the title of her book. She builds a case about why pension dumping (her term) has become an increasingly common practice in the wake of bankruptcy and how investors are profiting off the wreckage.

Agree or disagree with her, her well researched book which includes case studies and interviews provides analysis and insight on the complicated and competing dynamics involved with the termination of a defined benefit pension plan:

• Competing interests in bankruptcy court
• The choices that unions have to make
• The financial burdens assumed by the Pension Benefit Guaranty Corporation
• The risks that investors take and the returns they look for
• The issues that companies must deal with as they restructure

Ms. Hawthorne’s book should appeal to anyone involved with pension plans, e.g., CEOs, CFOs, HR professionals, union leaders, professional advisors, and policy makers. And if so, here is a link to Amazon.

Posted In Pension Plans , Book Reviews , Pension Protection Act of 2006
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I am honored to be a guest speaker at the 2008 Trust Forum sponsored by the Conference of State Bank Supervisors (CSBS) in San Antonio  on April 14-16, 2008. The CSBS is the national organization for state bank supervisors, and the nations leading advocate for the state banking system. The Trust Forum is the annual gathering of approximately 50 state bank examiners who supervise trust departments of banks and independent trust companies in their respective states.

The title of my presentation is:

The Pension Protection Act of 2006 and the Changing Financial Services Industry: New Challenges for State Bank Examiners.

I'm looking forward to meeting the attendees.
Posted In Pension Protection Act of 2006 , Seminars and Speaking Engagements
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See full-size image.

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

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

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

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

It will help.

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




Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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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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While cash balance litigation continues to wind its way through the courts, the long-term implications of these types of retirement plans have been generally ignored. That is until now. Richard W. Johnson and Cori E. Uccello have just authored a study, "Cash Balance Plans: What Do They Mean for Retirement Security?", published by the Urban Institute,  a nonpartisan economic and social policy research organization. Here is the abstract of the report:

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

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

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

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

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

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

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





Continue Reading Posted In 401(k) Plans , Cash Balance Plans , Pension Plans , Pension Protection Act of 2006
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It's the New Year, and it's prediction time. So what's ahead for employers in 2008? Paul Secunda in his post in The Workplace Prof Blog, 2008 Workplace Trends, points us to Diane Stafford's predictions in the on-line edition of the Kansas City Star. Paul comments that

These all sound right to me, and I would add that there will be more ERISA class actions by 401(k) account holders, more use of Voluntary Employee Benefit Associations (VEBAs) to deal with the growing problem of retiree health care, and there will be more emphasis on helping employees returning from military service.

I agree, but let me add one more trend for 2008 that I consider an easy prediction to make: more employers adding auto-enrollment for 401(k) plans. The impetus for which is, of course, coming from the Pension Protection Act of 2006. Here are some of the early returns:

• Schwab reports that more than 20% of its Retirement Plan Services clients now automatically enroll employees into a 401(k) plan (a four-fold increase from two years ago).
• New York Life found that 32% of its 401(k) plan clients had adopted automatic enrollment as of September 30, 2007, up from 18% on January 1, 2007.
  
• A recent Spectrem Group survey suggests that within two years, automatic enrollment will be in place at more than 80% of plans with $10 million or more in assets.

And how do employees feel about auto-enrollment? Very positively based on a recent survey by Retirement Made Simpler, a Washington, D.C.-based coalition that provides resources that help employers simplify the auto-enrollment process. Their survey found that the nearly 700 surveyed adults enrolled in an automatic 401(k) plan, 98% said they were glad their companies offered the retirement plan. But most significant to me was that of those employee who were automatically enrolled only 7% opted out.


Picture credit: The picture above is the album cover from George Benson's 1968 album, The Shape of Things to Come, the remastered version of which was recently released by Verve Records. This was Benson's debut album, and Verve says that "Shape of Things to Come is the true signal of Benson's arrival, not only as a major soloist, but as an artist who refuses to be pinned down four decades later".



Posted In 401(k) Plans , Pension Protection Act of 2006
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Inertia, in classical physics, is defined by Merriam-Webster's Collegiate Dictionary as: “a property of matter by which it remains at rest or in uniform motion in the same straight line unless acted upon by some external force.” In 401(k) plans, inertia can be defined as many eligible employees never signing up for the plan – even when the employer makes a matching contribution.

The Pension Protection Act of 2006 addressed the legal aspect of this issue by adding provisions for automatic enrollment and the Qualified Default Investment Arrangement (QDIA). But concepts like this just don’t pop into the law. It took almost ten years of advocacy in this case.

One of those advocates was Mark Iwry. 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.

Mark, no longer in government, told me recently that

The automatic 401(k) is a disarmingly simple concept: it enrolls employees at specified contribution levels and in a specified investment, but they can always opt-out, contribute more or less, or invest differently. This enlists inertia in the cause of saving, helping workers—especially moderate- and lower-income and minorities—save more and start earlier.

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. The RSP is part of a coalition called Retirement Made Simpler which includes the American Association of Retired People (AARP) and the Financial Industry Regulatory Authority (FINRA). Their common mission is to encourage savings through automatic 401(k).

And Retirement Plan Simpler does exactly that by providing research and resources including a Auto 401(k) Toolkit with sample employee communication materials.

And to make it simpler for you, here is a link to the Toolkit (PDF) on their website, and if you look to your left on this page, I've also added a link to their website under "Other Resources".

Picture credit: Scientist Activity Badge on Bill Smith's Unofficial Cub Scout Roundtable
Posted In 401(k) Plans , Pension Protection Act of 2006
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ABC7 Eyewitness News in New York has been reporting the story of planes at New York area airports landing low on fuel. On Thursday, the station reported they were given a memo by a Continental Airlines pilot that was sent by Continental's senior flight operations director to the airlines 4,500 pilots. According to ABC7, while telling pilots that management will "respect their authority and judgement" on how much fuel they decide to carry, the memo then warns that "adding fuel indiscriminately... ultimately reduces profit sharing and possibly pension funding."

Click here to go to the video.

Hat tip to Dave Baker at BenefitsLink.
Posted In Pension Plans , Pension Protection Act of 2006
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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 other day I wrote that the ERISA agencies have a full regulatory plate with the Pension Protection Act of 2006. Now here is the 2007-2008 Priority Guidance Plan that the IRS has just issued for retirement plans courtesy of McKay Hochman with a hat tip to Steve Brooks of our firm for bringing it to our attention.

It's going to be a busy couple of years for ERISA people.
Posted In Pension Protection Act of 2006
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I started to think about that question after reading Jonah Leher’s post, Don’t Read the Business Page, on The Frontal Lobe Blog. Mr. Leher tells us to ignore the mass media coverage about the stock market and the growing liquidity coverage because it’s too much information.
He writes about the experiment that Harvard psychologist Paul Andreassen conducted on MIT business students in the late 1980s. After having the students select a stock portfolio, he divided them into two groups. The first group could only see the changes in the prices of their stocks. The second group had access to a continual flow of information from various sources.

You know what’s coming. The first group – the “less information” group did significantly better than the second group – the “high information” group. Exposure to too much information was distracting. Andreassen was surprised with the result when he did the experiment in the later '80s, but most of us shouldn’t be now. Back then, there was wasn’t the constant flow of information – good and bad - bombarding us 24/7/365 from a multitude of sources. 

So what does that have to do with 401(k) plans? The Pension Protection Act of 2006 mandates additional disclosures to 401(k) participants for such new provisions as automatic enrollments and qualified default investment funds. More is on the way in the form of required disclosures regarding plan fees either in the form of Department of Labor regulations or by legislation.

No one disputes that participants should be provided with sufficient information in order to make informed decisions about their retirement funds. The question is how much information is enough information? Let's not turn 401(k) participants into a "high information group".

 

Posted In 401(k) Plans , Pension Protection Act of 2006
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That's the metaphorical objective of any regulatory agency whose responsibility is to interpret and administer laws passed by Congress- to translate those laws into regulations, rules, and produres. Mitchell Port on his California Tax Attorney Blog gives us an initiation to understanding IRS guidance, excellent background for anyone who is involved with retirement plans, and especially  the Pension Protection Act (PPA) passed on August 17, 2006. It’s not just the IRS that will be involved with the “translation”. The burden will also be on the Department of Labor (DOL). And both of the agencies will have a full plate with the different effective dates for the new law’s provisions. 

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

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

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

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

Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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If dealing with pension and fiduciary issues are getting you down, then you've got the Pension Tension Blues. Dr. Susan Mangiero, founder and President of Pension Governance, and Steve Zelin, the Singing CPA, have co-written a satirical song on the current state of affairs for retirement plan sponsors and participants. I'll never see them on stage at Buddy Guy's Legend's, but pretty good for a Ph.d. and a CPA.  Take a listen here. Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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Earlier this month in my article, It ain't over till it's over, I discussed the insurance industry's objection to stable value funds not being part of the Department of Labor (DOL) regulation for default funds. The Pension Protection Act of 2006 directed the DOL to designate “default” investment elections that employers could select to meet their fiduciary responsibilities when an employee does not make an an investment election.

The historical selection by most employers has been a fixed income fund - money market fund or stable value. The proposed DOL regulation, however, includes only options having equity exposure, i.e., asset allocation funds, target-maturity funds, or managed accounts.  And with over $300 billion at the end of 2005 in stable value funds according to the Investment Company Institute, most of which is managed by insurance companies, the insurance industry went to work in Washington to get stable value funds added as a fourth option. But it looks like it's over. Investment News reports that the DOL's final regulation to be issued next month will continue to reject stable value funds as too conservative and will not include this asset class as a default option.

If, indeed, this is the case, it will be interesting to see how it will play out after the regulation is finalized. Will some employers continue to include stable value funds as their default fund? And what will the reaction be if there is a market turndown and participants in default funds lose money? So, it's really not over - particularly if the insurance industry convinces Congress to get involved.

Posted In 401(k) Plans , Pension Protection Act of 2006
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The quotation above is one of the best-known Yogiisms, and it neatly describes the battle that is shaping up before the Department of Labor (DoL) finalizes its proposed regulation on default funds. On one side are the mutual fund companies and on the other are the insurance companies. And here’s what it’s all about. The Pension Protection Act of 2006 (PPA) provided fiduciary relief to employers by designating a “default fund” if the employee failed to make an investment election. It’s an especially important part of the now fully sanctioned automatic enrollment since a default fund would be where the funds of an automatically enrolled employees would be invested.

The PPA also directed the DoL to designate “default” investment elections that employers could select to meet their fiduciary responsibilities which could include a mix of asset classes other than a money market fund which has been the historical selection. And so the proposed regulation that the DoL prepared included balanced funds, target-maturity funds, or managed accounts. No money market fund and no stable value fund which the DoL considered too conservative.

With approximately $400 billion in stable value assets in 401(k) plans and an estimated 14 million more workers that will be brought into the system with automatic enrollment, it’s a real big issue for the insurance industry. And now the lobbyists for the insurance industry are gearing for a major campaign that would result in the DoL including stable value as a default option in the final regulation.

We'll see who's scores the winning run.

Posted In 401(k) Plans , Pension Protection Act of 2006
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Gone scrambling. Back in two weeks. Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Employee Stock Ownership 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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If you are still not convinced that 401(k) participants need investment advice, then check out the results of a recent survey as reported by Investment News, 43% of investors are suckers. The survey was conducted by Money-Track, a public-television series, and Investor Protection Trust. Most of the survey results I would have expected. I'm not surprised that:

• Only 1% of the people surveyed understood eight basic investing principles, e.g., diversification.
• 66% of the respondents would meet with a financial professional without first doing a background check.
• 40% of those surveyed said that they expected Social Security to make up a major part of their retirement income.
• 50% said they had not created a financial plan.

But here's the surprise: 43% of the respondents said that they would invest in an "opportunity" that would provide them with guaranteed returns of at least 100%, e.g., an option-trading system.


Or maybe just call me be naive and maybe "there's a sucker born every minute".

The phrase, "There's a sucker born every minute", often credited to P.T. Barnum, the famous showman, may actually have been said by someone else. Here's the history of it.
Posted In 401(k) Plans , Pension Protection Act of 2006
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Earlier this month I asked the question Technical Corrections to the Pension Protection Act of 2006. Another bite of the apple? Would special interest groups be able to accomplish now what they couldn’t accomplish in the PPA? Right question, wrong bill. The just passed Iraq spending bill included a provision giving funding relief to American Airlines and Continental Airlines. (The bill also included a provision that increases the minimum wage by $2.10 a hour, the first increase in almost 10 years.)

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

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

Sen. John Cornyn, Republican Senator from Texas where both airlines are located, who  supported the change was quoted as saying:

Passage of this provision will be of enormous benefit to the thousands of citizens who are depending on this nest egg when they retire.

We'll see whether this will result in a smooth landing.


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

Executive Summary

Distributions from 401(k) plans can be complicated and confusing. The IRS has just made available a this resource guide that covers the basics of 401(k) distributions. Each topic has a link to the applicable Internal Revenue Service publication.

Posted In 401(k) Plans , Pension Protection Act of 2006 , Publications
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The Pension Protection Act of 2006 makes significant changes affecting 401(k) plans - for the most part favorable to plan sponsors and participants.

Here is a summary of those changes effective in 2007:

• Increased 401(k) Limits. For 2007, the annual limit for 401(k) contribution increases to $15,500. The catch-up for age 50 and older remains at $5,000.
  

• Default Investments. Beginning after January 1, 2007, the Act permits the use of default investment choices beyond money market and stable value funds that plan sponsors can use for employees who do not make investment elections. The Department of Labor issued proposed regulations late last year which will be finalized soon.

• Investment Advice. Beginning after January 1, 2007 the Act encourages plan sponsors to make investment advice available to 401(k participants. There will be much to comment upon later this year.
  

• Faster Vesting of Employer Non-Elective Contributions. Effective in 2007, employer non-elective contributions, i.e., profit sharing, must vest according to rules applicable to matching contributions: no less favorable than either 3-year cliff vesting (100% vested after 3 years of service), or 6-year graded vesting (20% after two years, 20% a year thereafter, 100% after six or more years).
  

• More Frequent Benefit Statements. Effective in 2007, the new law requires that Plan Administrators must provide a benefit statement: 1) at least once a quarter to participants in plans in which they can self-direct their accounts, 2) at least once a year to participants in plans in which they cannot self-direct the investment of their accounts, and 3)upon request to any beneficiary.
  

• Diversification of Investments in Employer Stock.  Effective in 2007, participants must be given the right to diversify their investments in employer stock. Exceptions to the new law are provided for certain privately-held companies and Employee Stock Ownership Plans.
  

Finally, if you didn't add a Roth 401(k) provision to your 401(k) plan in 2006, consider doing so in 2007 to allow participants to diversify their future tax burden.
Posted In 401(k) Plans , Pension Protection Act of 2006
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President Ford signing the Employee Retirement Income Security Act (ERISA) on September 2, 1974.
Posted In 401(k) Plans , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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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 , Pension Plans , Individual Retirement Accounts , 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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One of those year-end retirement plan housekeeping matters is for plan sponsors to review the adequacy of the plan's fidelity bond required by Department of Labor (DoL) regulations. Here is a summary of the fidelity bond rules.

Overview

A fidelity bond is required to protect the assets in a retirement plan from misuse or misappropriation by the plan fiduciaries. In other words, intentional acts of fraud or dishonesty by a fiduciary who is a trustee and  any person who has:

• Physical contact with cash, checks or other Plan property.
• Power to transfer or negotiate Plan property for a price.
• Power to disburse funds, sign checks or produce negotiable instruments from the Plan assets.
• Decision making authority over any individual described above.

The fidelity bond must be at no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. And like all aspects of ERISA, there are important exceptions. Here are two:

1. Maximum Amount. The new Pension Protection Act of 2006 increases the maximum bond amount to $1 million for retirement plans that hold employer stock or other employer securities. A retirement plan would not generally be considered to hold employer stock or other employer securities if these assets are part of a broadly diversified group of assets such as mutual funds. The new bonding provision is effective for plan years beginning on and after January 1, 2007.
2.  Non-Qualifying Assets. If more than 5% of the plan assets are in limited partnerships, artwork, collectibles, mortgages, real estate or securities of "closely-held" companies and are held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code Section 408, the plan sponsors need to do one of two things: a) make certain that the bond amount is equal to 100% of the value of these "non-qualified" assets or b) arrange for an annual full-scope audit, where the CPA physically confirms the existence of the assets at the start and end of the plan year.

Consequences for Not Maintaining the Fidelity Bond

There can be serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond.

1. It can be a red flag to the DoL that they need to take a closer look at the plan.
   
2. In cases where a retirement plan has more than 5% in non-qualified assets, a serious underwriting risk may arise if the non-qualified assets are not properly listed on the bond application. This is because non-qualifying assets carry a higher level of risk for loss. If the non-qualified assets are not listed on the bond, the underwriter would have cause to deny coverage if there was a loss due to misuse or misappropriation by a plan fiduciary. Under those circumstances, the loss may be denied and the trustees could be liable for the losses to the plan.

Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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“It” refers to the Pension Protection Act of 2006 which provides fiduciary relief in several areas. This relief includes:

• Investment Advice. Many plan sponsors were previously reluctant to add an investment advice component to their 401(k) plans. The Act specifically permits qualified fiduciary advisers to deliver personally-tailored investment advice to participants in 401(k) plans and other tax-advantaged savings vehicles. This is effective after December 31, 2006.

• Default Investments. If a participant failed to make an investment election, most 401(k) plans used a money market or stable value fund as a default fund because of fiduciary liability concerns. The Act provides for a safe harbor subject to Department of Labor (DoL) regulation. The DoL’s recently issued proposed regulation permits the default fund to be either an asset allocation fund, target-maturity fund, or professionally managed fund.

• Blackout Periods and Mapping. The Act provides fiduciary relief during a “blackout period” including fund “mapping” if DoL prescribed conditions are met. A blackout period occurs when fund investments are changed, and a participant has limited or no ability to make fund changes. Mapping is that process in which a participant’s funds are transferred to similar mutual funds as determined by asset category, class and investment style. This is effective for plan years beginning after December 31, 2007.

Good news for our small and mid-sized retirement plan clients, the Trustees of which are usually the owners and/or senior management of closely-held companies.

 

 

Posted In 401(k) Plans , Pension Protection Act of 2006
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A recent study by implication supports the use of asset allocation and lifestyle funds as default funds which were those designated in the Department of Labor's recent proposed regulation.

The study by Tekeshi Yamaguchi, Olivia S. Mitchell, Gary Mottola, and Stephen P. Utkus, "Winners and Losers: 401(k) Trading and Portfolio Performance" (October 2006) for the Pension Research Council  found that::

... in aggregate, the risk-adjusted returns of traders are no different than those of nontraders. Yet certain types of trading such as periodic rebalancing are beneficial, while high-turnover trading is costly. Interestingly, those who hold only balanced or lifecycle funds, whom we call passive rebalancers, earn the highest risk-adjusted returns  (emphasis supplied).

Hat tip to Barry Barnitz' Financial page blog which links through to the entire article.
Posted In 401(k) Plans , Pension Protection Act of 2006
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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 , Pension Plans , Individual Retirement Accounts , Pension Protection Act of 2006
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Right after the Pension Protection Act of 2006 was passed, I read comments that the new Act would help employees by removing uncertainty about funding, and it would avoid pension plan terminations and freezes.

Not!

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

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

The emergence of pension plan freezes (a cessation of future benefit accruals in an existing pension plan) apparently engendered the Pension Villain's Elegy on the Pensions & Benefits Weblog.

The risk’s not worth the burden. Time to freeze.
But not to worry: we have a great 401(k)!
This cut will benefit our employees.

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

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

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

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

We know you thought we promised more, but please,
Eventually as a hybrid plan we may.
The risk’s not worth the burden. Time to freeze,
And this cut will benefit our employees.

Should we benefit people start using the term 401(k)world instead of Pensionland?

Posted In Pension Plans , Pension Protection Act of 2006
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"GUARDIAN UNIVERSITY�"
Tuesday, November 7, 2006

Lanny D. Levin Agency, Inc,
presents

Pension Protection Act of 2006�:
Challenges and Opportunities
(3 hours CE credit applied for)

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

Some of the topics:

• Extension of EGTRRA Provisions
• Retirement Plan Provisions
• Long Term Care Provisions
• New 401(k) Safe Harbors
• New Rules on Taxation of Employer-Owned Life Insurance
• Charitable Rollover Rules
• New Distribution Rules for Non-Spousal Beneficiaries

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


Here is the link to the registration form (PDF), or
Call Phyllis Scholnick (847) 266-2243 or Email phyllis_scholnick@levinagency.com
Posted In Pension Protection Act of 2006 , Seminars and Speaking Engagements
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As we know, the recently issued proposed 401(k) default investment regulations by the Department of Labor (DoL) allows 401(k) plan sponsors to select default investments funds that strive to achieve long-term capital appreciation as opposed to mere preservation of capital.

But what was the DoL's basis for permitting the use of investments other than the historically selected money market and stability of principal funds?

The DoL used  a simulation model to estimate the impact of the proposed 401(k) default investment regulations on retirement savings in the U.S. The model, called PENSIM, was developed by the firm Policy Simulation Group that specializes in the use of computer simulation models to estimate the implications of private sector and public sector policies in the areas of portfolio management, health insurance and pensions.

For you policy wonks - and actuaries - in the crowd, here is a link to the 231 page PDF Overview of PENSIM.

Hat tip to Prudence Mann's Fiduciary Investor blog.


The picture shown above is a screenshot of a title screen from The Investment Simulation Spreadsheet developed and copyrighted by Tom O'Haver, University of Maryland. It is believed that the use of a limited number of web-resolution screenshots qualifies as fair use under United States copyright law, as such display does not significantly impede the right of the copyright holder to sell the copyrighted material, is not being used to turn a profit in this context, and presents ideas that cannot be exhibited otherwise.


Posted In 401(k) Plans , Pension Protection Act of 2006
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A lot if Vanguard's experience with providing on-line financial plans for individual investors is a guide. According to Investment News, Vanguard is now providing 4,000 new plans a month - up from 15,000 for all of last year.

Here is the link to the Investment News article.
Posted In 401(k) Plans , Pension Protection Act of 2006
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Investment News reports that investment advisors are not altogether happy about the Pension Protection Act (PPA) provision that provides fiduciary relief for providing investment advice to 401(k) participants.

The reason? The PPA's fee restrictions on face-to-face advice. Their lobbyists, says Investment News, are trying to convince Congress that the restrictions in the Act were a mistake and should be fixed in a follow up technical corrections  bill before Congress adjourns for the year - and before the January 1, 2007 effective date.

But critics of the move see the price cap as a deliberate component of a legislative compromise - one that should remain in effect.

To be continued.

Here is the  link to the Investment  News article.
Posted In 401(k) Plans , Pension Protection Act of 2006
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That's the subject of a recent study by Vanguard Retirement Research, the results of which were that nearly two-thirds of participants adopting a managed account advisory service saw a sharp increase in their equity exposure. Expected returns rose by 82 basis points (after fund expenses but before any managed account fee), while Sharpe ratios improved by 22%.

The January 1, 2007 effective data is fast approaching for the Pension Protection Act provision that provides fiduciary relief to plan sponsors who make investment advice available to 401(k) plan participants. Whether plan sponsors should, however, is a blog post for another day.

In the meantime, here is the link to Vanguard's study (PDF).

Hat tip to Barry Barnitz' Financial page.
Posted In 401(k) Plans , Pension Protection Act of 2006
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One thing we can say for sure about new ERISA legislation. It does create more acronyms. Like for instance QDIA which is Pensionland shorthand for Qualified Default Investment Account.

So attorney B. Janelle Grenier will be adding one more to her 160 plus and counting Benefits Acronym Lexicon.

More to follow.


Posted In 401(k) Plans , Pension Protection Act of 2006
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The Department of Labor (DoL) issued the first regulation under the Pension Protection Act of 2006 (PPA) which deals with what is a permissible default fund.

The PPA provides a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. The regulation provides fiduciary relief if the fund is a qualified default investment account (QDIA) as defined in the proposed regulation. As expected, the default fund could have equity exposure as in a:

• Targeted-retirement-date fund;
• Balanced fund; or
• Professionally managed account

Plan fiduciaries still have responsibility for the selection and monitoring of the QDIA.

Here is the link to the DoL's Fact Sheet that summarizes the proposed regulation.

Posted In 401(k) Plans , Pension Protection Act of 2006
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The sun will not be setting after all on the favorable retirement plan tax provisions that were part of the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA).

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

The new Pension Protection Act of 2006 (PPA) now makes permanent the EGTRRA rules. One result of which is to allow participants in defined contribution plans to make larger contributions in the future. Such as:

• 401(k) limit now $15,000 in 2006 would have been reduced to $13,500 in 2011.
• 401(k) catch-up (age 50+) now $5,000 in 2006 would have been totally eliminated in 2011.
• IRA limit now $4,000 in 2006 would have been reduced to $2,000 in 2011.
• IRA catch-up (age 50+) now $1,000 in 2006 would have been totally eliminated in 2011.
• SIMPLE IRA limit now $10,000 in 2006 would have been $8,000 in 2011.
• SIMPLE IRA catch-up (age 50+) now $2,500 in 2006 would have been totally eliminated in 2011.

In other words, if the EGTRRA rules had been allowed to expire, the contribution limits would have reverted to pre-EGTRRA (2001) levels, adjusted for inflation.





Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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Former President Bill Clinton, whose birthday was yesterday, was heard last week lamenting the fact that he was about to turn age 60. Don’t feel bad, Mr. President, there are another 3 million who will join you this year - part of the first entrants of the baby boom generation. While few of them have retired, they are certainly considering it.

While the financial industry is getting ready to capture those retirement dollars, the new Pension Protection Act of 2006 liberalized distribution and payment options. Some of which are:

• Direct Rollover to Roth IRA. Distributions from a qualified retirement plan generally can not be rolled over to a Roth IRA. The rollover had to be a 2-step process. First, from the qualified retirement plan to a traditional IRA and then to the Roth IRA. Beginning in 2008 a distribution from a qualified retirement plan can be rolled over directly to a Roth IRA provided the current Roth conversion rules are met.
  

• IRA Distribution to Charity. Amounts distributed from IRAs are generally taxed as ordinary income with charitable contributions deductible under special rules. For 2006 and 2007, a tax free distribution of up to $100,000 per year can be made from an IRA directly to charity if three conditions are met: 1) the donor is over age 70 ½ , 2) the distribution would otherwise have been taxable, and 3) the donation cannot be used to increase the allowable deduction for charitable contributions on an individual’s tax return.

• Hardship Rules. Hardship distributions from qualified retirement plans can only be made on account of a financial hardship of the participant. Under the new law hardship distributions from qualified retirement plans can be also be made on account of hardship of the participant’s spouse or dependent. The new law directs the Treasury Department to effectuate this change 180 days after the enactment of the law.

• In-Service Distribution. Pension plans cannot generally make distributions unless the participant terminates employment or reaches the plan’s normal retirement age which is usually age 65. Beginning in 2007, in-service distributions can be made to a participant who attains age 62 and continues to work.

• Rollover by Non-Spouse Beneficiary. Prior law did not permit a non-spouse beneficiary to rollover the participant’s benefit into an IRA. Beginning January 1, 2007, a non-spouse beneficiary can transfer inherited qualified retirement plan benefits into an inherited IRA and adopt tax treatment of the inherited IRA.

And many of the sunset provisions of the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) that otherwise would expired in 2010 have been made permanent. So for the foreseeable feature, there should be no uncertainty about the distribution rules. More about the provisions that are here to stay at a later date.
Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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Posted In Pension Protection Act of 2006
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That's the amount of new money that  Bloomberg estimates will go into 401(k) plans as a result of the Pension Protection Act of 2006 because the new law:

• Permits automatic enrollment of employees in 401(k) plans
• Allows small employers to establish combined defined benefit and automatic enrollment 401(k) plans
• Makes permanent higher contribution limits for 401(k) plans and IRAs

And this estimate doesn’t include the additional fees that the 401(k) service providers will earn as a result of the law change that permits them to also provide investment advice to employees. This provision is effective for retirement plan years beginning after December 31, 2006. Translated, this means that since most plans are on a calendar year basis, the starting date is January 1, 2007.

We’re talking big money. For example, Fidelity alone is expected to see fees for advice increase from $200 million annually to as much as $1 billion.  Bloomberg cites Jim Lowell, editor of the independent trade newsletter Fidelity Investor, as making this estimate.

Potential for conflict of interest? You bet! Let's hope that the regulatory agencies are able to meet the challenge and that plan sponsors learn how to buy - and not be sold - 401(k) services.


Posted In 401(k) Plans , Pension Protection Act of 2006
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The new Pension Protection Act of 2006 opens the door for ERISA fiduciaries - a registered investment advisor, bank, insurance company or broker/dealer - to be compensated for giving investment advice to retirement plan participants. The Act creates a prohibited transaction exemption to these fiduciaries subject to certain safeguards to protect participants from abuse. More on the details at a later date.

With January 1, 2007, the effective date of the prohibited transaction exemption, the marketing process has already started. The investment advice provider will hopefully take the plan's demographics into account. And those demographics, suggests a 2006 study conducted by The Pension Research Council at the Wharton School, are not socio-economic factors but rather “money attitudes” which include:

• Successful Planners  who have a strong, goal-oriented vision of a successful retirement
• Up and Coming Planners who are similar to Successful Planners but don’t have as much confidence about their plans
• Secure Doers who have a strong interest in savings, particularly out of a sense of responsibility or duty towards themselves or others
• Stressed Avoiders who find financial matters to be a source of stress, anxiety and confusion
• Live-for-Today Avoiders who are uninterested in the future

The study, “Money Attitudes” and Retirement Plan Design: One Size Does Not Fit All, conducted by Donna M. MacFarland, Carolyn D. Marconi, and Stephen P. Utkus can be downloaded here (PDF).
Posted In 401(k) Plans , Pension Protection Act of 2006
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On Thursday, August 3, the Senate passed significant pension reform legislation by a wide margin (93 to 5). The bill enacted by the Senate is identical to the one passed by the House of Representatives last week. The President is expected to sign the bill into law.

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

The Act includes the following provisions:

Defined Contribution Plans

• Encourages automatic enrollment in 401(k) plans
• Permits employees to diversify their company stock accounts among other investments
• Removes the scheduled expiration of increased contribution limits, Roth contributions, and the saver’s credit
• Requires faster vesting of employer profit sharing contributions
• Allows non-spouse beneficiaries to rollover their distributions to IRAs
• Adds new requirements for notice to participants
• Changes the rules for 401(k) providers to provide investment advice to participants
• Resolves major controversies surrounding cash balance plans on a prospective basis

Defined Benefit Pension Plans

• Requires faster funding of pension obligations
• Allows larger tax deductions based on funded status of the plan
• Changes the method of calculating the lump sum equivalent of annuity benefits
• Requires additional survivor option
• Changes the basis of calculating PBGC premiums
• Allows participants age 62 and older to take in-service distributions
• Permits certain small employers to have defined benefit pension plans with 401(k) provisions

I will be providing more detailed analysis and comments on the Act’s provisions in the future.

Posted In 401(k) Plans , Pension Plans , Pension Protection Act of 2006
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