Retirement Plan Blog

08 | 19 | 2010 Posted By Jerry Kalish

A little over a year ago, I postulated on the the psychology behind today's economy.

The old economy, I said, was personified in the classic “Greed is good” speech by Gordon Gekko as played by Michael Douglas in the 1987 Oliver Stone classic, Wall Street.

Gekko returns in Stone's sequel, Wall Street: Money Never Sleeps. It's different this time. Today's economy is made up of people that Jay Suhr calls “The Cautionary Generation”.

You'll have to wait until September 24 to see the movie, but you can read about it now in my blog post, The Return of Gordon Gekko, in the Small Business Advocacy Blog of which I am the Editor.

08 | 15 | 2010 Posted By Jerry Kalish

There's a new blog out there, and it's one uniquely focused on small business and business owners. It's sponsored by the Small Business Advocacy Council (SBAC). Here's our mission statement:

The Small Business Advocacy Council (SBAC) was established to give small business owners, their employees and those with whom they conduct business a voice in local, state and federal politics. The SBAC is a non-partisan 501 (c) (6) not-for-profit political organization, whose goal is to advance advance the causes important to small businesses.

Additionally, the group seeks to strongly support our members by providing networking, advertising and promotional opportunities that will sustain those that care enough to stand with small business and hard-working Americans.

I say "our" because I am a member and the Editor of the new blog which is appropriately called the Small Business Advocacy Blog. 

If you're a business owner, consider joining us. Here's how. 

08 | 12 | 2010 Posted By Jerry Kalish

Those are the great Isely Brothers pictured off to the left whose music I grew up with. Memories of which were brought back to me by an article written by a kindred pop culture soul.

And with no disrespect intended, in of all places, a big Washington, D.C. law firm. It's David Fuller, a Partner in Morgan Lewis’s Employee Benefits and Executive Compensation Practice, who edits their firm's Payroll & Perks Bulletin Board.

In their recent issue, David writes about the IRS attempt to collect post bankrupcy taxes and interest from the Isley Brothers. You really had to be there to get all the references. So here's David's post, Is It Worth It to Twist and Shout reposted with his permission in it's entirety with links supplied by me.

Three of the brothers composing the famous R&B group the Isley Brothers filed for bankruptcy. The bankruptcy trustee made payments of more than $3 million to the IRS and the Isleys thought they had once again found Smooth Sailing—until the IRS decided The Heat Is On and took action to collect post-petition taxes and interest.

The Isleys then tried to Fight the Power and challenged the allocations of the tax payments. The Third Circuit this month upheld the dismissal of the Isley Brothers’ complaint challenging the IRS’s allocation of payments.

Marvin Isley, who passed away on June 6, was not part of the dispute. What It Comes Down To as the Isleys would say, is that taxpayers must be well prepared and well represented when challenging the IRS.

Just because you think It’s Your Thing (and you can “Do what you wanna do”) doesn’t mean the IRS will agree.

There's really not much I can add to David's post except to take it on home with a video of the afore-mentioned Twist and Shout as recorded by the Isely Brothers in 1962. And for you young-uns out there, that thing on the spindle is a 45 rpm record.   

08 | 7 | 2010 Posted By Jerry Kalish

Pardon the pun, but more employers are indeed achieving cost and operating efficiencies when the payroll system and 401(k) administration can directly talk to each other.

In the unconnected world, there are a multitude of steps that need to be done in order to get the employee's 401(k) contribution into the 401(k) recordkeeper's platform. With an integrated system, all of this takes place electronically, and the employer is removed as the middleman.

The result? Many employers have regained as much as 50 to 100 hours annually – time which could now be spent on strategic organizational matters.

You can read more about how employers are achieving these kinds of results in my Employee Benefit News column, Getting Plan, Payroll Into Alignment.

07 | 22 | 2010 Posted By Jerry Kalish

Unlike the money belt pictured above, the dollars charged for 401(k) services will start to become more apparent under the recently published Department of Labor Interim Final Regulation on Improved Fee Disclosure. 

Going forward, I'll be commenting on the new rules as they start to impact service providers, plan sponsors, and employees. That's I call the "who" and "how much" part of retirement plan fees.

But for now, don' forget that there is also the "what" part which is subject to one of the basic qualification requirements. That is, the plan must be established and maintained by the employer for the "exclusive benefit" of the employees and beneficiaries.

That means that the plan cannot pay for expenses that are considered to be the responsibility of the employer. These are called "settlor" expenses. On the other hand, expenses that relate to the fiduciary's administration of the plan can be paid out of plan assets. These are called "operational expenses". 

You can find the details about what expenses can (and can't) be paid with 401(k) plan assets in my recent column in Employee Benefit News.

07 | 1 | 2010 Posted By Jerry Kalish

This is a blog about retirement plans. So why, you might ask, am I reviewing a book about health care? I’m certainly not an expert on this complicated topic. But I am an expert on paying for it as a business owner, as a health care consumer, and an expert on watching client business owners and their employees also deal with it. And as costs and premiums continue to escalate, seeing these same employers and employees shift dollars more into health care at the expense of retirement savings.

So what’s the solution? In the view of many experts, it’s not legislation that will fix health care system in the form of the recently passed Patient Protection and Affordable Care Act (PPACA). Indeed, one expert, Paul Kasriel who is Senior Vice President and Director of Economic Research at The Northern Trust, says the PPACA “primarily represents a redistribution of income from the young and healthy to the under-65 less healthy.”

Others more cynical point to the new 10 percent tax on all indoor tanning sessions starting July 1 as part of PPACA.

Jim Champy and Harry Greenspun, M.D. provide a different approach in their new book, REENGINEERING HEALTH CARE: A Manifesto for Radically Rethinking Health Care Delivery. You may remember Jim Champy as the co-author with Michael Hammer of the 1993 book, RENGINEERING THE CORPORATION: A Manifesto for Business Revolution.

The earlier book certainly lived up to its title as it went on to change the thinking on how companies should structure work. In the process, their book sold more than 3,000,000 copies world wide, spent more than a year on The New York Times Best Seller List, and was translated into 17 languages.

Champy and Greenspun apply the same pioneering reengineering methodology to show that the health care industry is rife with opportunity for radical redesign to enhance quality and lower costs dramatically. Reengineering can improve the system in ways that government can’t by focusing on three main areas:

• How technology can create more seamless, accessible, valued, and sustainable health care systems and avoid technology’s pitfalls.
• How processes focusing on prevention and wellness and less on chronic disease and hospitals can better meet needs of patients.
• How the skills and behavior of the people who deliver health care can be tapped to replace outmoded ways with the talent, hopes, and ideas of a new generation.

From my vintage point as a business owner and health care consumer, my vote is for reengineering rather than "reform". Here is a link to the book at Amazon if you want to make up your own mind and a link to its predecessor. 

06 | 25 | 2010 Posted By Jerry Kalish

I could have gone with Verizon's "Can You Hear Me Now" Guy as my visual metaphor for this blog post.

But then I found out that there isn’t one “Can You Hear Me Now" Guy but many. Verizon has a thick rulebook which Gizmodo reports spells out the rules on how Guy should dress and comport himself during public appearances.

While I didn’t exactly feel betrayed by learning about multiple Guys, it did trigger a similar feeling back in the 60s when we booked the Drifters for a college party. The Drifters that did show up weren’t the Official and Sole Authentic Original Drifters, but another group using the same name.

So I decided to go in a different direction for today’s visual metaphor -old school - with the picture of Don Adams as Maxwell Smart, Agent 86, in the classic TV series, Get Smart. (Infinitely better than the recent movie and definitely not the first “Smart Phone” - sorry about that).

What I’m visualizing is the 401(k)helpcenter.com article about a recent study which reveals why plan sponsors select, stick with, and switch plan providers. What they are reporting on is The Briskin Consulting Study of Small-Retirement-Plan Sponsors Advice. The study’s conclusion is that “assistance, not investment performance, drive satisfaction and attrition among small-plan sponsors.”

No surprise here. The retirement plan industry is no different than any other service industry. Clients change service providers because of lack of service. In the small retirement plan market (however defined), I’ve seen service issues in situations in which providers have:

• Exited the market
• Outsourced poorly
• Changed service models
• Receiving compensation without providing commensurate services

The Briskin Study refers to the end result as attrition. I call it opportunity.

06 | 14 | 2010 Posted By Jerry Kalish

Our friend Roger Wohlner, a fee-only financial planner, who blogs at Chicago Financial Planner, sent me an email after reading the Marshall McLuhan reference in yesterday's post, Communicating 401(k): Is the Medium the Message?

Roger reminded me about McLuhan's cameo in Woody Allen's classic 1977 firm, Annie Hall. Thanks, Roger. The rest of you may enjoy it also. 

06 | 13 | 2010 Posted By Jerry Kalish

If you’re not of my generation, then let me introduce you to Marshall McLuhan by way of this YouTube video.

McLuhan, one of the visionary thinkers in the momentous decade of the 1960s, coined the expression "the medium is the message" which he introduced in his most widely known book, Understanding Media: The Extensions of Man, published in 1964.

Simply stated, McLuhan was saying that the medium itself influences how the message is perceived. McLuhan who died in 1980 didn’t live to see how spot-on he was going to be.  

So how does all of this figure in to communicating 401(k) plans? I mean really communicating 401(k) plans to participants in terms of saving money for retirement on a tax favored basis and making informed investment decisions with those dollars.

Fact of the matter is that employee education just hasn’t worked. It’s not for the lack of effort put forth by 401(k) providers which I discussed in my September 2009 column for Employee Benefit News, Lost in Translation.

And maybe it hasn’t worked because we are using the same communication methods to reach the four generations now in the workforce for the first time in our history. All of whom communicate and use technology differently.

Here’s what Larry Rosen, a professor of psychology at California State University, had to say about  this in his recent article on CNNOpinion, Generation 'Text': FB me.

We are in the midst of four distinct generations of Americans: Baby Boomers (born 1946-64), Generation X (1965-79), Net Generation (1980-89) and the new iGeneration (born in the 1990s and beyond and given the "i" designation to represent media such as iPods and the Wii but also to reflect the "individualized" nature of their media).

Until recently, "communicate" meant to talk face-to-face or on the phone. But both the Net Generation and the iGeneration have turned the concept of communication upside down. The old ways are, well, old. It is now all about texting, IMing, Facebooking, Skype-ing -- pretty much anything but talking live or on the phone.

And in the case of communicating 401(k) plans, anything but reading employee booklets and attending 401(k) meetings. So maybe, just maybe, we should relate the “how” we are communicating to the “who” we communicating and realize that McLuhan was right.

The medium is the message, and let’s start using the new ways to communicate.

05 | 23 | 2010 Posted By Jerry Kalish

 There’s an old expression among tax practitioners referring to taxpayers who know there is a potential tax problem, but are willing to take their chances. They’re “playing audit roulette”.

Not a good thing for plan sponsors to do with stepped compliance activities by the Internal Revenue Services and the Department of Labor who have oversight responsibility for the approximately 500,000 401(k) plans covering approximately 50 million employees.

And here’s the latest. Last week the IRS Employee Plans Compliance Unit (EPCU) announced that it will be sending a letter and instructions to 1,200 employers sponsoring 401(k) plans asking them to complete a 46-page 401(k) Compliance Check Questionnaire.

The EPCU will use a secure website to collect responses on the following topics:

• Demographics
• Participation
• Employer and employee contributions
• Top-heavy and nondiscrimination testing
• Distributions and plan loans
• Other plan operations
• Automatic contribution arrangements
• Designated Roth features
• IRS voluntary compliance and correction programs
• Plan administration

While the IRS indicates that this is not an audit or investigation, it does say that “failure to complete the Questionnaire will result in further enforcement action.”

While the odds of a 401(k) plan sponsor being selected are low, about 417 to 1, plan sponsors should view it as a reminder to periodically review plan operations and take corrective action if necessary. Far better to do so using available Internal Revenue Service and Department of Labor voluntary correction programs before getting caught up in an audit or investigation. 

05 | 9 | 2010 Posted By Jerry Kalish

 No, that’s not my high school graduation picture. It’s a Microsoft staff photo from December 7, 1978 from the StateMaster website.

Yes, that’s Bill Gates on the bottom row left, and co-founder Paul Allen on the bottom row right. The company was just three years old and still located in Albuquerque before it moved to its new home  in Bellevue, Washington the next year.

A lot’s changed for Microsoft since then. The same 1978 “that was then, this is now” reference point can be used for 401(k) plans. 1978 was the year in which Congress amended the Internal Revenue Code by adding section 401(k).

The differences are many, e.g., economic, demographic, cultural, political. Whatever, and now may be an appropriate time for plan sponsors to consider the extent to which their 401(k) plans are doing what they are supposed to do.

It’s a topic I write about in my column, 401(k) Plans Must Adapt To New Economic Realities, in the May, 2010 online issue of Employee Benefit News.

Times change. Maybe retirement plans should too.

05 | 1 | 2010 Posted By Jerry Kalish

Defined benefit plans and defined contribution plans - "apples and oranges" , right? Conceptually, yes. In a defined benefit plan, it's the employer who has to fund the promised benefit, but it's the employee who contributes and generally invests his or her account in a defined contribution plan, e.g., 401(k).

But in the real world in which most employees who are, in fact, covered by a retirement plan, it's 401(k) or nothing. And so the key result of a recent study, Defined Benefit vs. 401(k) Investment Returns: The 2006-2008 Update, by the consulting firm Towers Watson, has some serious implications.

The study indicates that defined benefit plans have outperformed defined contribution plans by approximately 1% a year which is consistent with their last analysis for the period 1995 and 2006.

Doesn’t sound like much, does it? But that 1% per year really matters. It can add up in terms of more lifetime retirement income. In my December 2007 blog post, What's 1% Worth, I cited research by the investment management firm AllianceBernstein that 1% translates into about $220,000 extra at retirement—and an extra 10 years of spending as shown below:

So why the difference in defined benefit and defined contribution investment returns?

Towers Watson cites possible reasons why defined benefit plans have had better investment returns. It could be because how investment results are reported, or because of different percentages of equity exposure, or it could be that

DB plan trustees have a fiduciary responsibility for investment performance. They or the professionals they hire usually have considerable financial education, experience and access to sophisticated investment vehicles — advantages 401(k) plan participants typically lack.

So in that context, then, shouldn't plan sponsors seriously consider a 401(k) managed account option?

04 | 13 | 2010 Posted By Jerry Kalish

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

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

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

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

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

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

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

04 | 8 | 2010 Posted By Jerry Kalish

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.

04 | 5 | 2010 Posted By Jerry Kalish

I was thinking recently about the late Shel Silverstein (September 25, 1932 – May 9, 1999). He was an incredibly talented Chicago guy whose creativity reached across the socio-economic spectrum as a poet, singer-songwriter, musician, composer, cartoonist, screenwriter and author of children's books.

(And no, dear, it wasn't about me running out and getting a tattoo like the one pictured here depicted from an illustration in Shel Sllverstein's classic children's book, The Giving Tree. The picture itself and others appeared in writer Cheryl Rainfield's  blog post, Literary Tattoos. 

Rather, I was recalling his Woulda-Coulda-Shoulda poem which goes like this:

All the Woulda-Coulda-Shouldas
Layin' in the sun,
Talkin' 'bout the things
They woulda coulda shoulda done
But those Woulda-Coulda-Shouldas
All ran away and hid
From one little Did.

Why now? It’s because it’s tax time, and it’s do late to do tax planning – retirement or otherwise – for last year. And for many business owners and plan sponsors, waiting under later in the year to plan for 2010 may be too late. Starting now can make a big difference and perhaps avoid some of the situations we see every December:

• Not Enough Time To Maximize 401(K) Contributions. Adopting a 401(k) plan in the latter part of the year may not give an employee enough time to maximize his or her own contributions. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral.
• Not Enough Compensation. Many owners/employees of S-Corporation minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.
• Timely Notice Not Give To Employees. Tax planning is a time-sensitive activity, and sometimes notices to employees must be made in order to achieve desired results. For example, an employer sponsoring a SIMPLE must give its employees notice of the plan provisions and employer contribution levels, including any plan changes, at least 60 days prior to the start of the next calendar year. An employer with a SIMPLE should keep November 1, 2010 in mind if a different plan type is intended in 2011.

So let me leave you with this. It isn’t anywhere close to Woulda-Coulda-Shoulda, but, hey, I'm just a pension guy:

Pension plan procrastination perils proper personal planning.

03 | 31 | 2010 Posted By Jerry Kalish

That’s a picture of a transparent memory chip developed by a group of South Korean scientists that Mark Wilson reports on in his December 17, 2008 blog post, Researchers Develop Transparent Memory, See-Through Electronics Next. Mr. Wilson calls it the precursor to completely transparent electronics.

So imagine that this technology is incorporated into the new tablet computers. Jason Chen offers an interesting scenario in his blog post, Be a Walking Wikipedia With the Handheld Looking Glass Computer:

There's no better way to annoy your travel companions than to take something like this handheld-computer design wherever you go. Not only can you hold it up to buildings and get the address, history and architectural schematics (you know, for a heist), but it also supposedly hooks up with your personal organizer, a dictionary and Google—for that extra bit of information overload.

Now imagine having this same “looking glass” technology to see through 401(k) product offerings to find all the fees. Fact is, we’re pretty darn close to that today as 401(k) fee transparency has taken another step forward.

Not in the form of regulatory action by the Department of Labor or class action lawsuits. But rather in the form of a plan sponsor entering into a proposed settlement with a 401(k) provider.

You can read the details in the Groom Law Group's March 11, 2010 Memorandum To Clients, Court Grants Preliminary Approval of Hartford Fee Lawsuit Settlement. But here’s the bottom line. Groom reports that Hartford will be paying approximately $14 million if the Court approves the settlement in June.

In addition, the insurance company will make changes to its plan documents, group annuity contracts, and funding agreements; and provide additional revenue sharing disclosures to current and future plan sponsors and participants

I’ll let the ERISA attorneys out there comment on the significance of this settlement in what the retirement plan industry calls the “401(k) Space”. (I'm resisting the urge to riff on that one). I’ll just offer up two practical suggestions to plan sponsors:

1. Know what you are signing
2. Be careful about ceding discretion to a service provider

Sometimes low tech can work well too. 

03 | 28 | 2010 Posted By Jerry Kalish

That's a picture of the oldest message in a bottle. It spent 92 years 229 days at sea according to the Guinness Book of World Records. A bottom drift bottle, numbered 423B, was released at 60º 50'N 00º 38'W on 25 April 1914 and recovered by fisherman, Mark Anderson of Bixter, Shetland, UK, at 60º 50'N 00º 37'W on December 10, 2006.

But in the 21st Century, the bottle numbered 401(k)/403(b) with the message inside of guaranteed lifetime retirement income doesn’t have 92 years to wash up on shore with solutions.

The need is obvious. Just consider the impact of the recent stock market meltdown and continuing economic problems on retirement savings and retirement dreams deferred.

The solutions are, of course, much more difficult to develop. While innovative retirement income products are being developed by the financial service industry, a recent study by Cogent Research titled In-Retirement Income indicates a vacuum in which retirement income products are simply not resonating with pre-retirees and retirees and no single provider stands out.

While we all waiting for the vacuum to be filled – and filled it will be – defined contribution plans like 401(k) and 403(b) are most likely the environment in which it will be happening. And that's the starting point which our blogging buddy, attorney Bob Toth, spells out on his blog, The Business of Benefits which links to his recent BNA Tax Memorandum, Income Guarantees in Defined Contribution Plans.

03 | 21 | 2010 Posted By Jerry Kalish

That's how many people fill out their brackets for March Madness. Jennifer Taglione writes about these and other shortcuts used to pick the winner of the NCAA basketball championship in her post, Bracketology 101: Common Bracket Methodologies, on the Bleacher Report blog.

That type of decision-making may be o.k. for picking (or trying to pick) the winner of the NCAA basketball championship. But for selecting a new 401(k) service provider, short-cut decision-making is not a good idea. Selecting a 401(k) service provider is, of course, a fiduciary decision.

401(k) Helpcenter provides some excellent guidance in their COLLECTED WISDOM™ On Choosing and Monitoring Plan Providers. It may even help avoid what I have seen as the common mistakes made in selecting a 401(k) service provider:

• Not understanding service and investment models
• Not understanding fees
• Not listening to employees about what matters to them
• Making the decision-making based solely on company politics and other relationships
• Looking solely at “costs”

Similar type of decision-making I write about in How Not To Hire An Auditor For Your ERISA Plan.

03 | 4 | 2010 Posted By Jerry Kalish

2009 was a challenging year for employers and employees. 

From our vintage point, we are seeing more employers than in recent years finding it necessary to return excess 401(k) contributions to Highly Compensated Employees by the March 15 deadline or provide a supplemental 100% vested contribution called a Qualified Non-Elective Contribution, a/k/a “QNEC”.

Unfortunately, passing 401(k) discrimination tests is not as easy as it was for Bill and Ted passing  their history test in the 1989 classic comedy, Bill & Ted’s Excellent Adventure. If you missed it (it comes around from time to time on cable), Bill S. Preston, Esq. played by Alex Winter and and Ted Logan played by Keanu Reeves are two high school slackers that use a time machine to go back in time to bring back a group of famous historical figures to use in their presentation. 

Those illustrious individuals, shown above, that were thrust into 1989 California (and what a trip that was) included Napoleon Bonaparte, Billy the Kid, Socrates, Sigmund Freud, Ludwig van Beethoven, Genghis Khan, Joan of Arc, and Abraham Lincoln.

Unfortunately, we don’t have a time machine or the late George Carlin who played Rufus from the future who supplied the lads with that time machine.

But going forward, the March 15 deadline can be an excellent focal point for employers to rethink those plan design elements that might help improve 401(k) discrimination results. 

Returns of excess 401(k) contributions by HIghly Compensated Employees can sometimes be avoided changing the plan to: 

• Add an employer safe harbor contribution
• Add an employer safe harbor match
• Change the waiting period
• Change the definition of compensation
• Add automatic enrollment

But any of these changes means, of course, starting the planning process now - or maybe have history repeat itself a year from now. 

03 | 1 | 2010 Posted By Jerry Kalish

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.

02 | 5 | 2010 Posted By Jerry Kalish

Our friends at Employee Benefit News Legal Alert published one of those "must read" articles. Attorney Cynthia Marcotte Stamer writes Tough Times Are No Excuse for ERISA Shortcuts. Ms. Stamer correctly points out that irrespective of the business hardships that plan sponsors are facing, the Department of Labor (DOL) will aggressively pursue enforcement if they perceive that a plan sponsor has failed take the necessary steps to protect plan participants.

Here are three key points she makes:

1. Many employers don't understand their fiduciary responsibilities and potential liabilities associated with sponsoring a retirement plan.
2. Plan sponsors frequently incorrectly assume that they can rely upon retirement plan service providers to ensure that their fiduciary responsibilities are being met.
3. Plan sponsors in other cases don't realize that they meet ERISA's functional definition of a fiduciary.

For comprehensive and understandable resources on what this "fiduciary stuff" is all about, check out The Fiduciary Education Campaign, a compliance assistance initiative of the Employee Benefits Security Administration (EBSA), the DOL agency responsible for fiduciary oversight.

Employee Benefit News Legal Alert is just one of the free resources provided by Employee Benefit News. Here's a link to check them out.

01 | 29 | 2010 Posted By Jerry Kalish

That was the title of a blog post I wrote exactly one year ago today when Brightscope, Inc., an independent data analytics company launched their 401k ratings disclosure website.

It featured  the BrightScope Rating™, a quantitative 401(k) plan rating developed by BrightScope, Inc. in partnership with some of the country's top independent fiduciaries, finance professors, and 401(k) experts. BrightScope Ratings™ take into account over 200 unique data inputs per plan and calculate a single numerical score to define 401k plan quality at the company level.

In noting that it was the nation’s first online 401(k) rating system, I ended my post by saying, As for me, I’m still thinking about the implications of this innovation. Could be huge.

So I thought it would be interesting to see exactly the progress this start-up company has made over the past year.

Here’s a brief quantitative look-back. Then: 5 employees, now: 22. Then: 800 401(k) plans rated, now: 34,000 401(k) plans rated. Then: a few hundred page views a day, now: approximately 12,000 a day.

The buzz about BrightScope started from their initial press release and has been fueled by media coverage in both mainstream and trade media.

Since the beginning of 2009, the Company has launched the following products:

• July 2009: Plan Management Dashboard for corporate plan sponsors
• September 2009: Advisor Central for retirement-plan advisers
• January 2010: Personal 401(k) Fee Report for 401(k) participants.

They have arrived in the middle of the “perfect storm”: increased Congressional scrutiny and involvement in 401(k) plans, stepped up regulatory focus by the Department of Labor, and everyone’s concern about the adequacy of retirement income – or lack thereof.

Only time will tell the extent to which Brightscope will impact the 401(k) plan industry. But impact it they will. Year 2 should be very, very interesting.

01 | 23 | 2010 Posted By Jerry Kalish

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.

01 | 10 | 2010 Posted By Jerry Kalish

That's the poster from the not so good 1979 movie, The Shape of Things To Come. You kinda get the picture from the tagline Beyond the earth... Beyond the moon... Beyond your wildest imagination!

The movie was an adaptation of  the 1933 science fiction novel, The Shape of Things To Come, by H.G. Wells which speculates on future events from 1933 until the year 2106.

My own prognostications for the future are not nearly as expansive. But rather limited to the world of 401(k) for 2010. Here's a link to my January 2010 column in Employee Benefit News, The Shape of Things To Come for 401(k) Plans. 

12 | 31 | 2009 Posted By Jerry Kalish

It’s that season of the year. No, not the obvious holiday season, but the award show season. And I’ve got my own called, The Retirement Plan Year in Review: The Good, The Bad, and The  Ugly.

The reference is, of course, to Sergio Leone's classic 1966 movie, considered the greatest of the Italian spaghetti westerns, starring Clint Eastwood (the Good), Eli Wallach (the Bad), and Lee Van Cleff (the Ugly).

And so with apologies to the afore-mentioned director and actors, here are my 2009 nominations in each of the three categories.

• The Good: Increased Consumer Spending
• The Bad: Job Losses
• The Ugly: Early Retirements Hurt Social Security System and Many Recipients

You can see the entire "award show" in my December, 2009 column in Employee Benefit News.

So for 2009, that's a wrap.

Best wishes for a healthy, happy, and prosperous New Year.

12 | 26 | 2009 Posted By Jerry Kalish

Welcome to Adam Pozek and his new blog, Pozek On Pension to the cadre of retirement plan bloggers. He is Vice President, Consulting Services for Sentinel Benefits & Financial Group.

In the few posts Adam has published so far, he provides context for what’s happening with retirement plans with a point of view.

And here’s one that immediately caught my eye as a response to a plan sponsor or advisor “shopping” for a retirement plan administrator. I’ll simply link them to Adam’s post, Is Cheapest Always Best?

Right on!

12 | 16 | 2009 Posted By Jerry Kalish

Our blogging buddy, attorney Bob Toth, blogging from a ski slope in Quebec province, discussed the demise of defined benefit pension plans, Continuing the DB Demise Discussion. He notes that there are only 19,000 defined benefit plans now being covered by the PBGC.

The context in which Bob writes is what is generally perceived to be “Corporate America”. He quotes Nassim Nicholas Taleb from his book, The Black Swan: The Impact of the Highly Improbable:

Consider the following sobering statistic. Of the five hundred largest U.S, Companies in 1957, only 74 were still part of that select group, the Standard and Poor’s 500, forty years later. Only a few had disappeared in merger; the rest either shrank or went bust.

But that’s Corporate America as it used to be. From my vantage point, Corporate America is small business owners, and defined benefit plans are very much alive and well with new plans being adopted.

Just like Fleetwood Mac who after many years apart are back together, defined benefit pension plans are back and better than ever. Here is a presentation I did last year on that theme. 

11 | 29 | 2009 Posted By Jerry Kalish

The Employee Benefit Research Institute (EBRI), an independent non-partisan research organization, in their annual Retirement Confidence Survey (RCS) has been asking workers how confident they are in having enough money for a comfortable retirement since 1993.

And in today’s economy, it should be no surprise that EBRI reported The 2009 Retirement Confidence Survey: Economy Drives Confidence to Record Lows; Many Looking to Work Longer. The Executive Summary stated

Workers who say they are very confident about having enough money for a comfortable retirement this year hit the lowest level in 2009 (13 percent) since the Retirement Confidence Survey started asking the question in 1993, continuing a two-year decline. Retirees also posted a new low in confidence about having a financially secure retirement, with only 20 percent now saying they are very confident (down from 41 percent in 2007).

The 2009 RCS reports that workers who have lost confidence in their ability to secure a comfortable are responding as follows:

• 81% have reduced their expenses
• 43% are changing the way they invest
• 38% are working more hours or a second job
• 25% are saving more money , and
• 25% are seeking advice from a financial professional

Sounds reasonable, yes? But here’s the rub. The RCS concludes that faulty assumptions and a lack of planning still hinder the ability of many Americans to realistically assess the preparations they need to take to ensure a financially secure retirement.

And that’s the problem that Frank Armstrong, III and Paul B. Brown address in their new book, Save Your Retirement: What To Do If You Haven’t Saved Enough or If Your Investments Were Devastated by the Market Meltdown.

So what’s so special about this book amidst the glut of books about retirement planning? Simply this. It reflects the real life experience of the authors in contrast to the media-created “investment experts” for many of whom the current recession is their first.

Frank Armstrong has more than 35 years of experience in the securities and financial services industry and is the founder and principal of Investor Solutions, Inc., a fee-only registered investment advisor, based in Miami. Paul Brown is a longtime contributor to the New York Times and co-author of the best selling retirement plan guide Grow Rich Slowly. He is a financial expert for ThirdAge.com, the popular website devoted to the concerns of people over age 40.

There’s nothing magic in their book. It’s just basic, old-school financial management in which Armstrong and Brown respond directly to what I call the “new financial realities” by showing battered investors

• Where to move their savings
• How to recalculate what they’ll really need to retire
• How to assess when they can now afford to retire
• How they should change their approaches to investing
• How to use the federal tax system to save more
• What to expect from Social Security now

So if you’re one of those people worried about how and when you can afford to retire, then this book can be an excellent guide. Here's a link to Amazon if you want to purchase the book, and you can also subscribe to Frank's companion blog, Sink or Swim.

You can also check out other book reviews I’ve done: Josh Itzoe's timely Fixing The 401(k); Fran Hawthorne's controversial Pension Dumping: The Reasons, The Wreckage, The Stakes for Wall Street; and Christian Jarrett’s and Joannah Ginsburg’s This Book Has Issues - Adventures in Popular Psychology.

11 | 27 | 2009 Posted By Jerry Kalish

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.

11 | 15 | 2009 Posted By Jerry Kalish

If you missed that 2000 stoner comedy Dude, Where’s My Car?, you had several chances recently to catch it on cable. But if you’re still not aware of this movie that was a modest box-office success but has managed to develop a cult following, let me raise your pop culture awareness.

Two potheads played by Ashton Kutcher and Seann William Scott wake up from a night of partying and can't remember where they parked their car. And it occurred to me what if they woke up 40 years later and couldn’t find their 401(k) accounts from all the different employers for whom they worked. (Yea, yea, I know I should get a life outside ERISA!).

That’s a likely scenario for many employees who were never part of a defined benefit pension plan and participated only in defined contribution plans such as profit sharing and 401(k). In an economy in which workers change jobs frequently, employers go out of business, move or are acquired, it’s not unusual for them to lose track of former account balances.

The resources to find these lost defined contribution accounts are even more limited than for defined benefit plans. For these plans at least, the Pension Benefit Guaranty Corporation (PBBC) does have its Pension Search database, but it’s only useful to assist employees whose defined benefit pension plan the PBGC has taken over. The PBGC does, however, provide information on how to track down a lost pension from other sources in their publication, Finding a Lost Pension.

There are, however, at least two resources, however limited, that may help:

1. The Social Security Administration which receives Schedule SSA information from the Department of Labor each year for terminated employees with vested benefits. However, the information is only as current as the date that the employer left his former employer.
2. The National Registry of Unclaimed Retirement Benefits (NRURB), a database operated by the benefit distribution processing firm PenChecks. However, employers must take the initiative to register names of former employees who have left account balances in their retirement plan. There is currently approximately 50,000 such individuals in their database.

So what’s the solution? One to consider is the approach taken by the U.K. and Australia. Each country has a central registry for the purpose of helping people find lost pensions. You can read about this approach in the March/April 2002 issue of Contingencies magazine article, Retirees ISO Their Lost Pensions, written by David Blake of the Pensions Institute in London and John Turner of the American Association of Retired Persons (AARP).

The bottom line is that employees are on their own, and it’s time to address the matter. 

And by the way, if you did miss the movie that inspired this post, be patient. The sequel, Seriously Dude, Where's My Car, is supposed to premiere next year.

11 | 1 | 2009 Posted By Jerry Kalish

On October 31 and November 1, I participated in a seminar at the John Marshall Law School, "New Rules for Non-Traditional Retirement Plans", as part of the Law School's LLM Program in Employee Benefits.

The seminar was led by attorney Bob Toth with whom I collaborated in our 403(b) Crunch Time Series. Bob is considered one of the leading experts on 403(b) plans, 457 plans, and the annuitization of 401(k) Plans. He is Of Counsel with Giller & Calhoun and blogs at his firm's Business of Benefits blog.

Bob asked me to discuss some of the practical aspects of dealing with 403(b) and 457 plan sponsors with the law students who had great interaction with all of the presenters over the entire seminar. Since my presentation came at the end of a long day of tax law discussions, I started on a lighter note. Take a look:

New Rules for 403(b) and 457 Plans

10 | 23 | 2009 Posted By Jerry Kalish

Common Craft has just released their new video, Saving for Retirement In Plan English. They are superbly talented producers of videos for training and education, whose product they say is "explanation".

The video can be licensed for use by any organization that has the goal of increasing awareness and adoption of a retirement savings program, e.g., 401(k) plan sponsors.

Earlier this year, I blogged about Common Craft's video, Investing Money in Plain English as a way to help 401(k) participants get back to the basics.

Sometimes less is more.

10 | 9 | 2009 Posted By Jerry Kalish

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.

10 | 6 | 2009 Posted By Jerry Kalish

For today’s visual metaphor, I could have used artwork for Simple Minds’ 1984 hit, Don’t You (Forget About Me), from the soundtrack of Breakfast Club, the movie by the recently deceased John Hughes. Instead, I’m using a picture that caught my attention photographed by artist Jeannette Sheehy inspired by the song.

In the context of the movie, the song title recalls the theme of the movie, five teenagers who they spend a Saturday in detention together and realize that they are all different than their respective stereotypes.

In a retirement plan context, the song title reminds many 403(b) plan sponsors that there is work that has to be done before year end. And the work is being in compliance with the IRS final 403(b) Regulations.

I wrote about the new Regulations in late 2008 in our 403(b) Crunch Time Series with guest author, attorney Bob Toth, himself a blogger on Giller & Calhoun's Business of Benefits blog.

The Regulations originally had a January 1, 2009 effective date and dealt with the following aspects of 403(b) plans:

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

In late 2008, the IRS extended the plan document requirement to December 31, 2009. But that's not the only “Don’t You Forget About Me” aspect of 403(b) plans. Two others include:

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

It’s only early October, and there is still time for 403(b) plan sponsors to do a compliance review to determine the extent to which they are in compliance with the 403(b) Regulations, and to develop an action plan to resolve an issues.

In the meantime, let’s lighten things up and roll the video, Simple Minds performing Don't You (Forget About Me) in Philadelphia at Live Aid, July 13th 1985.

09 | 23 | 2009 Posted By Jerry Kalish

Gimme Shelter is, of course, one of the classic songs by The Rolling Stones, and it first appeared as the opening track on the band’s 1969 album Let It Bleed.

The song was written in the context of the cultural turmoil of the 1960s, e.g., the Vietnam War, and the lyrics speak of seeking shelter from a coming storm.

Oh, a storm is threat’ning,
My very life today;
If I don’t get some shelter,
Oh yeah, I’m gonna fade away

Gimme Shelter was needed all too soon on December 6, 1969 documented in the 1970 film of the same name directed by Albert and David Maysles and Charlotte Zwerin. The documentary chronicled The Rolling Stones’ 1969 US tour, which culminated in the disastrous Altamont Free Concert at which the above picture of Mick Jagger was taken.

The song and the film were also indicative of the long and sometimes inglorious history of tax shelters. During this time, the top tax brackets in the U.S. was extremely high, 70%; and there was a growing trend towards marketing and packaging tax shelters for the middle class. In Rolling Stones terms, Gimme Tax Shelter.

There is nothing inherently wrong with tax shelters which are methods to reduce taxable income, e.g. qualified retirement plans. But human nature being human nature, “abusive tax shelters” (defined by the IRS as transactions promoted for the promise of tax benefits with no meaningful change in a taxpayer’s income or assets) appeared in every increasing numbers.

Generally, the IRS has found several forms of abusive tax shelters such as the use of multiple layers of domestic and foreign pass-through entities such as Trusts, Partnerships, S-Corporations, and Limited Liability Companies. The cost of adverse tax consequences resulting from an abusive tax transaction can be significant.

And, oh yes, certain forms of qualified retirement plans have been classified as such by the IRS. In the late 1990s, for example, some fully insured defined benefit pension plans permitted by Section 412(i) of the Internal Revenue Code were funded by life insurance policies with “springing cash values”.

These policies had no cash value for the first 5-7 years, after which they had significant cash value. Just before the cash value sprung, the participant would purchase the policy from the plan for the policy’s surrender value, zero. The objective was create a tax free transaction. The fallout – both financial and legal – from these types of retirement plans continues.

I wrote about the newest form of supercharged retirement plan in one of my weekly columns for my other blog home, Slate’s BizBox blog, How To Buy A Business...Maybe, Maybe Not. It’s supposed to work something like this. A new business owner rolls his account from his former employer’s plan into his new retirement plan, and then uses the funds to buy stock in his new company.

Thus, the new business is capitalized with tax-deferred money. If it sounds too good to be true, it may very well be. It’s one of the transactions right on the IRS’s radar screen for abusive tax schemes. The IRS calls these transactions ROBS, rollover for business start-ups, so you kind of get the drift of their view.

For the technical details, here are two links.

• The October 1, 2008 memorandum that Michael D. Julianelle, IRS Director of Employee Plans, penned. The memo alerts IRS agents performing audit reviews and determination letter approvals to study each of these transactions on a case-by-case basis.
• McKay Hochman provides an excellent discussion of the retirement plan issues in their recent Email Alert, Rollovers for Business Start-ups (ROBS).

So what to do before committing money to any tax shelter? Attorney Susan Berson writes that some of the questions the IRS will ask about the tax shelter are the same ones you should ask before investing. Susan is a Partner in the boutique law firm, The Banking and Law Group, LLC, specializing in banking law, tax litigation, business law and mediation services.

Not much I can add to what Susan, formerly a senior trial attorney with the United States Department of Justice Tax Division in Washington, D.C., can say except this:

It’s worth the time and money to seek an opinion with a tax advisor not associated with the transaction. The cost of adverse tax consequences resulting from an abusive tax transaction can be significant.

09 | 16 | 2009 Posted By Jerry Kalish

That’s Dr. Eli Peli, pictured on the right. Dr. Peli is Senior Scientist and the Moakley Scholar in Aging Eye Research at Schepens Eye Research Institute, and Professor of Ophthalmology at Harvard Medical School. And the device that Dr. Peli is wearing is an augmented-reality system he invented.

In reporting on his research, the New Scientist magazine says, “augmented reality techniques can dramatically improve the sight of people with tunnel vision” , a condition, which narrows a person's field of view.

That’s tunnel vision in the context of medicine. We have our own tunnel vision in our political economy. I define it as the inability for us to deal with more than one public policy issue at the same time. The reasons why are beyond the scope of my expertise, but here is a striking example of tunnel vision in the benefits world in which I reside.

It’s that while the health care debate rages (and I use that word intentionally) on, resolving the Social Security system’s long-term funding shortfall is apparently out of sight, out of mind. In Dr. Peli’s terms, the issue is in our peripheral vision.

According to the 2009 and latest Social Security Trustees’ report, the program’s long-term funding shortfall currently amounts to negative 2.00% taxable payroll. This means that the program would need additional revenues equal to 2 percent of taxable payroll for each year over the next 75 years to match the projected future current-law costs over that time frame. Without changes, the program ultimately will be able to pay only about 75% of benefits promised under current law.

The options are described in new research conducted by the Employee Benefit Research Institute (EBRI), an organization about which I have previously written. EBRI is a private nonprofit research institute based in Washington, D.C. that focuses on health, savings, retirement, and economic security issues. EBRI does not lobby or take policy decisions.

EBRI’s research study, Social Security Reform: How Different Options Might Affect Future Funding, discusses a range of possible reform options, all of which have been part of various reform proposals over the last two decades, and draws upon data presented in the annual Social Security Trustees’ report referenced above.

The options are basic:

1. Reduce benefits (by lowering the scheduled increase in future benefit levels by changes to the benefit formula, or by raising the normal retirement age), or
2. Raise taxes (by changing the amount of earnings that are taxable and used for the calculation of benefits under Social Security) and changes in benefits taxation.

The degree to which any of the options presented in the study would improve the long-term funding status of Social Security depends on how much emphasis policymakers might place on a specific provision. And when they do so.

Dr. Peli, we need you.

09 | 13 | 2009 Posted By Jerry Kalish

That’s Chicago’s own Bill Murray and Scarlett Johansson pictured in a scene from Lost In Translation, the 2003 movie in which they co-starred.

I’ll skip the movie review and just describe it as writer/director Sofia Coppola’s story about Murray and Johansson playing two people out of sorts with Japan, the country they find themselves visiting. Coppola won the Oscar that year for Best Writing, Original Screenplay.

Kinda like 401(k) participants attempting to translate investment education programs in managing their accounts. My September column in Employee Benefit News discusses how many plan sponsors have added an independent investment advice component to address the situation. Here is the link (free registration may be required) .  

09 | 9 | 2009 Posted By Jerry Kalish

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

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

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

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

09 | 8 | 2009 Posted By Jerry Kalish

That's The Police, circa 1983, pictured above. 1983 as the year when Sting was the King of Pain. That was the title, of course, of the hit song he wrote, one of the tracks on the album Synchronicity – the last and greatest Police album.

The story goes that King of Pain was a very personal song for Sting. He had recently separated from his first wife and was not getting along with the other two members of the band. Sting wrote the song in Jamaica at the house where Ian Fleming wrote the James Bond books. Fleming called his house in Oracabessa, Goldeneye (available for your next vacation, and not exactly where you would expect to see "a little black spot on the sun today").

Now some 26 years later, employees commuting back to work after the Labor Day weekend are the new Kings and Queens of Pain. That's the findings of the second annual IBM Commuter Pain survey released last week. The survey indicates that the recession is taking its toll on urban motorists, who have become significantly more sensitive to gas prices and are looking for ways to spend more time with family and friends.

IBM has compiled the results of the survey into a Commuter Plan Index that ranks the emotional and economic toll of commuting in each city on a scale of one to 10, with 10 being the most onerous. Here's how the cities stack up ranking those with the highest commuter pain index first:

1. Los Angeles
2. Washington, D.C.
3. Miami
4. Chicago
5. Boston
6. New York
7. Atlanta
8. San Francisco
9. Dallas-Ft. Worth
10. Minneapolis-St. Paul

To deal with the problem, the IBM survey concludes that:

Commuters too, will have to do their part. Continued use of public transportation, carpooling, vanpooling, and alternate forms of transportation like walking or biking will help ease the burden on our roads.

Employers can, in fact, help employees do their part by offering a Commuter Transit Benefit, the link to which will take you to the blog posts I've written on this topic. It’s an increasingly popular program that allows employers to offer employees the opportunity pay for certain transportation expenses on a pre-tax basis under Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century (TEA-21).

In 2009, employees may reduce their salary or receive up to $230 per month for transit passes, transportation in a commuter highway vehicle, or parking expenses.

Employees can also receive up to $20 per month tax-free for the reasonable expenses they incur during a calendar year for the purchase of a bicycle, for bicycle improvements, and for repair and storage if the bicycle is regularly used for travel between the employee’s residence and place of employment.

A Commuter Transit Benefit may not take all the pain away from commuting, but it's better than simply taking two aspirins. 

Nuff said. Now let's roll the video and scroll the lyrics. 

The Police lyrics

09 | 2 | 2009 Posted By Jerry Kalish

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.

08 | 31 | 2009 Posted By Jerry Kalish

The picture above is the cover of Jim Collins’ bestseller, Good To Great. The book, says Mr. Collins, shows that

Greatness is not primarily a function of circumstance; but largely a matter of conscious choice and discipline.

He’s talking about corporate management, of course. But why not think about 401(k) plans in those same terms. How do we go from good 401(k) plans to great 401(k) plans?

That process is clearly underway. There are folks out there leading the charge. They include our friends and fellow bloggers Brightscope, a firm which quantitatively rates 401k plans, and Josh Itzoe. Josh is both a CFP® and AIF® and is a Principal of Greenspring Wealth Management, Inc., a registered investment advisory firm and Independent Fiduciary in Towson, MD. I reviewed Josh's book Fixing The 401(k) earlier this year. 

There’s also Roger Wohlner, CFP®, whose local, and in his blog, Chicago Financial Planner, writes about the characteristics of a good 401(k) plan. Those ingredients, he says, are:

• An active and engaged Investment Committee is essential.
• An investment process governing the management of the plan.
• A menu of solid, well diversified investment options is offered.

What can take a 401(k) plan from good to great is Roger’s conclusion:

In the future hopefully plans will offer their participants the option of having an unbiased, unconflicted Fiduciary Advisor manage their individual 401(k) accounts. This goes far beyond the education currently offered by some plans and, in my opinion, gets to the real heart of what participants need.

And why? Participants in 401(k) plans just haven't been achieving an appropriate rate of return. No great insight on my part, but just take a look at recent research to see how really bad it’s been.

For the past 15 years, Dalbar, a Boston-based financial research firm, has been issuing a report called the Quantitative Analysis of Investor Behavior (QAIB) that examines the returns that investors actually realize and the behaviors that produce those returns.

In its 15th annual study, Dalbar discovered that equity, fixed income and asset allocation mutual fund investors experienced average annual losses for all time periods examined except the longest (20-year) time frame. And even those positive returns did not keep pace with the average inflation rate.

I’ll leave the commentary and analysis of the report’s results to the investment experts like Josh and Roger, but one stat jumped out at me. While the S & P 500 earned an average return of 8.41% from 1988 to 2008, the average equity investor earned a mere 1.87%.

Some investment experts call that 6.54% differential the cost of uninformed investing, and others call it the cost of going it alone. I call it the cost of inadequate retirement income.

There’s no guarantee that independent investment advice is the answer. To quote the ubiquitous compliance officer: “Past performance is no guarantee of future investment results.”

But then again, investment education programs haven’t worked. 

08 | 26 | 2009 Posted By Jerry Kalish

Each week Nevin E. Adams, JD, PLANADVISER Editor-in-Chief writes a column called IMHO (In My Humble Opinion), and he's always a good read.

He's just published a two-part series that's an excellent, common sense approach for fiduciaries that's definitely worth keeping handy. It's called “To Do” List: 10 Things You’re (Probably) Doing Wrong—or Not Doing Right—as a Plan Fiduciary.

His 10 things are:

1. Not having a plan/plan investment committee.
2. Not HAVING committee meetings.
3. Not keeping minutes of committee meetings.
4. Not having an investment policy statement.
5. Not removing “bad” funds from your plan menu.
6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.
7. Depositing contributions on a timely basis.
8. (Not) monitoring providers on a regular basis.
9. Not following the terms of the plan document.
10. Not realizing who is a fiduciary—and what that means.

To get the full picture, here are links to the complete columns: Part 1 and Part 2.

08 | 25 | 2009 Posted By Jerry Kalish

What's an eligible rollover distribution and what's not can be as complicated and confusing matter as the maze pictured above. Here's a recent and handy discussion of the rules and a chart that may be helpful to find your way through it. It's published by McKay Hochman which you can find here.

08 | 24 | 2009 Posted By Jerry Kalish

I was flipping - or rather, clicking - through my album collection yesterday, and landed on The Well's On Fire, Procul Harum's 2003 studio album. If you're not a child of the '60s or are too young, they're the 1960s British rock group best known for their 1967 hit single, A Whiter Shade of Pale, and who are still touring.

And there it was, Track No. 9, The Wall Street Blues which some might say is as relevant now as it was then. So in that light, let's roll the video and scroll the lyrics: 

Procol Harum lyrics

I don't mean to bum you out on a Monday morning, but, hey, we got to keep it real, don't we?

08 | 18 | 2009 Posted By Jerry Kalish

The economy doesn't seem to be improving, and hardship distributions from 401(k) plans continue to be taken. A few months ago I posted, Hard Times Mean More 401(k) Hardship Distributions.

I'm revisiting this matter again to point you to how to make hardship distributions correctly as discussed in the IRS' Summer 2009 Edition of Retirement News for Employers. 

Here are the highlights of the IRS' 7 steps to making hardship distributions:

1. Review the terms of your plan.
2. En sure that the employee complies with the plan’s procedural requirements.
3. Verify that the employee’s specific reason for hardship qualifies for a distribution using the plan’s definition of what constitutes a hardship.
4. If the plan, or any of your other plans in which the employee is a participant, offers loans, document that the employee has exhausted them prior to receiving a hardship distribution.
5. Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee’s financial need.
6. Make sure that the amount of the hardship distribution does not exceed any limits under the plan and is made only from the amounts eligible for a hardship distribution.
7. If the plan has a provision that the employee taking a hardship distribution is suspended from contributing to the plan for at least 6 months, make sure to enforce that provision. 

Basic, yes. Practical, very. Here is a link to the complete article, 7 Steps to Making a Hardship Distribution (PDF).

08 | 13 | 2009 Posted By Jerry Kalish

That's Les Stroud pictured above whose TV show, Survivorman, is one of my favorites. One of my other favorites is Bear Gyylls show, Man Versus Wild.   

Both are survival experts who go toe-to-toe with some of the harshest environments on the planet and come through alive.

So if you'll grant me some editorial license, Les's picture is the visual metaphor I'm using for the harsh environment in which fiduciaries must operate. And it is harsh out there.

Buffeted by the most complex set of forces since ERISA arrived in 1974, plan fiduciaries today must cope with heightened compliance enforcement by the Internal Revenue Service and the Department of Labor, increasing litigation by plan participants and tightened fiduciary liability insurance markets.

But despite all these forces that are swirling around, there are indeed some practical ways that fiduciaries can effectively manage their responsibilities. Here is a link to my column in the August issue of Employee Benefit News in which I discuss this matter. (Free registration may be required).

Employee Benefit News is an employee benefit publication which provides free newsletters including  seminars and podcasts from industry experts, and online content for plan sponsors. One of their other publications, Employee Benefit News Legal Alert, also carried  my article. You can check all of their publications here.

But I do have one nagging question. Les Stroud is Canadian. Bear Grylls is British. Would I be too much of a homer if I asked where are the Americans?

08 | 10 | 2009 Posted By Jerry Kalish

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!

08 | 7 | 2009 Posted By Jerry Kalish

Classic rock bands never go away. They keep on touring, and are rediscovered by new generations of music fans. Kinda like, those classic tax planning techniques that are being rediscovered by new generations of business owners.

One of those oldies, but goodies is buying life insurance through a profit sharing or 401(k) plan. In today’s economy, the reason is obvious. Cash flow, or lack thereof. Here’s a link to our Benefit Briefing that explains how life insurance fits into profit sharing and 401(k) plans in question and answer format.

Picture credit: Knebwort, the "Stately Home of Rock for 35 years".

07 | 30 | 2009 Posted By Jerry Kalish

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

07 | 22 | 2009 Posted By Jerry Kalish

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

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

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

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

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

07 | 13 | 2009 Posted By Jerry Kalish

It's already the middle of July, and for many retirement plan sponsors Form 5500 will be due by the end of this month unless extended. And if you’re a plan sponsor whose 5500 must include an ERISA audit, selecting a plan auditor is a fiduciary function.

Here is a link to my column in the July  issue of Employee Benefit news about what you need to know about ERISA audits. (Free registration may be required). Employee Benefit news is an employee benefit publication which provides free newsletters, seminars and podcasts from industry experts, and online content for plan sponsors. You can check it out here.

07 | 11 | 2009 Posted By Jerry Kalish

You remember that classic labyrinth wooden maze game. It’s the toy that has captivated and challenged children and adults for generations. It takes concentration and dexterity to guide the steel ball through the maze to reach the winning position.

Well, this is the 21st Century after all, and some folks from the Cowtown Computer Congress in Kansas City made it into a robotic labyrinth game as pictured above. They plugged an Arduino and two servos into the wooden labyrinth board game, and added some programming and a WiiFit board.  

Kinda like a 401(k) participant managing his or her own account to get to retirement with adequate income. Instead of WiiFit, they’re using employer sponsored investment education programs. Now I don’t know about how the computer folks feel about the results of their project, but 401(k) participants now think that current investment education programs are coming up short.

That acccording to String Financial’s recent study, Market Insights: Helping Tomorrow’s Retirees Better Prepare Today.

String Financial surveyed over 400 defined contribution plan participants in the third quarter of 2008. The respondents’ collective view of educational materials supplied by 401(k) providers and their employers is that they are: 

• Difficult to understand. 34% of respondents felt the materials included terms or concepts that they did not understand and were not adequately explained;
• A commodity product:. 41% agreed that the materials do not contain information that could not be easily found elsewhere (19% disagreed);
• Ineffective. Fewer than 19% of respondents indicated that the educational resources led to changes in retirement planning behaviors or practices.

And in real terms, even worse if you look at how research conducted by DALBAR. For the past 15 years, DALBAR has been issuing a report called the Quantitative Analysis of Investor Behavior (QAIB) that examines the returns that investors actually realize and the behaviors that produce those returns.

I’ll leave the commentary and analysis of the report’s results to the investment experts like our friends at Interlake Capital Management, LLC who in their blog, The Float, wrote, Dalbar 2009: Not Pretty.

Not pretty, indeed. While the S & P 500 earned an average return of 8.41% from 1988 to 2008, the average equity investor earned a mere 1.87%. Some call that 6.54% per year over that time period the cost of uninformed investing, and some call it the cost of going it alone. I call it the cost of inadequate retirement income.

And the answer is? 

07 | 7 | 2009 Posted By Jerry Kalish

There a lot of business myths out there. One of the most potentially dangerous is that there is a "7-Year Rule" and a "6-Year Rule" respectively for maintaining business and ERISA records. Both may be guidelines, but not the practical side of record retention.

That's the topic of my recent post over at my other blog home, Slate's BizBox blog for small business. Here's a link to Hang On To Your Records. 

07 | 5 | 2009 Posted By Jerry Kalish

You may be familiar with the PBS TV series, Antique Road Show. It’s that show that visits various cities in the U.S., and invites people to bring their unusual antiques and collectibles to be valued by appraisers.

But sometimes, things go awry in these situations as shown in the video below - actually an advert for the BBC version of the show in HD.

 
Hopefully, 401(k) participants who have hard to value assets in their accounts won't experience the same type of chaos. But there can be serious issues nonetheless.

Let's start with a definition. Hard to value assets, a/k/a "HVA" - another one of our many ERISA acronyms) include real estate, nonpublicly traded securities, shares in a limited partnership, and collectibles. They’re usually found in self-directed brokerage accounts ("SDBAs" - sorry, another acronym) which I wrote about earlier this year, Self-Directed Brokerage Accounts: Deja Vu All Over Again?

J.P. Morgan's recent newsletter analyzed the issues and regulatory activity impacting HVAs in their article, Plan investments – Hard to Value Assets. I'll leave the critical analysis to the experts like Brian Donohue, FSA, the Managing Director of J.P. Morgan's Compensation & Benefit Strategies.

But there's an aspect of HVAs that very timely to some of our clients at this time of year. Form 5500 due at the end of this month for calendar year plans unless extended. HVA can impact  "small plans” (those with fewer than 100 participants). These plans are generally exempt from the general requirements under Title I of ERISA that a retirement plan be audited each year by an independent qualified public accountant as part of the plan’s annual report Form 5500.

The exemption is based on the requirement that at least 95% of a small plan’s assets must be “qualifying plan assets” which those assets that can be readily valued. Or in other words, having not more than 5% of HVAs. In such case, the audit waiver can still be met if additional bonding is obtained in accordance with Department of Labor regulations.

And as to who pays the cost of the additional bonding, the Plan Administrator can require that the cost be paid by the participant whose self-directed account  caused the threshold to be exceeded. A policy clearly stated in the plan's Investment Policy Statement. You do have one, don't you?

06 | 30 | 2009 Posted By Jerry Kalish

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

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

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

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

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

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

The DOL safe harbor says that

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

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

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

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

06 | 23 | 2009 Posted By Jerry Kalish

It's the age-old story: worker classification, or rather misclassification. I wrote about it this past February, Independent Contractor or Employee? Employee Classification Still A High Priority Enforcement Matter.That was about the IRS auditing employers to determine whether those "independent contractors" were actually employees with required tax withholdings and possible inclusion in benefit plans.

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

06 | 22 | 2009 Posted By Jerry Kalish

See larger image.

This is the third in our EGTRRA Restatement Series, the purpose of which is to help retirement plan sponsors handle the required amendment and restatement of their retirement plans. Last week, I discussed the written plan document requirement, Put It In Writing.

Today’s post is about what type of plan document to use. And like the clothes pictured in the closet above, you can buy them off-the-rack or have them custom made.

In ERISA terms, off-the-rack plans are those plans that are pre-approved by the IRS. They can be either Master & Prototype or Volume Submitter.

Master &  Prototype (M&P) consists of a basis plan document and an adoption agreement. The basic plan document contains all the non-elective provisions, and the adoption agreement contains provisions that may be selected by the Plan Sponsor. Any change in the pre-approved plan provisions causes the plan to lose its master or prototype status.

A M&P Plan can either be

• Standardized which allows only limited choice and is designed to satisfy the coverage requirements of the Internal Revenue Code, or
• N Non-Standardized which offers additional plan options and more flexibility than a standardized M&P Plan, but does offer the same protection.

Volume Submitter (VS) are also pre-approved by the IRS. A VS in the form of a specimen plan may include an adoption agreement. Once IRS has approved the specimen plan,
employers who adopt the same plan and meet certain conditions will be able to rely on the IRS determination letter.

In contrast, a custom made plan is called Individually Designed (IDP). These are plans that are custom designed to meet the needs of the plan sponsor by providing the maximum amount of flexibility, or are not available through a M&P or VS such as an ESOP or Cash Balance Plan. IDPs must be individually reviewed by the IRS to obtain approval.

Which type of plan document is best? There is, of course, no “best” type of plan document any more that there is a “best” type or retirement plan itself, e.g., profit sharing, 401(k), or defined benefit. It depends on the facts and circumstances of your individual situation and what you are trying to accomplish. But which ever one you select, make sure it fits.

On deck for Friday is the Summary Plan Description requirement.

06 | 18 | 2009 Posted By Jerry Kalish

See larger image.

Inspired by today's DOL-SEC Joint Hearing on Target Date Funds and Envestnet survey of employee understanding of target funds. 

06 | 17 | 2009 Posted By Jerry Kalish

This is the second in our EGTRRA Restatement Series, the purpose of which is to help retirement plan sponsors handle the required amendment and restatement of their retirement plans.

On Monday, I discussed Why A Law Passed In 2001 Is So Important To Retirement Plans In 2009.

Today’s post is about the written plan document requirement. Seems obvious, doesn’t it, that in order to have a plan, you have to have it in writing? Obvious, yes, but also it’s one of the fundamental requirements that make a retirement plan “qualified”.

A “qualified retirement plan” means that the retirement plan is afforded special tax treatment for meeting a bunch of requirements of the Internal Revenue Code (the “Code”). Some of the qualification requirements have to be met in the document, and others of which have to be met by the manner in which the plan is operated.

The plan document defines the rights and obligations of the plan sponsor, participants, and beneficiaries. It's also the basis for the IRS determining that the plan is tax-qualified in its form.

Here's a few things you may not know about plan documents:

First, contributions to a qualified plan's trust must be made to a trust that is valid under "local law". That is, created and maintained as a domestic trust in the United States. So no offshore stuff.

Second, that doesn't mean that all qualified retirement plans have trustees. The plan can be funded solely through annuity contracts issued by an insurance company or custodial account held by a bank. 

Third, the plan doesn't have to first be submitted to the IRS for approval to qualify for tax-favored status. Whether to submit the plan or not is one of those facts and circumstance questions. But that's a matter I'll discuss later.

Now here's where the EGTRRA part applies. Just because a plan is not submitted to the IRS for approval, it still must be amended periodically. The plan can lose its tax qualified status if the plan sponsor fails to make required plan amendments on a timely basis - even if the changes don't affect the plan's operation.

So where do you get a plan document? The retirement plan marketplace offers a number of alternatives: individually designed or plans pre-approved by the IRS. And that will be the subject of my next post on Monday. 

In the meantime, who says ERISA isn't cool. The picture above is the My Document Laptop Case inspired by the My Document Windows icon. Well, maybe more geeky than cool. It can be found on the designboom website and can be bought directly from the designer in Taiwan. 

06 | 16 | 2009 Posted By Jerry Kalish

Over at my other blog home, Slate’s Bizbox Blog today, I wrote about Staying Up-To-Date on Your Retirement Plan. Not up-to-date in terms of your plan document as I'm doing in our EGTRRA Restatement Series, but up-to-date in terms of the timely deposit of payroll taxes and employees' 401(k) contributions.

So an article by way of Dave Baker's BenefitsLink provided some practical suggestions in dealing with this issue. Attorneys Kelsey N. H. Mayo and David L. Woodard of the North Carolina law firm, Poyner Spruill LLP write about Audit Risk Rising—What an Employer Can Do Before an Audit Happens.

While their article is about payroll taxes, they address the issue I mentioned in my Slate column about businesses outsourcing the payroll function. Here's what they have to say about that:

In addition, if you are an employer that has outsourced its payroll functions to a third-party, it is important to remember that the employer remains liable to the IRS for any employment tax violations. To identify and prevent issues you should:

* Receive regular documentation from your payroll vendor that shows how payroll taxes are being determined and paid.
* Periodically reconcile statements received from your payroll vendor to ensure employment tax amounts are being calculated and submitted correctly.

They also point out that

Given these impending audits, it is also important to remember that other agencies and states, including North Carolina, routinely share information with the IRS, including information regarding tax avoidance schemes and questionable tax practices. This information sharing could lead to additional investigations from other agencies and the state.

One of those information sharing agencies, by the way, is the Department of Labor. 

06 | 16 | 2009 Posted By Jerry Kalish

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

06 | 15 | 2009 Posted By Jerry Kalish

Back at the end of last year, 403(b) plans had a looming deadline. It was the January 1, 2009 effective date for the new IRS 403(b) regulations.  I blogged about that deadline in our series of posts we called 403(b) Crunch Time.

I was joined in that series by our blogging buddy Bob Toth, Of Counsel to the law firm of Giller and Calhoun. Bob, Evan Giller, and Monica Calhoun now have their own blog, The Business of Benefits, which you should check out.

One of the significant requirements added by the new IRS 403(b) regulations was that of a plan document. And now looming on the horizon is another IRS document requirement. This one is much more comprehensive since it covers all ERISA retirement plans.

It's the requirement that retirement plans need to amended and restated no later than April 30, 2010 to comply with the 2001 tax law, The Economic Growth and Tax Relief and Reconciliation Act. That law “acronymized” to EGTRRA made significant changes to the Internal Revenue Code as it affected retirement plans.

It’s a complicated matter which I’m going to blog about in a series called The EGTRRA Restatement Series. Part 2 on Wednesday will be about the written plan document requirement for a qualified retirement plan. So  stay tuned.

05 | 29 | 2009 Posted By Jerry Kalish

No, it’s not one of those Letterman things. It’s a lot more serious matter. The ability to manage increasingly complicated risks in today’s difficult economy can be the difference between business success and business failure.

Risk, of course, is in the eye of the beholder. A recent survey by Aon Corporation provides some insight as to how employers in the global economy measure and prioritize risk. In October and November 2008, 551 employers responded from more than 40 countries and across 31 industries responded to an AON survey to find out their views of emerging and escalating business risks, and the steps they are taking to address these challenges.

The results were published in Aon's 2009 Global Risk Management Survey report which lists the top ten most pressing global risks:

1. Economic slowdown
2. Regulatory/legislative changes
3. Business interruption
4. Increasing competition
5. Commodity price risk
6. Damage to reputation
7. Cash flow/liquidity risk
8. Distribution or supply chain failure
9. Third-party liability
10. Failure to attract or retain top talent

The #1 risk, “economic slowdown”, came as no surprise to me. But what did pop out at me is #10, “failure to attract or retain top talent”. Maybe it’s because of the economy that some employers aren’t as concerned about that, but maybe it's also a bit short-sighted.

You can download the complete survey here (registration required). 

05 | 12 | 2009 Posted By Jerry Kalish

Remember the classic “Greed is good” speech by Gordon Gekko as played by Michael Douglas in the 1987 Oliver Stone classic, Wall Street. Here’s Douglas in his 1988 Academy Award winning role telling us why "greed is good":

Fast forward to today at a time when greed is viewed quite differently. It's one those psychological elements behind today's economy that was explored by an an interdisciplinary panel at a recent conference called, "Crisis of Confidence: The Recession and the Economy of Fear.”

Over at my other blog home, Slate’s Bizbox Blog, I write about this conference sponsored by the University of Pennsylvania's Department of Psychiatry and the Psychoanalytic Center of Philadelphia. Check out, Greed used to be good. 

And here's an interesting side note. Greed may no longer be good, but apparently power clothes are making a comeback. The ABA Journal Law News Now reports that Worried Lawyers Embrace Gordon Gekko’s Wardrobe. But as someone commented on the article, "It’s called Nordstrom Rack.  It’s where law students, lawyers, and consultants facing tougher times now go to shop".

05 | 8 | 2009 Posted By Jerry Kalish

Here is a link to my column in the May issue of Employee Benefit news about how automatic enrollment in 401(k) plans boosts 401(k) participation. (Free registration may be required). This is the first of the monthly columns I will be writing for Employee Benefit news - an employee benefit publication which provides free newsletters, seminars and podcasts from industry experts, and online content for plan sponsors. You can check it out here.

05 | 6 | 2009 Posted By Jerry Kalish

If you're one of the estimated 6 million people on Twitter as I am, you're familiar with the question in the headline. If you're not quite sure about exactly what Twitter is, then take a look at the video explanation by the extremely creative video producers at Common Craft called Twitter in Plain English.

Much of Twittering takes place at work. And sometimes that can cause problems in terms of time spent or inappropriate tweets. I discuss that matter including a Twitter policy in my blog post, Twitter in the Workplace. It appears over on at my other blog home, BizBox by Slate, a special promotion by OPEN from American Express. 

05 | 4 | 2009 Posted By Jerry Kalish

Suppose you’re a plan sponsor that wants to increase 401(k) participation among your low income employees, what do you do?

You know, of course, that employee financial education programs by themselves are not enough to influence a change in employee behavior. You might consider automatic enrollment about which I’ve written about before.

Automatic enrollment has been shown to raise 401(k) participation rates dramatically when it is applied to new hires, particularly new hires who are low earners. In one important study, automatic enrollment increased 401(k) participation rates of those making under $20,000 annually from 13 percent to 80 percent.

Research from the Retirement Security Project (a member of the Retirement Made Simpler coalition) indicates that low-income individuals can, and will, save given the right circumstances.

So what exactly are the right circumstances? If you are thinking outside the box like Staples, you partner up with Progress Through Business, a nonprofit organization focusing on poverty alleviation issues, and H&R Block to offer discounted tax preparation to low-income employees of Staples, Inc. thorough a pilot program called Tax Break first rolled out in January 2007 and run again in January 2008.

What follows are the highlights of a study of this unique program prepared by John Hoffmire, PhD Director of the Center on Business and Poverty University of Wisconsin-Madison, Wisconsin School of Business and Thomas Harms, Treasurer, Progress Through Business, for the filene Research Institute.

What made Tax Break unique was the inclusion of opportunities for low income employees to enroll in both employer and government benefit programs in the tax preparation process. The result was a significant increase in employee participation in such employer-sponsored plans as 401(k) retirement plans, employee stock purchase plans, and tuition reimbursement programs. Enrollment in government benefits also increased, with higher incidences of the Earned Income Tax Credit, child care credits, renters credits, education credits, and various advantages that are available to but sometimes not accessed by eligible low-income taxpayers.

The employees screened for benefits in 2007 showed a 29% increase in 401(k) plan enrollment, a 16% increase in Employee Stock Purchase Plan enrollment, and a 42% increase in scholarship program enrollment. In terms of just the 401(k) plan, employees benefited by accumulating retirement saving and receiving a 50% match by Staples on the first 6% an employee contributed.

The program worked out well for Staples. After one full year of tracking, those who participated in the program during the 2007 tax season showed a 32% improvement in retention over those who did not participate. This improvement in retention more than covered the costs incurred
by Staples.

In fact, according to Hoffmire, “For each dollar that Staples invested in the program, they got back more than $6 in retention benefits related to having to hire others and train others who they did not want to lose. This calculation was based on the cost that McDonalds faces when they lose a worker they did not want to see leave the company. In fact, the savings were even greater for Staples, because their costs related to unwanted turnover are even higher than McDonald’s.”

So why the excellent results? Because someone thought outside the box and recognized tax filing is the single largest financial event of the year for that for low income employees. And it presented a unique “teachable moment”. That is, a time at which an individual is most receptive to learning something.

In addition, the researchers found other advantages that accrued to Staples and its employees. Hoffmire said, “On certain days, when the tax program was being promoted in Staples’ large distribution centers, you could notice an improvement in the error rates as employees seemed to show more care for their work as they felt they were being offered a benefit that was worth the equivalent of a 2% raise just through the tax preparation component of the program.”

Here is a link to the complete study, The Economics of Serving Low-Income Employees at Tax Time: Implications for Credit Unions (PDF, 63 page).

Picture credit: red mountain communications. 

04 | 30 | 2009 Posted By Jerry Kalish

I've written about Solo-Ks before over at my other blog home, Slate's BizBox. (See The Wonderful Solo-K).  It's a special retirement plan for the self-employed or small business owner with no employees (other than their spouse) to establish 401(k) plans and to max out their deductible retirement plan.

But as we creep toward 5500 filing time for 2008 calendar plans (July 31, 2009 unless extended to October 15, 2009), there is a yellow caution light out. And that's whether Form 5500 has to be filed for these so-called "owner-only" plans.

I cover the basics on that topic in Don't Miss Out On Your Solo-K over at Slate's BizBox, a special promotion by OPEN from American Express. And yes, even blogs have "product placement."

04 | 23 | 2009 Posted By Jerry Kalish

Hardship distribution provisions in 401(k) used to be one of those retirement plan matters on which plan sponsors didn’t spend a whole lot of time.

Lately, however, that’s not the case. From our vantage point, we’re seeing more requests for hardship distributions than ever before. That being the case, I’m going to take a few moments to discuss 401(k) hardships in the context of the current economic situation.

Background

While hardship provisions, like loans, are allowed by law, employers are not required to provide for them in a 401(k) plan. Many do because they provide a sense of security to participants as they balance between retirement savings and current financial needs. In other words, a safety value in case they ever need the money for a financial security. And that time is now for many participants.

So is an overview of what constitutes a hardship and they should be administered. Hardship distributions from a 401(k) plan can be permitted under two general rules: safe harbor rules and general rules for an immediate and heavy financial need (more about that later).

Safe Harbor Rules

Under these rules, a hardship distribution would only be made upon the finding by the Plan Administrator of an immediate and heavy financial need where such Participant lacks other available resources. The IRS says the following are the only financial needs considered immediate and heavy:

Expenses for (or necessary to obtain) medical care that would be deductible under Code section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);

• Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
• Payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the employee, or the employee's spouse, children, or dependents;
• Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence;
• Payments for burial or funeral expenses for the employee's deceased parent, spouse, children or dependents;
• Expenses for the repair of damage to the employee's principal residence that would qualify for the casualty deduction under Code section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income);

And Safe Harbor means exactly that. Follow the rules listed above, and a plan sponsor will automatically be in compliance with IRS regulations.

General Rules

Under these rules, a hardship distribution shall only be made upon the finding by the Plan Administrator of an immediate and heavy financial need where such Participant lacks other available resources. But unlike the Safe Harbor rules, whether a Participant has an immediate and heavy financial need is determined based on all relevant facts and circumstances.

For example, the need to pay the funeral expenses of a family member would constitute an immediate and heavy financial need and a distribution made to a participant for the purchase of a boat or television would not constitute a distribution made on account of
an immediate and heavy financial need.

The General Rules for hardship provide flexibility for the employer to allow distributions based on the facts and circumstances of the employee and are not listed in the safe harbor rules. Whether that is desirable or not is another matter. This flexibility, however, is achieved only if the appropriate language is included in the plan.

So now finally, what exactly is an immediate and heavy financial need of an employee? IRS regulations say that a hardship distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if:

• The employee has obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer;
• The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution (Safe Harbor only).
• Hardship distribution may not exceed the amount of the employee's need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.

A withdrawal made by a 401(k) plan participant, either under general or safe harbor rules, is subject to heavy tax and penalty consequences and should therefore only be done as a last resort. And let's hope that the "last resorts" don't continue to be situations with which 401(k) participants are confronted.

For the official version of hardship distributions, here is a link to the IRS' FAQs regarding hardship distributions.

04 | 21 | 2009 Posted By Jerry Kalish

The album cover pictured above is of The Times They Are a-Changin', singer-songwriter Bob Dylan's third studio album, released in January 1964. 

The title track is one of Dylan's most famous. Many at the time felt that it captured the spirit of social and political upheaval that characterized the 1960s. 

Now let’s fast forward some 45-plus year later. There’s another type of upheaval going on. This time it’s financial. And we’re seeing some profound changes taking place in the financial services industry. 

Over at my other blog home, Slate's Small Business blog, a special promotion by Open from American Express, both Marc Tracy and I see these changes taking place in two different areas. Marc on Wall Street, and me on “Big Law” (that's the colloquial expression given to the 250 largest American law firms, with about 15 of them having more than 1000 lawyers).

Marc writes that The Great Rearranging Hits Wall Street when he says

Indeed, the essential disappearance of the investment-banking industry--with all five of the major i-banks having either switched to less flexible and more regulated bank holding companies (Goldman, Morgan Stanley), been bought by bank holding companies with the aid of ample federal government subsidy (Bear Stearns, Merrill Lynch), or, er, filed for bankruptcy and disappeared (Lehman Brothers)--has left an absolutely gigantic vacuum for start-ups who now know that the only way to survive is to stay relatively small.

In Big Law and Small Business, I noted that the ABA Journal reports that for the first quarter of the year approximately 7,000 attorneys and staff have lost their jobs in addition to canceled summer programs, postponed first-year associate start-dates, and pay cuts across the board including partners. Not a pretty picture for the 43,000 imminent law-school graduates about to enter the legal job market. But at the same time, many of the smaller law firms and boutique law firms are doing very well, thank you.

So what does it all of this mean? Well, there are at least two ways to look at it.

There’s Seth Godin who said in his brilliant blog post, Small is the New Big. In the recent recession, it seem more right-on and prescient. And if all this seems pretty obvious to you, Seth wrote this in June, 2005.

And then there’s Dylan who in the climatic lines of the final verse of The Times They Are a-Changin' wrote and sang:

The order is rapidly fadin'
And the first one now
Will later be last
For the times they are a-changin'.

Here, take a look and listen yourself:

Lyrics | Bob Dylan lyrics - The Times They Are A-Changin' lyrics

04 | 14 | 2009 Posted By Jerry Kalish

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.
 

04 | 9 | 2009 Posted By Jerry Kalish

With so much going on in the retirement plan arena, I nearly missed the subhead in Pensions & Investments article, Borzi strong on DC fee disclosure issue. (Free registration may be required).

"Borzi", as those of us in the benefit business know, is Phyllis C. Borzi, just nominated by President Obama to be Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). It's the federal agency which has oversight over ERISA reporting, disclosure and fiduciary requirements.

The headline isn't exactly breaking news. Fee disclosure - the word of art is transparency - has been and will continue to be a high priority for the Department of Labor.

The subhead that made me sit up was Annuities, DB concerns also on radar for nominee to lead EBSA (emphasis supplied). The article itself says that Ms. Borzi "also might require 401(k) plans to offer annuities to plan participants to help ensure they have an adequate income at retirement".

It's starting to happen, folks, the annuitization of 401(k) plans: new products being developed, distribution ramping up, and now what may be regulatory and even legislative mandates. And it may be sooner rather than later.

04 | 9 | 2009 Posted By Jerry Kalish

 Common Sense Fail

The picture above is from the FAIL blog which daily posts user-submitted funny FAIL pictures and videos. The "fail" relates to so many people not having enough common sense not to sit down on a wet park bench that this sign actually had to posted.

Which then lead me back to today's headline, "if common sense was common, more people would have it".

It's an old expression that inspired one family I know to create the website, If Common Sense Was So Common......, to collect and share humorous absurdities. If you have a story about the absence of common sense, then send it to them and it may get published.

Now what does all of this have to do with retirement plans? Simple. One of the family members who created the website is an actuary with whom we work on mutual retirement plan clients. And this is, after all, a blog about retirement plans. Yeah, I know it's a stretch, but sometimes you have to give a shoutout for your friends.

04 | 7 | 2009 Posted By Jerry Kalish

Making complex ideas easy to understand is a topic I've blogged about before. Last month, I blogged, I asked you what time it is, not how to make a watch, which included Jonathan Jarvis' excellent video The Crisis of Credit Visualized.

Here's another example. It's the video, Investing Money in Plain English. It was created by Common Craft, superbly talented producers of videos for training and education, whose product they say is "explanation".  

Maybe it's time for 401(k) investment education to get back to basics.

03 | 31 | 2009 Posted By Jerry Kalish

In whatever what we're in now - recession, economic downturn, financial crisis. So the answer to the "how we doing" question is not uniform across the board. The sectors I see are our business owner clients and their employees who participate - or not - in their company's retirement plan. And each has an entirely set of feelings as to where they are now.

I've written about both groups in my other blog home, Slate's Small Business blog, a special promotion by Open from American Express.

Business Owners are generally optimistic as I noted in my column, An Optimistic Optimism Index. That's the findings of the new Small Business Success Index launched just this month by Network Solutions and the University of Maryland's Robert H. Smith School of Business.

Employees on the other hand are understandably concerned about job security and losing health insurance coverage as I noted in my column, New Grim Report on Small-Business Employees. That's the findings of the recently released Well-Being Index for the first quarter of 2009 by Principal Financial.

Picture above: Half Empty or Half Full by Jaxxon by way of Flickr.

03 | 27 | 2009 Posted By Jerry Kalish

Maybe the visual metaphor is an extreme answer to the question raised above. But asset allocation for participants investing their accounts in employer stock seems to be an investment strategy on the decline.

Asset allocation is, of course, that strategy of a 401(k) participant distributing his or her investments among different asset classes so as to diversify. It's one of those concepts that has been de rigueur as part of 401(k) investment education.

Asset allocation seemed to be getting traction with those employees who invested in employer stock. According to a December 2008 Issue Brief, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007, published by the Employee Benefit Research Institute, those 401(k) participants continued to seek diversification of their investments.

Since the Enron debacle, the share of 401(k) accounts invested in employer stock continued to shrink, falling by 0.5% to 10.6% in 2007. That continued a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend, but they were less likely to hold employer stock.

But between then and now things changed. Earlier this month, The Wall Street Journal reported that Despite Risks, Workers Guzzle Employer Stock. The article noted a study by Hewitt Associates that in January, for the first time in more than seven years, a large group of 401(k) participants invested more money into employer stock than any other type of investment. Employees invested $65 million in employer stock that month.

Employer securities are a big part of retirement plans. According to the above-mentioned EBRI Issue Brief, almost 2/3 of 401(k) plans with more than 5,000 participants offered employer stock as an investment option in 2007. And about 8% of participants in those plans had more than 80% of their account invested in employer shares.

So how much stock is too much stock? The Financial Industry Regulatory Authority (FINRA) issued an investor alert, Putting Too Much Stock in Your Company—A 401(k) Problem. (FINRA is the non-governmental regulator for nearly 5,000 brokerage firms, and was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange).

FINRA says that says that if a participant has than 20% of his or her assets in company stock, and this investment also constitutes more than 20% of their overall investment portfolio, they should consider rebalancing their investments to increase diversification.

Many retirement experts say that is even too much, and that employees should keep no more than 5% to 10% of their balances in company stock, and some believe such shares don't belong in retirement plans at all.

Obviously, more work needs to be done on 401(k) investment education.
 

03 | 19 | 2009 Posted By Jerry Kalish

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

03 | 16 | 2009 Posted By Jerry Kalish

I started writing about annuities almost two years ago when I asked the question (rhetorical, of course), Are 401(k) plans transforming into defined benefit plans?

Since then, the financial industry's race to develop and distribute retirement income products has been accelerating, and I'll be increasing my coverage of this emerging area accordingly.

And one piece of recent news struck me as how competitive the retirement income market is becoming.  

It was the announcement that Lincoln National Life Insurance Company, part of Ft. Wayne, Indiana-based Lincoln Financial Group, won a  $13.1 million jury verdict in a variable annuity patent infringement case against three Aegon USA companies, Transamerica Life Insurance Co., Transamerica Financial Life Insurance Co., and Western Reserve Life Assurance Co. of Ohio.

The patent claim at issue related not to the variable annuity itself but to a computerized method for administering variable annuity products that combine guaranteed minimum payment features with systematic withdrawal programs.

The patent also includes data processing methods used to administer variable annuities in the payout phase and withdrawals from mutual funds, particularly systematic withdrawals from funds.

I'll let the intellectual property lawyers slice and dice this case, but from a marketing standpoint - priceless.

03 | 14 | 2009 Posted By Jerry Kalish

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.

03 | 12 | 2009 Posted By Jerry Kalish

I was honored to be a guest speaker today to The Lake County Estate Planning Council. The group is an interdisciplinary organization for professionals involved in estate planning to better serve the needs of the public in estate planning.

The title of my presentation is:

LIFE INSURANCE IN QUALIFIED RETIREMENT PLANS:
The Impact of the New Economic Realities on Business Owners, Employees, Beneficiaries and Financial Service Providers

Here it is:

 Life Insurance in Retirement Plans

03 | 10 | 2009 Posted By Jerry Kalish

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!).

03 | 6 | 2009 Posted By Jerry Kalish

If you’re a TV reality show fan, you’ll recognize the quoted part of the headline as the opening from Bad Boys, the theme from Fox’s long-running show COPS, by Inner Circle, the Jamaican raggae group.

The second part of the headline can be viewed as life imitating art. As the economy tanks, crime rises. Marc Tracy over at my other blog home, Bizbox - a special promotion by OPEN from American Express on Slate, writes about that in Sniffing Out Employee Fraud.

But it’s not just white collar crime. Just this week, the CFO of a client called me about a terminated employee caught shopping at the company warehouse using a ten-fingered midnight discount. The terminated employee has now applied for a profit sharing plan distribution. He asked me whether the company could impose a forfeiture of his vested account balance.

In other words – and the focus of this post - may a nonforfeitable benefit ever be forfeited?

Back in the day (pre-ERISA), retirement plans did have “bad boy clauses” in which forfeitures were imposed because of employee dishonesty or a violation of a promise not to compete.

But now in the modern era, bad boy clauses are generally not permitted. Generally, I say, because the Pension Answer Book, one of our “go-to” resources cites a number of court cases and Internal Revenue Service regulations that vested benefits in excess of the benefits required to be nonforfeitable under the ERISA alternative vesting schedules may be forfeited because of an employee's misconduct or dishonesty

So paraphrasing one of the Pension Answer Book’s examples, suppose an employer’s plan had a five-year graded vesting provision. The plan provides for forfeiture of benefits if an employee with less than three years of service terminates employment and works for a competitor or is dishonest. Permissible because the plan could have had three-year cliff vesting.

The Pension Answer Book points out that the qualified plan must provide the specific criteria for application of this bad boy clause, and it can not be discriminatory in operation.

Whatever. A bad boy clause isn’t even going to be an option for most employers today since most employers use pre-approved plan documents, e.g., prototypes and volume submitter, which won’t have such clause.

And to use an individually designed plan with such clause would be many times more expensive for both preparation of the document and the IRS determination letter process. And add additional cost if protracted discussions with the IRS is required.

Sorry. 

03 | 3 | 2009 Posted By Jerry Kalish

Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about how entrepreneurs can succeed in this economy. Bhaskar Chakravorti, a senior lecturer of business administration at the Harvard Business School was recently interviewed by Martha Lagace for the Harvard Business School’s Working Knowledge newsletter.

Mr. Chakravorti says that while the present economy removes opportunities and resources, it has also managed to add new and different opportunities. Here is a link to my article, Four Rules To Follow During This Economy, which contains a link to Ms. Lagace’s complete interview, Creative Entrepreneurship in a Downturn.

02 | 26 | 2009 Posted By Jerry Kalish

So what’s a nice book about psychology doing on a blog like this. Take a seat on the couch, and we can talk about it. 

It’s a small world when it comes to blogging. One day I came across the British Psychological Society's Research Digest Blog, which is written and edited by Christian Jarrett, Ph.D., a British psychologist. I’ve referenced studies that Christian wrote about in several of my blogs. (See One More Reason to Consider A Commuter Transit Benefit, ERISA, It’s Not Elementary, and What We’ve Got Here Is Failure To Communicate.

So when I learned that Christian and his American co-author, Joannah Ginsburg, an American psychotherapist and journalist, published a book, I was eager to see whether it was as interesting and as helpful as the BPS blog. The answer is a resounding yes.

Here’s how the publisher describes it:

This Book Has Issues delves deep into the human consciousness and casts light onto the reasons why we think, feel, and act the way we do. Packed with illuminating real-life examples, introductions to groundbreaking psychologists, and plenty of experiments and tests to unveil the way your own mind works, This Book Has Issues has the power not just to intrigue and entertain, but also to change the way you think. Divided into eight fascinating chapters, This Book Has Issues covers everything from the real reasons we fall in love to the science behind a good night’s sleep. From extreme disorders to the truth behind the ways we live our everyday lives, This Book Has Issues takes you on a journey through the amazing landscape of the mind.

That’s from the publisher's marketing department. So let me translate it from “popular psychology” into “retirement plan psychology”.

The success of any retirement plan depends on how the needs and expectation of the plan sponsor, participants, and beneficiaries can be met. In other words, the human factor drives the plan’s success.

So in that context, if you want to:

• Learn how our brains can sometimes make mistakes
• Get tips to boost your memory abilities
• How to look at problems some people have with language and counting
• Challenge your basic ideas on behavior and communication
• Get the latest research on relationship, leadership, and brainstorming
• Get to know yourself better using a range of tests
• Learn how to deal better with stress
• Learn how to get better sleep

Then This Book Has Issues is for you.

It travels well also. You can listen to two excellent book reviews from Radio New Zealand (MP3 file), and on the Australian radio show, Faster Than Light.

Christian’s and Joannah’s book is available in the U.S. from Barnes and Noble and in the U.K from Amazon U.K.

Author's Note: Here are links to the other book reviews I've done: Josh Itzoe's timely Fixing The 401(k) and Fran Hawthorne's controversial Pension Dumping: The Reasons, The Wreckage, The Stakes for Wall Street.

02 | 25 | 2009 Posted By Jerry Kalish

Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about the impact of the stimulus package affects employee benefits, specifically COBRA and Commuter Transit Benefits under Section 132 of the Internal Revenue Code. The stimulus package provides extended and subsidized COBRA benefits and increases the amount of transit benefits that can be provided on a pre-tax basis. Check out the details in COBRA and Transportation: How The Stimulus Affects Employee Benefits.

02 | 24 | 2009 Posted By Jerry Kalish

There has been as lot of discussion and media attention on the impact of the financial markets’ meltdown on 401(k) accounts – most of which was either anecdotal or generalized.

For example, much commentary that in 2008 during which major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37%, participants in 401(k) plans suffered corresponding losses.

But here’s the reality in an analysis published yesterday by the nonpartisan Employee Benefit Research Institute (EBRI).

I’ve written about the EBRI before (see Employee Benefit Research Institute (EBRI) Relaunches Website) and the research they make available for us retirement industry folk and policy makers.

The analysis used the EBRI/ICI 401(k) database of more than 21 million participants to estimate the impact of market activity on 401(k) account balances from Jan. 1, 2008, to Jan. 20, 2009. The ICI (Investment Company Institute) is the organization that represents the mutual fund industry.

Because of the importance of this issue, I don’t want any summary I would do to dilute the significance of their analysis which showed that participants’ losses were largely determined by their account balance, age, and job tenure.

So following are the key points directly from their press release:

Impact Varies By Account Balance

Not surprisingly, how the recent financial market losses affect individual 401(k) account balances is strongly affected by the size of a participant's account balance. Those with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions: Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, since contributions had a bigger impact than investment losses. However, those with more than $200,000 in account balances had an average loss of more than 25 percent.

Impact Varies by Age and Job Tenure

401(k) participants on the verge of retirement (ages 56–65) had average changes during this period that varied between a positive 1 percent for short-tenure individuals (one to four years with the current employer) to more than a 25 percent loss for those with long tenure (more than 20 years).

Short-Term vs. Long-term

While much of the focus has been on market fluctuations in the last year, investing for retirement security is (or should be) a long-term proposition. When a consistent sample of 2.2 million participants who had been with the same 401(k) plan sponsor for the seven years from 1999–2006 was analyzed, the average estimated growth rates for the period from Jan. 1, 2000, through Jan. 20, 2009, ranged from 29 percent for long-tenure older participants to more than 500 percent for short-tenure younger participants.

Recovery Time and Future Stock Market Performance

The analysis also calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the sharp stock market decline. Because future performance is unknown, this analysis provides a range of equity returns: At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.

Near-Elderly With Very High Equity Exposure

Estimates from the EBRI/ICI 401(k) database show that many participants near retirement had exceptionally high exposure to equities. Nearly 1 in 4 between ages 56–65 had more than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 percent. As a result of the Pension Protection Act of 2006, many 401(k) plan sponsors appear to be offering lifecycle/target-date funds, which automatically rebalance asset investments into more "age appropriate" allocations. Had all 401(k) participants been in the average target-date fund at the end of 2007, 40 percent of the participants would have had at least a 20 percent decrease in their equity concentrations, and consequently, might have mitigated their losses, sometimes to an appreciable extent.

Here is a link to the full February 2009 Issue Brief, The Impact of the Recent Financial Crisis on 401(k) Balances (24 pages, PDF). 

02 | 21 | 2009 Posted By Jerry Kalish

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.

02 | 18 | 2009 Posted By Jerry Kalish

No, not the academy awards. Too early for that. But this post is about the ostrich-like approach 401(k) participants have taken in opening (or rather not opening), their December 31, 2008 statements. Earlier this month, I posted the visual below about participants' hesitation, Just Get It Over With, from Jessica Hagy's award winning blog,  Indexed,

That's a facetious description, of course. But specific and troubling data comes out of a recent survey by I-Pension, LLC, a Newton, MA-based Registered Investment Advisor focused on middle-income investors.

I-Pension surveyed middle-income investors following the 2008 year-end meltdown and found that: 

• 27% of the respondents admitted to not opening their fourth-quarter 401(k) statements.
• Of those that did open their statements and read their statements, almost 33%spent less than one minute reviewing the results and 72% spent less than 3 minutes.

Here is I-Pension's press release that discusses the survey and other findings regarding 401(k) participants' investment expertise - or lack thereof.  

To paraphrase a pop culture expression, the answer is out there somewhere.

02 | 16 | 2009 Posted By Jerry Kalish

The new 403(b) compliance picture seems to be getting clearer. Much needed light was provided on the new regulations at the February 6, 2009 Tax-Exempt and Government Entities Joint Council Meeting in Baltimore attended by senior IRS officials and tax practitioners.  

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

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

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

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

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

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

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

02 | 8 | 2009 Posted By Jerry Kalish

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

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

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

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

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

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

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

02 | 5 | 2009 Posted By Jerry Kalish

Unless you've been asleep, compliance with fiduciary responsibilities is one of the highest priorities of the U.S. Department of Labor (DOL).

And if you're a small employer, it can be a difficult and challenging assignment to be responsible for a retirement plan. But here's some help.

The DOL will be sponsoring a free seminar in Chicago on June 24 and in Atlanta on July 9: A Retirement Plan Compliance Assistance Seminar for Small Business.

Representatives from both the DOL and Internal Revenue Service will discuss fiduciary responsibilities, reporting and disclosure requirements, common mistakes and how to fix them.

Here are links to the seminar brochure and registration information for each location:

For Chicago on June 24 and for Atlanta on July 9.

If you're a local plan sponsor in either of these areas, attendance could be very worthwhile.

02 | 4 | 2009 Posted By Jerry Kalish

Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about new research in a just-published working paper by the Harvard Business School. The article, "Performance Persistence in Entrepreneurship", appeared in the Harvard Business School's Working Knowledge Newsletter.  Check out Persistance and Experience Pay Off.

02 | 2 | 2009 Posted By Jerry Kalish

Last week in a blog post about self-directed brokerage accounts, I wrote about participants just starting to open their year-end 401(k) statements with some (or much) hesitation. But here's Jessica Hagy in her award winning blog,  Indexed, whose picture, Just get it over with, is far more effective than my words about hesitating to get the bad news.

01 | 29 | 2009 Posted By Jerry Kalish

Transparency has several meanings.

In optics, transparency is the material property of allowing light to pass through.

When used in a social context, transparency implies openness, communication, and accountability.

In the 401(k) industry, transparency means fee disclosure. And, of course, it's what Congress and the Department of Labor have been focusing on over the last few years.

But it may be the private sector that puts transparency into a very practical setting. BrightScope, Inc., an independent data analytics firm today announced the launch of their 401k ratings disclosure website featuring the BrightScope Rating™, the nation’s first online 401(k) rating system.

The new BrightScope Rating™ debuted today (see Press Release) at the 2009 Los Angeles Benefits Conference, co-sponsored by the Internal Revenue Service (IRS), the American Society of Pension Professionals & Actuaries (ASPPA) and the National Institute of Pension Administrators (NIPA).

What’s a BrightScope Rating™? It’s a quantitative 401(k) plan rating developed by BrightScope, Inc. in partnership with some of the country's top independent fiduciaries, finance professors, and 401(k) experts. BrightScope Ratings™ take into account over 200 unique data inputs per plan and calculate a single numerical score to define 401k plan quality at the company level.

For example, BrightScope currently rates the 401(k) Plan for the Southwest Airlines Pilots as among the top plans within its respective peer group, as measured in terms of plan size, number of participants and employee demographics.

Participants contributing to this plan, BrightScope says, have a high likelihood of having a secure retirement.

The picture below is a snapshot of what you would see on the BrightScope website for the Southwest Airlines plan.

The complete rating can be viewed by clicking here.

You can see detailed scores and attributes for the other approximate 1000 of the largest 401(k) plans that BrightScope has reviewed to date by visiting their website, www.brightscope.com with more plan ratings available later this year.

As for me, I’m still thinking about the implications of this innovation. Could be huge. 

01 | 27 | 2009 Posted By Jerry Kalish

Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about new research that MetLife recently unveiled regarding the four key types that employers embody when it comes to workplace benefits investments and strategies. Check out Thinking Critically About Your Benefit Package.

01 | 26 | 2009 Posted By Jerry Kalish

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Just about now, 401(k) participants are starting to open their year-end statements. Some because they’re just starting to receive them, others because they’ve decided it’s now time to confront the harsh reality of substantially diminished account balances. That is, if they haven’t already gone on-line (how many times?) the last quarter. But, of course, the piece of paper in their hands makes it official.

And so what you may start to see again – and we already have – is 401(k) participants saying, “hey, I can do a better job than this” and wanting to manage their accounts themselves in what the retirement industry calls “self-directed brokerage accounts” or SDBAs. These individual accounts are established and maintained either on a stand-alone basis or through the 401(k) provider handling the menu of funds.

SDBAs were popular back in the days of irrational exuberance when 401(k) participants wanted to go beyond the limitations of the fund menu. The driving force was usually a business owner or important Highly Compensated Employee with a large account balance. And so while there are many reasons not to have SDBAs as part of a 401(k) plan, those participants with clout may cause is to happen in today's investment climate.

In that case, it’s incumbent on the plan sponsor to structure a program that deals with such concerns as

• Fiduciary liability for improper investment transactions
• Unrelated business taxable income (UBTI)
• Administrative and investment expenses
• Valuation

All of which can be dealt with proper planning and execution. The starting point for which is the Investment Policy Statement. You do have one, don’t you?

Photo above, deja vu, by pngn via Flickr.

01 | 23 | 2009 Posted By Jerry Kalish

This one goes out to all the business owners who provide either personal or business services - present company included. Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article that says why not have clients who you enjoy, are not toxic, and reflect your values. Check out You Are Who Your Clients Are.

01 | 19 | 2009 Posted By Jerry Kalish

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?

01 | 13 | 2009 Posted By Jerry Kalish

Over the past few months, I've blogged about how employers can sponsor a commuter transit benefit to help employees cope with higher commuting costs to pay for those expenses on a pre-tax basis under Section 132 of the Internal Revenue Code. The employer can also receive tax benefits since generally there are no payroll-related taxes involved.

But there may also be an important non-tax reason to consider - stress in the workplace. Dwight A. Hennessy, Department of Psychology, Buffalo State College writes about that in his article, The Impact of Commuter Stress  on Workplace Aggression, that appeared in the September 5, 2008 on-line issue of the Journal of Applied Social Psychology, Here is the Abstract

Immediately following their regular commute to work, participants completed questionnaires regarding state driver stress and anger during that commute. Then, immediately following completion of that work day, they completed a state version of the Workplace Aggression Scale. As state driver stress increased, the frequency of both expressed hostility and obstructionism increased (independently) during that work day, butS only among male employees. In contrast, overt aggression during that work day was greatest among males who were higher in physical aggressiveness as a general trait characteristic. The present study highlights the interactive nature of traffic and workplace environments, in that negative experiences in the traffic environment may spill over for some individuals to influence nondriving events.

Hat Tip to Dr. Christian Jarrett, Editor, of the British Psychological Society's Research Digest blog. 

01 | 12 | 2009 Posted By Jerry Kalish

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

• Employee Ownership Notes sponsored by The National Center for Employee Ownership
• Employee Ownership Blog sponsored by The Employee Ownership Foundation

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

01 | 8 | 2009 Posted By Jerry Kalish

If you are in the business of benefits or otherwise need independent non-partisan research information, you should be pleased with the news that the Employee Benefit Research Institute (EBRI) has relaunched and updated its website. The improved site makes it easier to access EBRI's treasure trove of research made available free to the public. You can check it out here.

01 | 7 | 2009 Posted By Jerry Kalish

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.

01 | 4 | 2009 Posted By Jerry Kalish

I was one of those commentators who ended last year on a “glass half empty” note when I characterized the 2008 retirement plan year as The Good, the Bad, and the Ugly. Some commentators like Mark Miller were much more direct. Mr. Miller ended the year in his column that appears on his website, RetirementRevised, by writing 2008 ends with alarming retirement benefit trends.

But this is a new year when we can look ahead – and indeed, look ahead with optimism. The present retirement plan system can be fixed. And whether or not changes are made on either the legislative or regulatory level, or waiting for whenever the economy improves, the process can and should start now.

Josh Itzoe is among those of us that believe that many of the “broken” retirement plans, i.e., 401(k) plans, can be fixed by plan sponsors and other fiduciaries. Josh is both a CFP® and AIF® and is a Principal of Greenspring Wealth Management, Inc., a registered investment advisory firm and Independent Fiduciary in Towson, MD.

And to the point of this post, Josh is also the author of a recently published book, Fixing The 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully. So what’s so special about this book amidst all of the many 401(k) books out there. Here’s how Matthew D. Hutchison, MS, CPC, AIFA®, CRC®, answers that question in his Forward to the book.

There are many books about 401(k) plans. There are hundreds of thousands of professionals who want to invest your 401(k) assets. Very few of them, unfortunately, embrace a “participant first” approach to delivering retirement plan services. That is what makes this book so special. It is focused on one thing: Protecting future participant benefits. The goal of this book is to serve the best interests of nearly fifty million individual participants.

Those of us who have been around 401(k) plans for a while know who Matthew Hutcheson is. He’s an Indepenent Fiduciary himself and a published author and internationally recognized authority on retirement plans and their associated fiduciary issues. He's also testified before Congress on these matters.

There’s nothing magic in Josh’s book. It’s just basic, old-school procedural prudence, the process by which fiduciaries act solely in the best interests of plan participants and their beneficiaries. It’s not only good risk management for fiduciaries, it's just good management period.

 Here are some of the areas that Josh covers in his book:

• The basic fiduciary responsibilities outlined under ERISA.
• The roles, responsibilities, and motivations of the various people/companies involved in selling and servicing these plans.
• Which questions to ask and what information to gather in order to uncover and reduce the various fees and expenses associated with 401(k) plans.
• How to design a 401(k) plan to deliver successful outcomes.
• How to help employees use the plan most effectively.

So if you’re a plan sponsor concerned about both your personal responsibilities and your participants’ retirement security, then this book can be an excellent guide.  Here's a link to Amazon if you want to purchase the book. You can also follow Josh through his new blog of the same name, Fixing The 401(k).  

12 | 30 | 2008 Posted By Jerry Kalish

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. 

12 | 27 | 2008 Posted By Jerry Kalish

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12 | 23 | 2008 Posted By Jerry Kalish

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

12 | 22 | 2008 Posted By Jerry Kalish

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

Introduction

My last post was a year-end ERISA fidelity bond reminder. ERISA does not require liability protection; the only mandatory insurance is an ERISA Fidelity bond to protect the plan assets from losses due to misuse or misappropriation. The ERISA Fidelity bond protects the plan assets. Without fiduciary liability insurance, who protects the fiduciaries?

Executive Summary

The new retirement plan environment referred to in the headline includes a recent case unanimously decided by the U.S. Supreme court that has significant implications for plan fiduciaries.

On February 20, 2008 in LaRue v. DeWolff Boberg & Associates, Inc., et al., the Court ruled 9-0 that

Section 502(a)(2) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), does not provide a remedy for individual injuries distinct from plan injuries, but that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in one or more, but not all, participants’ accounts.

In non-legalese, the Court held that individual participants in a defined contribution plan can
sue for a breach of fiduciary duty that results in a loss to the participant’s own account, even if not all participants’ accounts have similar losses.

No one knows, of course, whether we will see an increased in lawsuits against fiduciaries, but many ERISA attorneys predict that LaRue’s victory means that there is likely to be a significant increase in litigation involving 401(k) plans, and that plan fiduciaries may be confronted with a variety of claims brought by plan participants seeking to recover losses to their individual accounts.

In this new environment, we think that fiduciaries should think in risk management terms and consider whether they should purchase fiduciary liability insurance.

This Benefit Briefing will provide you with answers to frequently asked questions (FAQs) to help you decide whether you should purchase fiduciary liability insurance. 

12 | 20 | 2008 Posted By Jerry Kalish

Last July, I asked the question will Form 5500s reveal outdated fidelity bonds or retirement plans without bonds at all. That was prior to the July 31st due date (unless extended) for calendar year retirement plans required to file Form 5500 for the 2007 plan year. And, I noted, as in the past, there will be a number of plan sponsors who have to indicate on the 5500 thay they have outdated fidelity bonds or none at all.

Since the fidelity bond requirement is high up on the Department of Labor’s compliance priorities, it’s not a great leap to assume that the Department of Labor monitors this item on Form 5500.But 2007 was then, and this is now. It’s not too late to meet the bonding requirements for 2008 which are:

• All persons, including fiduciaries, who handle funds or other property of an employee benefit plan (“called plan officials”) have to be bonded unless they are covered by an exemption.
• Each plan official is required to be bonded for at least 10% of the amount he or she handles, but in no event less than $1,000.
• The maximum bond amount required under section 412 with regard to any one plan is $500,000 per plan official, or $1 million per plan official in the case of a plan that holds employer securities.

The Department of Labor recently issued Field Assistance Bulletin No. 2008-04 to address the fidelity bonding questions that its investigators frequently confront during their examinations of ERISA plans. The issues are presented in a question-and-answer format consisting of 42 frequently asked questions (FAQs) covering:

1. ERISA Fidelity Bonds
2. Exemptions From The Bonding Requirements
3. Funds Or Other Property
4. Handling Funds Or Other Property
5. Form And Scope Of Bond
6. Bond Terms And Provisions
7. Amount Of Bond

An ERISA fidelity bond is not the same thing as fiduciary liability insurance which is not required by law.  That's a topic for my next post in which I'll discuss in an FAQ format. 

12 | 15 | 2008 Posted By Jerry Kalish

Last month, my blogging buddy, attorney Bob Toth, and I started the 403(b) Crunch Time Series to help 403(b) plan sponsors get ready for the January 1, 2009 effective date for the IRS final 403(b) regulations. We had intended to have the series run until year end, but only got to #6 before the IRS last Friday issued IRS Notice 2009-3 (see Plop plop, fizz fizz, oh what a 403(b) relief it is: IRS Notice 2009-3).

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

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

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

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

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

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

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

There are three levels of correction programs in EPCRS:

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

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

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

12 | 11 | 2008 Posted By Jerry Kalish

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

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

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

Here's What It Does Do

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

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

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

Here's What it Doesn't Do

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

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

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

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

12 | 10 | 2008 Posted By Jerry Kalish

Over at Slate's BizBox blog, a special promotion by Open from American Express, I posted an article that discusses the pros and cons of borrowing against your 401(k) account. Check out Your 401(k); Another Way to Borrow.

12 | 4 | 2008 Posted By Jerry Kalish

See full-size image.

While media and investor attention has been totally focused on the market meltdown, the funded status - or lack thereof, of public employee pension plans has been escaping attention. And attention there should be, because it affects all of us taxpayers in our respective states.

And it's one of those complicated issues that the mainstream media won't or can' t seem to get their hands around and heads into. t I wrote about it last August in my post, Dilbert (and others) on public employee pension funding,  In that post, I mentioned two bloggers who are right on top of this issue in their respective states:

• Jack Dean writes about public employee plans in California. He edits Pension Watch. He also edits PensionTsunami.com, a project of FACT -- the Fullerton Association of Concerned Taxpayers. FACT's primary focus is on California's public employee pensions and the state's funding issues.
• John Bury writes about New Jersey public employee plan in his blog, NJ Voices. John's one of us. That is, he's in the retirement plan business. He's an Enrolled Actuary with his own firm in Montclair, New Jersey.

And while Jack and John are regular reads for me through my RSS reader, it was a recent study  that got my attention. Robert Novy-Marx and Joshua D. Rauh, both of the University of Chicago Graduate School of Business, co-authored the study for the National Bureau of Economic Research (NBER), The Intergenerational Transfer of Public Pension Promises (summary by Matt Nesvisky).  

Their study indicates that the extent to which public pensions are underfunded has been obscured by governmental accounting rules, which allow pension liabilities to be discounted at expected rates of return on pension assets. Specifically, their abstract says:

The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Let me repeat the last sentence of the abstract again for emphasis: Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Hat tip to Dave Baker at BenefitsLink.

Picture above is oil on canvas, 54" x 76", by the artist Jung Hee Lee-Marles, who was born in Seoul, South Korea and now lives in Ottawa, Canada.

12 | 3 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

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

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

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

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

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

12 | 1 | 2008 Posted By Jerry Kalish

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

On Wednesday before the Thanksgiving Holiday, I discussed The Change in 403(b) Universal Availability. Now it’s Bob’s turn, and here’s his post on 403(b) Service Agreements: “Harmonizing” the 403(b) Plan.

We are now rushing toward year's end, and all the challenges that it brings in getting some sort of minimal compliance structure in place which will enable 403(b) plan sponsors to meet the demands of the new regulations. The biggest of these challenges seems to be coming from the mundane (though some wags may call it the "inane"!). The regs have created so many new moving pieces that we find ourselves spending an inordinate amount of time organizing the detailed work which is necessary to make it all work.

What is becoming clear is that the most critical operational document (besides, of course, the plan document) is something we have rarely seen in the past: the 403(b) service agreement. It seems to me that it is only through this sort agreement that you can really hope to develop and manage some sort of sane compliance scheme. It is the way to "harmonize", if you will, the often disparate parts and sometimes contradictory parts of your new 403(b) system.

The key to this service agreement is for it to specifically identify which party will be specifically responsible for which specific task (get the sense that specificity is the key?). My approach to plan documents has been the polar opposite, as I attempt to draft with very broad strokes. But with service agreements, the only way to hold anyone accountable for the variety of tasks involved is to make sure all parties involved fully understand the task for which they will be held responsible.

Be careful with these agreements-do not make the mistake of using a standard 401(k) service agreement and merely "change numbers". The compliance work that needs to be done is often spread between a number of different parties, and financial services may often be handled separately.

Be careful also about compliance with security laws, as that is not the responsibility of the employer.

And finally be careful with Information Sharing Agreements (ISA)-often times they are actually service agreements, containing much more than merely information sharing rules. Combining ISAs with service agreements can actually be a very good idea, but vendors will need to make sure they are consistent with other agreements they sign with any employer, and employers need to make sure they understand the nature of the agreement being signed.

That's it for now. On Wednesday, I'll be back with Timing of Depositing Employee Contributions.

11 | 28 | 2008 Posted By Jerry Kalish

It's that time again. The 401(k) safe harbor notice requirement of December 1 is fast approaching.  And if you’re a plan sponsor still undecided about whether you want to have a Safe Harbor 401(k) plan for 2009 because of economic uncertainties next year, then you can take advantage of a safety value that’s permitted by the regulations.

Instead of distributing a Safe Harbor notice that guarantees the 3% contribution regardless of its subsequent financial condition, an employer can provide a “conditional notice” at least 30 days before the start of the plan year.

The notice would state that the employer may give a safe-harbor contribution for the following year. And then no later than 11 months later, the employer must provide another notice indicating that the Safe Harbor has been elected and the 3% contribution will be made for that year.

That’s for the 3% Safe Harbor contribution across the board. But what about the Safe Harbor match: can it be stopped during the plan year? The answer is yes by providing a notice to the employees at least 30 days before the contributions are to be stopped.

And here’s two important matters that are part of this discussion:

1. There must be the proper plan documentation.
2. The 401(k) discrimination tests must be provided for the entire plan year.

Actually, there’s one more important consideration - your employee's expectations. Go beyond the formal notice requirements when communicating with your employees.

Graphic above by YES NO MAYBE, a London-based streetwear / urban clothing label that was "born of its creator’s indecisiveness."

11 | 26 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

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

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

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

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

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

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

11 | 24 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

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

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

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

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

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

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

11 | 20 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

Here’s two examples of potential problems for employers.

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

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

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

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

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

11 | 18 | 2008 Posted By Jerry Kalish

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.

11 | 18 | 2008 Posted By Jerry Kalish

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

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

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

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

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

There are two common errors:

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

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

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

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

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

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

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

11 | 17 | 2008 Posted By Jerry Kalish

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

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

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

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

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

11 | 15 | 2008 Posted By Jerry Kalish

See larger image

Based on informal discussions with 403(b) providers.

11 | 11 | 2008 Posted By Jerry Kalish

We're big on commuter transit benefits here. Not only for cilents, but for our own employees who take public transportation. It's good for employees, it's good for employers, and it's good for the environment.

It's something I've blogged about before, What's Old is New Again: Commuter Benefits Under Section 132 and The Next Generation of Tax Favored Commuter Benefits: Bicycle Commuting.

Under Section 132 of the Internal Revenue Code, employers can provide a program that allows employees to pay for commuter expenses, i.e., public transportation, parking, and now bicycle commuting on a tax-favored basis. Employers get a tax break since Social Security taxes are not imposed on the benefit - not available with 401(k) plans.

It's a benefit that continues to grow in popularity because of the economy and global warming. TransitCenter, a company specializing in commuter benefit programs, just released their 2008 Commuter Impact Survey that provides a number of key insights and implications regarding the impact of commuting on employers, employees, and strategies used to address these impacts. Here are the implications they found as a result of their survey:

The Survey indicates that employers are profoundly concerned about the impact that high fuel and commuting costs are having on their employees. Importantly, most employers see a need to help find viable solutions to soften this impact. Yet, while employers see raising salaries as a means of providing relief, they also cite concerns that they may not have the resources to do so in today’s economic climate.

Survey findings also show that commuter benefit programs, including flextime, telecommuting and tax-free commuter benefits, continue to be a viable solution for employers to help employees cope with high commuting expenses. In particular offering a tax-free commuter benefits program is viewed as having three key impacts: a highly relevant and cost-effective enhancement to a company’s overall benefits package; an effective way to attract and retain employees; and an easy solution to help reduce a company’s carbon footprint.

Factors that may prompt more companies to offer commuter benefits — and more employees to use them — include tax credits and increases to the IRS cap on monthly pretax salary deductions for commuter benefits.

 Here is a link to the full survey.

Hat tip to Kris Dunn and his HR Capitalist blog.

11 | 10 | 2008 Posted By Jerry Kalish

Saturday's post, Balance Forward 401(k) Plans: Someone's Gotta Win, Someone's Gotta Lose, generated several emails to me on the topic.  The comments involved frequency of the valuation and whether interim valuations could or should be done. Let me see if I can respond to all of them at one time.

First, some additional background. Balance forward recordkeeping was the traditional method of accounting when only contributions were made by the employer and deposited once a year. As 401(k) features were added to existing profit sharing plans and daily valuation technology available to even the smaller plans, employers increased the valuation frequency, e.g., quarterly or monthly, or simply changed to a daily valuation system.

So it seems to me that the real issue is: Should balance forward plans provide for interim valuations, and if so, how? And like all matters ERISA, there are both tax and fiduciary issues to consider. Here's Sungard Relius discussing, Interim Valuations: The Right Thing to Do?, in more detail.

So no easy answer here. But definitely one of those matter to discuss with ERISA counsel.

11 | 8 | 2008 Posted By Jerry Kalish

Balance forward 401(k) plans may seem like an arcane topic for a Saturday morning even if you’re a pension person. But if you’re a plan sponsor or a 401(k) plan participant, today’s investment climate is not a good time to be part of one. Let me explain why.

Balance forward is an industry term given to those defined contribution plans, e.g., 401(k) and profit sharing, in which participants’ accounts are valued monthly, quarterly or annually. And after all the accounting takes place, it can be 4-8 weeks after the valuation date before participants receive statements. Most defined contribution plans, however, value participants’ accounts daily right after the markets close.

And I hadn’t given much thought to them lately thinking they were an anachronism. But the topic came up a recent conference of pension people that I attended, and there’s more of them out there than I thought. My brief skimming of one of the Form 5500 databases indicated that there are at least 70,000 401(k) plan not counting the profit sharing plans that allow participants to self-direct their accounts.

So what’s the problem you might ask. My visual metaphor up top is the answer. Like chess, balance forward retirement plans are a zero-sum game. That’s what the economists and game theorists call a situation or interaction in which one participant’s gain results from another participant’s loss. And in the context of the recent huge swings in the stock market, balance forward plans are a bigger zero-sum game than ever before.

Here why? Assume a participant in a balance forward plan with a $50,000 account balance as of December 31. The participant receives a distribution for $50,000 on March 1. But between January 1 and the distribution date, the plan has lost 20%. Thus, the plan - which is to say - all the remaining participants eat the $10,000 loss.

But now let's assume that same participant receives the same $50,000 distribution. But instead of the plan suffering a market loss, it increased by 20%. Now all the remaining participants in the plan share in the $10,000 gain.

Now that's fair, isn't it?

11 | 4 | 2008 Posted By Jerry Kalish

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.

11 | 1 | 2008 Posted By Jerry Kalish

Just this summer I wrote What's old is new again: commuter benefits under Section 132. The post was about employers rediscovering (or discovering in some cases) that they could assist employees paying for commuter transit and parking expenses on a pre-tax basis - and the tax savings that employers themselves could realize. Interest sparked, of course, by higher gas prices.

Now here comes the next generation of tax-favored commuter benefits. Buried in the Emergency Economic Stabilization Act of 2008, a/k/a the "Bailout Bill", is a provision that allows employers to provide employees with a new tax-favored bicycle commuting reimbursement benefit.

Section 132(f) of the Internal Revenue Code was amended to allow employees starting January 1, 2009 to receive up to $20 per month tax-free for the reasonable expenses they incur during a calendar year for:

• The purchase of a bicycle and for bicycle improvements
• Repair and storage if the bicycle is regularly used for travel between the employee’s residence and place of employment

The bicycle commuter benefit is not available if the employee receives other Section 132 commuter benefits, i.e., transit or parking reimbursement.

Picture credit: Bike To Work, The Best Part of Your Day poster by daisy art studio of Seattle, Washington.

10 | 22 | 2008 Posted By Jerry Kalish

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

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

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

• The Changing Face of Small Business

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

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

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

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

• The Rise of Personal Businesses

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

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

 See?

10 | 13 | 2008 Posted By Jerry Kalish

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

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

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

10 | 7 | 2008 Posted By Jerry Kalish

A while back I wrote that there's been a Social Security "early bird special" taken by most married men. Recent experience has been that approximately 50% of those eligible for taking Social Security at age 62, the earliest possible age do so. The financial implications can be huge. If you're a married man and have been the primary wage earner. Then, your decision to take early Social Security benefits can result in a reduction in your wife's survivor benefits.

But taking Social Security sooner can also result in a reduction in benefits - for anyone - of approximately 25% if you're one of the Boomers. Here's a chart  published by the Women's Institute for a Secure Retirement (WISER) who also maintain a blog. The chart illustrates the percentage of reduction in benefits for those retiring at age 62 and the percentage increase in benefits for those working beyond full retirement age.

That is, if you can afford to do that.

Picture above, Waiting in Repose, by artist Dale Wicks.

10 | 2 | 2008 Posted By Jerry Kalish

I've been reminded again of that old Mac Davis song, Texas in My Rear View Mirror, in recent discussions with clients and their other advisors regarding the impact of reductions in force and layoffs on their retirement plans. 

My fellow Lex Blogger, Michael Moore, nicely discusses the employment law aspects of this economic fallout in his post, Managing Layoffs and Reductions in Force, on his Pennsylvania Employment and Labor blog.  

Now here's where the Mac Davis reference comes in. A partial termination of a retirement plan is perfectly clear in the rear view mirror. That is, it's based on facts and circumstances, an expression I've heard on many occasions from my attorney friends over the years. There is no objective set of rules.

So what’s a plan sponsor to do? Two things come to mind:

• Consider the partial termination rule in the context of the planning for the reduction in force and layoffs about which Mr. Moore writes.
• Determine whether it would make sense to submit the plan to the IRS for a ruling as to whether a partial termination occurred.

If you want to get into the nitty gritty of partial terminations, here is a link to the IRS' 401(k) Resource Guide - Plan Participants-Plan Termination.

09 | 30 | 2008 Posted By Jerry Kalish

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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. 

09 | 29 | 2008 Posted By Jerry Kalish

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

Stay tuned for the details.

09 | 22 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

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

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

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

09 | 5 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

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

09 | 3 | 2008 Posted By Jerry Kalish

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Venn diagram template via GraphJam. 

09 | 2 | 2008 Posted By Jerry Kalish

Our fellow bloggers at Slate magazine’s BizBox blog have been following what the general business media have saying about 401(k) plans for small businesses. Their most recent post on the topic, The 401(k) Question Continued ...  picked up on an article in U.S. News and World Report, What Small Business Owners Need to Know About 401(k)'s, that focused solely on 401(k) plans as the best retirement vehicle for business owners.

But as I indicated in an earlier post, Which way to the best retirement plan?, what’s best is  based on the specific set of facts and circumstances. One size doesn’t fit all.

While you don’t read a lot about them, SIMPLEs and SEPs do have their advantages for the business owner. SIMPLEs permit salary reduction contributions and matching contributions, and SEPs allow employer contributions of up to 25% of compensation. Both have substantially less documentation and compliance requirements (and expense) compared to a qualified retirement plan, i.e., 401(k)/profit sharing plan, but the trade-off is less design flexibility and plan features. 

So 401(k) as a slam dunk? Maybe more like a jump ball.

08 | 29 | 2008 Posted By Jerry Kalish

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.

08 | 24 | 2008 Posted By Jerry Kalish

The funded status (or lack thereof) of public employee pension plans doesn't get a whole lot of coverage by the mainstream media.

That's unfortunate because it's an important public policy issue with extremely significant long-term financial implications for all of us taxpayers. But leave it to cartoonist Scott Adams to weigh in on the topic via his Dilbert strip for August 8, 2008:

But via the internet, it is an area that is covered by several knowledgeable bloggers.Two who I follow regularly via my RSS reader are John Bury and Jack Dean.

John Bury's blog is NJ Voices. John's one of us. That is, he's in the retirement plan business. He's an Enrolled Actuary with his own firm in Montclair, New Jersey. He's also a community activist who writes regularly about state, county and local government including the New Jersey state pension plan. And if you read his posts, he is - with all due respect - an actuary with attitude. And, in my opinion, that's a good thing.

Jack Dean is on the other side of the country in California. He edits Pension Watch. He also edits PensionTsunami.com, a project of FACT -- the Fullerton Association of Concerned Taxpayers. FACT's primary focus is on California's public employee pensions and the state's funding issues.

Hat tip to Mr. Dean for his post about Dilbert, Unfunny Pension Issue Hits the Funnies. 

08 | 21 | 2008 Posted By Jerry Kalish

The Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. The GAO investigates how the federal government spends our taxpayer dollars and has often been called the "congressional watchdog,"

I blogged about the GAO just the other day in my post, Getting ready for the first wave of Baby Boomers reaching retirement age: the Social Security Administration's big challenge. That post discussed the GAO’s report assessing how the Social Security Administration’s reduced workforce will manage the increased number of Social Security recipients as the Baby Boomers retire.

401(k) plans have also been on the GAO’s project list with particular emphasis on the fiduciary aspects of ERISA. Back in December, 2006, I blogged that GAO's 401(k) fee report, Congressional comments picking up buzz in local papers. The political result of that report was the introduction of legislation in Congress requiring more fee disclosure. That legislature was s put on hold when Congress adjourned while the Department of Labor has made significant regulatory initiatives in this area.

All this is background for the most recent GAO report issued last month, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors Highlights of GAO-08-774, a report to the Chairman, Committee on Education and Labor, House of Representatives. While it doesn’t break any new ground, it does provide an excellent overview of where the retirement plan industry is now with respect to: 

1. Common 401(k) plan features, which typically have important fiduciary implications, and factors affecting these decisions.
2. Challenges sponsors face in fulfilling their fiduciary obligations when overseeing plan operations.
3. Actions the Department of Labor takes to ensure that sponsors fulfill their fiduciary obligations, and the progress Labor has made on its regulatory initiatives.

The GAO also renews its recommendations to Congress to pass legislation that would help the Department of Labor’s fiduciary oversight. From the report’s conclusion (and note the section I have highlighted in italics):

Since our 2006 report, Labor has made progress on its disclosure initiatives but some important fiduciary issues have yet to be fully addressed. In our previous reports, we asked Congress to consider amending ERISA to (1) explicitly require 401(k) service providers to disclose to plan sponsors the compensation they receive from other service providers and (2) give Labor authority to recover plan losses against certain types of service providers, even if they are not currently considered fiduciaries to that plan under ERISA. While Labor has proposed a regulatory change that could eliminate some of the confusion surrounding certain fiduciary obligations, it is unclear how closely the final regulation will follow the proposed rule. We continue to believe that changes to ERISA would help Labor in its efforts to promote sponsors' fiduciary oversight and be in the best interest of participants.

Here's the link to the complete report, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors.  

08 | 18 | 2008 Posted By Jerry Kalish

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.
 

08 | 17 | 2008 Posted By Jerry Kalish

 Line-graph template via GraphJam.

08 | 14 | 2008 Posted By Jerry Kalish

Over the last several years, the Social Security Administration (SSA) has been faced with staffing reductions and an increased demand for services challenging its field offices to manage work while continuing to deliver quality customer service.  Now consider that the first wave of approximately 80 million baby boomers is reaching the age of retirement eligibility, and the SSA has a massive challenge ahead of it.

So how is the SSA going to manage this challenge? That's what Congress wants to know and the Senate Finance Committee asked the U.S. Government  Accountability Office (GAO) to find out. The GAO is an  independent, nonpartisan agency that works for Congress. The GAO investigates how the federal government spends our taxpayer dollars and has often been called the "congressional watchdog,".

The GAO’s recent report, Social Security Administration Field Offices: Reduced Workforce Faces Challenges as Baby Boomers Retire, assesses how the SSA is managing these challenges to determine:

1. The effect that reduced staffing levels may be having on field office operations
2. The challenges that SSA faces in meeting future service delivery needs

This statement is drawn from GAO’s ongoing study on field offices for the Committee which is expected to be issued later this year. But for now, here is what the the GAO found:

Growth in claims from the nation’s baby boomers and a retirement wave of its most experienced staff may pose serious challenges for SSA if the agency does not have a clear plan. The first wave of approximately 80 million baby boomers is reaching the age of retirement eligibility, and SSA estimates that retirement and disability filings will increase the agency’s work by approximately 1 million annual claims by 2017. To further compound this challenge, SSA projects that 44 percent of its workforce will retire by 2016. Because retirements will occur among the agency’s most experienced staff, this will have a serious impact on field offices’ institutional knowledge. SSA is planning on hiring an additional 2,350 new employees this fiscal year for regional and field office operations, almost all of whom will go to the field offices. Agency officials stated, however, that it typically takes 2 to 3 years for staff to gain the experience they need to function independently. SSA is using various strategies to recruit new employees to fill knowledge gaps. SSA is finalizing its Annual Strategic Plan which will describe the agency’s strategies for addressing these issues.

Here is a link to the full report (PDF, 26 page).

Photo above by Maya Hasson via flickr.
 

08 | 12 | 2008 Posted By Jerry Kalish

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

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

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

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

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

08 | 10 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

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

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

3. Timely notice not given to employees.

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

Timing can be everything.

08 | 7 | 2008 Posted By Jerry Kalish

The elderly are the fastest growing part of our population. They’re more active and living longer than every before, and as a result they have legal needs and concerns that prior generations haven’t faced. And a new field of the law is evolving to address those needs and concerns.

It’s called Elder Law and it combines estate planning, wills and trusts, guardianship, elder rights, health care planning, and Social Security. And one of the elder issues on the minds of virtually every Boomer becoming eligible for Social Security is “when should I start taking Social Security benefits?”

I addressed a part of that issue recently in my post, Social Security "early bird special" taken by most married men. The decision to take early Social Security benefits would result in a reduction in a wife’s survivor benefits.

Someone who has, however, addressed the totality of the Social Security decision is Richard Kaplan, a law professor at the University of Illinois College of Law, who teaches elder law. Professor Kaplan, a prolific author on elder law issues, has just had published, A Guide to Starting Social Security Benefits, that appeared in the July-August, 2008 issue of the Journal of Retirement Planning. Here is the Abstract of his article:

When a person should begin taking Social Security retirement benefits is a critical question for planning one's retirement. This article explains the various factors at play in determining the optimum starting point, including: longevity considerations; spousal implications, whether for a previously employed or a previously unemployed spouse; the impact of post-retirement employment; the availability of health insurance prior to Medicare eligibility for the worker and the worker's spouse; alternative sources of retirement income, including distributions from retirement savings plan assets and lifetime liquidation of nonretirement assets (and the pertinent income tax ramifications); and anticipated investment strategies.

Here is a link to download Professor Kaplan's complete article from the Social Security Research Network (free but registration required).

Hat tip to Rick Bales, my fellow blogger, one of the Editors at Workplace Prof Blog.

08 | 7 | 2008 Posted By Jerry Kalish

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

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

08 | 6 | 2008 Posted By Jerry Kalish

It didn't have a big box office in 1986 when it was released, but the ¡Three Amigos! movie has gone on to become a comedy classic. And how could it not, 

• Written by Steve Martin, Lorne Michaels, and Randy Newman
• Directed by John Landis
• Starring Steve Martin, Chevy Chase, and Martin Short
• Supporting roles played by the late Phil Hartman, John Lovitz, and Joe Mantega (Chicago guy!)
• Original music by the late Elmer Bernstein

Now let's fast forward 22 years to today's headline, ¡Three Amigos! of 401(k) Fee Disclosure Opening At A Retirement Plan Near You Soon. And in the starring roles (drum roll please) will be:

1. New Reporting Requirements for Schedule C of the 2009 Form 5500. Effective January 1, 2009, the Department of Labor (DOL) will be requiring new and extensive disclosures for service provider fees and other compensation. How extensive? See for yourself. Here's a link to the DOL's FAQs About The 2009 Form 5500 Schedule C. Nick Curabba on Baker & Daniels' Benefits Biz Blog gives us some help in his post, DOL's New Thinking on Schedule C.

2, The DOL's proposed amendments to the service provider fee disclosure regulations under Section 408(b)(2) of ERISA. The new regulations mandate disclosures of compensation and conflcts of interest by plan service providers. The effective date will be 90 days after the final regulation is published in the Federal Register. It's possible that the DOL will make the effective date coincident with the January 1, 2009 Schedule C date discussed above.

3. The DOL's proposed regulations released July 23 that would impose new requirements for the disclosure of fee and expense information to participants in self-directed retirement plans, i.e., 401(k) plans.  The proposed regulations would be effective for plan years beginning on and after January 1, 2009. At the same time, the DOL proposed changes to the regulations under Section 404(c) of ERISA that would incorporate these new disclosure requirements.

The DOL is, of course, the producer/director of these new ¡Three Amigos!.  But unlike the original, this isn't a comedy. And unlike the orignal, viewing isn't discretionary - it's required.

07 | 26 | 2008 Posted By Jerry Kalish

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

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

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

07 | 23 | 2008 Posted By Jerry Kalish

The right of any person to any future payment under this title shall not be transferable or assignable,7 at law or in equity, and none of the monies paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

1. Allows the enforcement of child support and/or alimony for the support and maintenance of a child subject to, and in accordance with, State or local law.
2. Allows the Internal Revenue Service to collect unpaid Federal taxes.
3. Allows beneficiaries to elect to have a percentage of their benefits withheld and paid to the Internal Revenue Service to satisfy their Federal income tax liability for the current year.
4. Allows benefits to be withheld and paid to another Federal agency to pay a non-tax debt the beneficiary owes to that agency.
5. Authorizes the Internal Revenue Service to collect beneficiaries’ overdue Federal tax debts by levying up to 15 percent of each monthly payment until the debt is paid.

07 | 9 | 2008 Posted By Jerry Kalish

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

07 | 9 | 2008 Posted By Jerry Kalish

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1. SOCIAL SECURITY: Golden Years or Fool's Gold? How and why the system got started and its long-term prospects.
2. SOCIAL SECURITY: PART TWO Politicians Clash. What government, as well as leading presidential candidates, would do to fix the problem, and how much of their Social Security checks future benefit applicants can expect to keep.
3. "Windfall' Rule Enriches Feds in Name of 'Fairness'. Possible benefit cuts for individuals also receiving state or government benefits.
4. Can Retirees Afford to Work? The cost of losing Social Security benefits by going back to work.

06 | 28 | 2008 Posted By Jerry Kalish

The results of a recent survey by Putnam Investments come as no surprise to those of us that are involved with 401(k) plans on a daily basis.

Putnam found that because of the current downturn in the economy employees are putting away less money in their 401(k) accounts: 21% of 401(k) participants are now contributing at a lower rate and 4% have stopped altogether.

But there is a way employers can help employees put more dollars in their paychecks at no additional expense to them. In fact, tax savings are available to both employers and employees.

So what is it, and how does it work? It’s an oft forgotten program that allows employers to offer employees the opportunity pay for certain transportation expenses on a pre-tax basis under Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century (TEA-21).

Pre-tax means before income taxes and FICA. Pre-tax benefits are valuable to employees because they effectively increase take-home pay. These benefits are also valuable to employers because the employer avoids paying its share of FICA.

Qualified transportation expenses generally include payments for the use of mass transportation, e.g., train, subway, bus fares), and for parking. Amounts are indexed for inflation. For 2008 the maximum monthly pre-tax contribution for mass transit is $115.00, and $220.00 for parking.

And there’s one more goodie. While Section 132 benefits are similar to the pre-tax flexible spending accounts available for medical expenses and dependent care under Section 125, there’s one important difference. The transportation benefit does not include a "use it or lose it penalty," as required with medical/dependent care flexible spending accounts.

 

06 | 20 | 2008 Posted By Jerry Kalish

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

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

06 | 5 | 2008 Posted By Jerry Kalish

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

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

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

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

05 | 27 | 2008 Posted By Jerry Kalish

... reviews the evidence on the role DB pensions play in ensuring that older Americans have the resources they need to be self-sufficient in retirement. It examines recent trends in pension coverage and discusses the effect these trends have had on the state of retirement readiness among American workers. Finally, it points in the direction of areas worthy of exploration for policymakers seeking to address specific retirement security goals.

05 | 23 | 2008 Posted By Jerry Kalish

If you happen to be near a Texas Roadhouse (and there's 300 locations in 44 states from which to choose) on any Monday to Friday from 3:00PM - 6:00PM, you can enjoy their Early Bird Special. That’s two hand-cut USDA Choice 8oz. sirloins and 4 made-from-scratch side items - all for only $16.99. Pretty good deal, and you don’t even have to be a senior citizen to take advantage of it.

Folks joke about these early bird specials at restaurants and the geriatric crowd they attract. But the Social Security "early bird special" is no joke if you happen to be one of the oldest baby boomers who are turning 62 this year. That "early bird special" is when you can start taking retirement benefits at this earliest eligibility age.

And about 50% of the Social Security eligibles are expected to claim their benefits as soon as they resulting in an estimated 25% reduction in benefits compared to waiting until full retirement age. If you're a single male, then your decision only affects you. But if you're married and have been the primary wage earner, then your decision to take early Social Security benefits can result in a reduction in your wife's survivor benefits.

It's a serious matter, and goes beyond the pop psychology of Men Are From Mars and Women Are From Venus. Recent academic research has focused on Why Do Married Men Claim Social Security Benefits So Early? Ignorance or Caddishness? I'm pleased to report on behalf of my gender that the reason was neither. Here's how the researcher phrased it: 

Regression results found no association between early claiming and caddishness or the ability of husbands to make claiming decisions independently. The one statistically significant finding is the association of college education and later claiming, which cautiously take to indicate greater financial awareness.

It's a public policy issue that needs addressing. It's not going to happen overnight. So if you're a married man eligible for Social Security (or for that matter anyone who is eligible), don't make this important decision on your own. There are qualified financial professional out there who can help.

05 | 22 | 2008 Posted By Jerry Kalish

What must a plan sponsor do to fulfill its responsibility?

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

What if the fiduciary has not assigned responsibility?

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

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

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

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

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

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

05 | 12 | 2008 Posted By Jerry Kalish

State Treasurer Richard Mourdock announced the designation of $50 million and the launch of IEI for the purpose of assisting Indiana businesses to become ESOP companies, which will preserve Hoosier jobs.

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

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

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

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

ESOP companies have a track record of creating wealth, encouraging the entrepreneurial spirit, and increasing productivity, explained Treasurer Mourdock. Furthermore, no group of employee-owners has ever, ever, ever, ever moved their company to Mexico or China!

05 | 11 | 2008 Posted By Jerry Kalish

• Increases in all categories of wealth accumulation (e.g., retirement plan, housing equity and other financial wealth) increase the probability of retiring while good earnings prospects, implying high opportunity cost for retirement, induce continued employment.

• The type of retirement plan available to workers has a significant impact on when they retire. Workers entitled to traditional DB plan benefits are more likely to retire than those who are not, while workers with significant assets from DC plans tend to significantly delay their retirement.

• New evidence supports the hypothesis that business cycles (stock market booms and busts) increase the probability - and thus timing - of retirement for DC plan participants.

• Health insurance (HI) has a large effect on the retirement decision. HI, if conditional on employment, strongly discourages retirement, while alternative sources of health insurance, such as employer-sponsored retiree HI, spouse’s HI or public HI, facilitate or encourage labor force exit.

• The retirement behavior of older workers is significantly linked to Social Security policy. The ongoing increase in the normal retirement age for Social Security and the cohort-specific actuarial adjustment of SS benefits, as defined by the law, will encourage younger cohorts to work longer.

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

05 | 7 | 2008 Posted By Jerry Kalish

In a rather strange ERISA case, a plaintiff filed suit after the ERISA plan administrator denied his claim that sought retirement benefits pursuant to a Plan titled Kroger 30-And-Out even though he was never an employee of Kroger.

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05 | 4 | 2008 Posted By Jerry Kalish

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.

04 | 29 | 2008 Posted By Jerry Kalish

The necessity of communicating with ex-employees results in increases workload, plan costs, and your liability. (Ted) Benna says some former employees who harbor grudges against their ex-employers have used the non-receipt of plan information as a reason to file suit.

Victims of downsizing often perceive their layoff as being unfair, which can lead to various forms of retaliation. Informational justice, defined as providing employees with adequate explanations in a timely manner, has been prescribed as a way to mitigate the retaliation tendencies associated with unfairness perceptions. Few studies, however, have examined contexts in which informational justice might be more vs. less effective in this regard. In the present research, we explored whether employees' perception of the employer's integrity moderates the relationship between informational justice and retaliation among layoff victims. Results from a field and laboratory study suggest that informational justice helps manage retaliation only when layoff victims perceived that their employer had high (vs. low) integrity prior to the layoff. In Study 2, we found that perceived sincerity mediated the impact of informational justice by integrity interaction on retaliation.

04 | 27 | 2008 Posted By Jerry Kalish

knowing the Plan’s investment had been impaired by [his] own fraudulent acts, . . . failed to take any steps to protect the Plan’s assets. . . .

04 | 21 | 2008 Posted By Jerry Kalish

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.

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

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.

04 | 18 | 2008 Posted By Jerry Kalish

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.

04 | 16 | 2008 Posted By Jerry Kalish

It appears to be the richest retirement program in America. There's no way we can afford the pension and health care benefits.

04 | 13 | 2008 Posted By Jerry Kalish

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.

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.

04 | 5 | 2008 Posted By Jerry Kalish

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.

04 | 2 | 2008 Posted By Jerry Kalish

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

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

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

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

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

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

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

03 | 31 | 2008 Posted By Jerry Kalish

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).

03 | 28 | 2008 Posted By Jerry Kalish

• 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.

03 | 24 | 2008 Posted By Jerry Kalish

The Lawrence Berkeley National Lab calls KEVLAR® the "Wonder Material" on it’s website because of its strength. The material is used by law enforcement, the military, and by civilians.

Police wear bulletproof vests made of KEVLAR® which we know from watching cop shows. The U.S. Navy uses KEVLAR® cables to support sonar facilities to find out how much noise submarines make because it is 20 times stronger than steel under water. And windsurfers use sails that are made with KEVLAR® which can withstand the force of 60 mph winds and don't rip easily.  But unfortunately, we can’t use the Wonder Material to make a 401(k) plan.

LaRue, understandably, has brought out all the pundits. A few have suggested the best protection is allowing participants to self-direct their investments, a few have suggested not allowing participants to self-direct, and a few have said to not permit self-directed brokerage accounts. 

But in my opinion, most of the commentators have nailed it. It’s not about the structure, it's about process. Specifically, "procedural prudence", a concept that has been part of the fiduciary world long before ERISA.

But what exactly does it mean? In my view,  it's having a process in place that can answer the following questions about plan investments:

• Is there an investment policy statement?
• What objective criteria were used to evaluate the investments?
• What was done when a choice failed to meet the criteria?
• What other service providers were considered?
• How were the employees educated?

Questions that might be asked by the Department of Labor or plan participants (or their attorneys). It's both risk management and prudent management.

Yes, it’s that simple, and that difficult.

KEVLAR® is a registered trademark of E.I. du Pont de Nemours and Company.

03 | 20 | 2008 Posted By Jerry Kalish

Just to your left is a picture of one of the 10 vehicles damaged in a parking lot at a hospital by a fire that started in the trunk of someone's car. Fire firefighters suspect that fumes built up inside the trunk and were ignited by an electrical source, such as the taillights or brake lights. The gas containers did not have the lids on tight. They only had the spouts with caps, which would allow vapors to leak.

You can see this visual metaphor coming a mile away, can't you? It's about plan sponsors making good decisions, one of which is the selection of 401(k) service providers. LaRue has retirement plan sponsors refocused  on that - or they should be. LaRue, after all, was about a participant who claimed that the plan's fiduciaries failed to follow his investment instruction to sell securities. This failure, he claimed, resulted in a loss of $150,000 in the value of his account.

Selecting 401(k) service providers in a prudent manner (it is, in fact, a fiduciary function) may avoid such problems down the road. And so, here's just a short list of how plan sponsors should not select 401(k) service providers. 

• Not understanding service and investment models
• Not understanding fees
• Not listening to employees about what matters to them
• Making the decision-making based solely on company politics and other relationships
• Looking solely at “costs”

It's a new day out there, folks.

Picture credit: How Not to Transport Gasoline on the Naval Safety Center website. 

03 | 18 | 2008 Posted By Jerry Kalish

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

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

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

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

03 | 15 | 2008 Posted By Jerry Kalish

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• 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

03 | 1 | 2008 Posted By Jerry Kalish

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

02 | 29 | 2008 Posted By Jerry Kalish

Looking for a quick fix, which is your retirement savings, could spell doom. People, this is a temporary Band-aid, and it’s going to hurt when you have to rip it off.

02 | 25 | 2008 Posted By Jerry Kalish

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

02 | 24 | 2008 Posted By Jerry Kalish

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

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

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

02 | 17 | 2008 Posted By Jerry Kalish

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

02 | 10 | 2008 Posted By Jerry Kalish

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

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

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

02 | 3 | 2008 Posted By Jerry Kalish

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.
 

01 | 19 | 2008 Posted By Jerry Kalish

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

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

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

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

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

01 | 12 | 2008 Posted By Jerry Kalish

The other day I wrote about the duty of a fiduciary to monitor service providers in the context of 401(k) plan sponsors not being concerned about the consolidation service of providers. We also hear a lot about the duty of a fiduciary to not just select service providers prudently, but to also monitor them. And this advice is not just yadda yadda, because there is a real world aspect to it. And if you're wondering exactly where the rubber does hit the road, here's a real world situation to keep in mind.

An article in yesterday's on-line edition of the North Hampton,  Massachusetts Eagle-Tribune about a businessman who must repay $100,000 reports that an owner of a local  architectural firm agreed to pay $100,000 to his profit-sharing plan as part of a settlement with the U.S. Department of Labor (DOL). The DOL accused the owner of failing to monitor a financial company that stole over $500,000 from the 11 participants in the profit sharing plan. The settlement with the DOL also included the owner paying an additional $10,000 fine and agreeing never to manage any other retirement plan himself.

And how exactly did the investment adviser now serving a 11-year prison sentence for the embezzlement of the funds get nabbed? The Eagle Tribune's story said that according to a published report at the time the embezzlement scheme was only discovered after the adviser sent audiotape confessions to his wife, his mother, and the Exchange Commission, among others, before trying to kill himself.

Situations like this are fortunately rare, but stuff does happen. What should the business owner have done? I'm going to save that topic for another time in the very near future and discuss using procedural prudence in the selection and monitoring of retirement plan providers.

Picture above, in case you wondered exactly where the rubber meets the road..., by Fubuki via Flickr.



HT to Dave Baker at BenefitsLink for pointing me to this story.

01 | 11 | 2008 Posted By Jerry Kalish

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.

01 | 6 | 2008 Posted By Jerry Kalish

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.)

01 | 1 | 2008 Posted By Jerry Kalish

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.

• 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.

12 | 27 | 2007 Posted By Jerry Kalish

"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!

12 | 23 | 2007 Posted By Jerry Kalish

See full size image

• 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
  

12 | 21 | 2007 Posted By Jerry Kalish

Click here to see larger image.

 What's 1% worth? In terms of an increased retirement benefit - a lot of money! Paul Secunda over at the Workplace Prof Blog provides us with an Illustration of How 401(k) Management Fees Add Up, and shows us the effect on earnings of even one percentage point difference in annual fees on a 401(k) balance of $20,000 invested over 20 years.

That's during the accumulation phase. But what impact does a 1% increase in return have during the distribution phase. The chart above shows us that a 1% increase in returns, compounded over a lifetime, makes an enormous difference. In this example provided by Alliance Bernstein, it translates into about $220,000 extra at retirement—and an extra 10 years of spending. 

So whether it's during the accumulation phase or during the distribution phase, 401(k) fees really do matter.

For the mathematically inclined, following is the methodology Alliance Bernstein used to develop their chart:

Results are simulated. This is a hypothetical illustration only and its results are not indicative of any specific investment, including any AllianceBernstein mutual fund. The savings phase simulates a defined contribution participant salary of $45,000 at age 25, linearly increasing to $85,000 by age 65, making yearly contributions of 6% of salary at age 25 increasing by 0.5% per year to a maximum 10% with a 50% company matching contribution up to the first 6% of salary. In the spending phase, $63,750 (75% of final salary) is deducted at the beginning of each year. A yearly investment return of 9% is assumed at age 25, linearly decreasing to 6% at age 80 and remaining constant thereafter. In the “1% Greater Return Scenario” a yearly investment return of 10% is assumed at age 25, linearly decreasing to 7% at age 85 and remaining constant thereafter. Inflation is assumed to be a constant 3% and dollar values are expressed in real purchasing power terms.

12 | 13 | 2007 Posted By Jerry Kalish

See full size image

• Are we getting the best value for our money?
• Are we meeting all of our fiduciary responsibilities?
• Do we have the right investment lineup?
• Do we provide a communication program that works?
• Are we receiving the type of service we need?

12 | 9 | 2007 Posted By Jerry Kalish

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.

12 | 5 | 2007 Posted By Jerry Kalish

Tight credit and a slumping housing market that has reduced the use of home equity as a loan source is causing people to look in other directions to borrow money. And for those who are participants in 401(k) plans, there may be a loan provision in their plan to utilize. But there is a downside to consider. 

• They’re losing the earnings on their accounts since there’s less money to invest.
• The tax shelter advantage is lost since the loan is paid back with after-tax dollars.
• The interest paid on the loan is not deductible since it’s considered regular consumer debt.
• If the participant terminates employement prior to paying off the loan, the loan has to be repaid or it’s considered a taxable distribution with a 10% penalty tax if the participant is under age 59 ½ .

Here’s an example of the financial impact of a 401(k) loan from T. Rowe Price. Assume that the participant has been making monthly contributions of $264 to his 401(k) account and has been earning annualized return of 8%. Now at age 40, he takes out a loan for $50,000 for 5 years at an interest rate of 7%. His after-tax monthly loan repayment would be $198 and he halts his monthly contributions to the plan.

By taking the loan: 

• His balance at end of 5-year payback period would be $74,143, and
• His balance at age 65 would be $520,799.

But if he doesn’t take the loan: 

• His balance at end of the 5-year payback period would be $93,891, and
• His balance at age 65 would be $618,095.

Taking the 401(k) loan reduces the employee’s account balance by approximately 21% at the end of the 5-year payback period, and by approximately 19% at age 65.

Something to consider.

12 | 2 | 2007 Posted By Jerry Kalish

I've written about the "annuity puzzle" before. That's the investment industry term for the disconnect between the economic arguments of annuitizing a lump sum amount and the investor’s aversion to doing so. Most of the retirement plan industry attention recently has been focused on the "annuitization" of 401(k) plans. That is, adding annuity options to 401(k) plans in response to retirees and pre-retirees who are significantly underestimating how long they need to make their retirement savings last.

Whether that effort is successful is a topic for another day. But let's not forget that there are still defined benefit plans out there. A recent study by Gary R. Mottola, Stephen P. Utkus at the Vanguard Center for Retirement Research, Lump Sum or Annuity? An Analysis of Choice in DB Pension Payouts, adds to the understanding off the annuity puzzle in a defined benefit environment.

They examined distributions from two Fortune 500 defined benefit plans and one cash balance plan. In brief, their study indicated that many married participants chose to “deannuitize” their benefit in their defined benefit plans. In other words they chose a lump sum over the ERISA-mandated joint and survivor annuity default by submitting the required written, notarized waiver.

Here is what Mr. Mottola and Mr. Utkus say about the implications of their findings:
 

The desire among married participant in their 50s and 60s to “deannuitize” a DB plan distribution appears to be quite strong, and stands in sharp contrast to the inertia typically displayed by defined contribution participants in the accumulation phase. As a result, plan design and policy efforts that rely on inertia and default choices to encourage annuitization within retirement plans are likely to have only modest effects. Meanwhile, the fact that annuitization rates rise with age suggests that the demand for traditional annuities may arise later in life, at an age when many participants have already retired and left their employers’ retirement plans. Also, annuity demand may increase in tandem with the broader trend toward taking a later retirement.

Here is a link (PDF) to their study.

Hat tip to the Financial Page blog.by Barry Barnitz.
 

11 | 30 | 2007 Posted By Jerry Kalish

• "Retirement plans are too expensive to set-up and administer.” – There are retirement plan service providers that are structured to provide cost-effective services to small businesses.
• "It still seems expensive to set-up and administer a plan." - Check with your accountant and see if your business qualifies for a tax credit for establishing a retirement plan.
• "I have to make a contribution every year.” – Retirement plans can be set up so that contributions are discretionary”.
  
• "I have to provide the same contribution to the employees as for me.”.– Not necessarily since there are allocation methods that can be used to provide larger contributions to the owners and still pass IRS compliance tests.

11 | 27 | 2007 Posted By Jerry Kalish

It seems like there is always an ERISA deadline. Here's one coming up on December 1. It's the due date for a calendar year plan to distribute a safe harbor notice for 2008. If the notice is timely provided and other conditions met (discussed below), a 401(k) plan is treated as satisfying the discrimination testing. The result, then, is to avoid returning excess contributions to the Highly Compensated Employees (HCEs).

An employer can satisfy the safe harbor requirement in one of two ways. 

1. Contribute at least 3% or more of compensation to all eligible employees. Generally, the 3% contribution must be provided to all employees eligible to make elective deferrals to the plan even if they make no contributions themselves.
2. Contribute a matching contribution equal to 100% of the first 3% of elective contributions and 50% of the next 2%. Thus, if every employee contributes at least 5% of compensation, the maximum employer match is 4% of total compensation.

Here is some of the fine print: 

• No allocation requirement may be imposed, such as a 1,000 hour or last-day requirement.
• The contribution must be 100% vested.
• The 3% contribution can also be used to satisfy Top Heavy minimum contribution and can be used towards satisfying the cross-testing gateway for new comparability plans.
• The matching contribution can used to satisfy a Top Heavy minimum contribution.
• HCEs can also receive a safe harbor contribution.

Automatic enrollment plans wanting to use a safe harbor have another set of requirements which is a topic for another day.

Safe harbor plans are not for every employer. The decision to use the safe harbor method should be based on the employer's objections and plan demographics.

11 | 19 | 2007 Posted By Jerry Kalish

• 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

11 | 17 | 2007 Posted By Jerry Kalish

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 judgment" 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.

11 | 15 | 2007 Posted By Jerry Kalish

I recently wrote about the Alliance Bernstein 2006 research that indicated that plan sponsors want to "keep it simple".  What that translates to when plan sponsors are shopping for service providers is the ability to provide administrative services on-line.

New research by Spectrem Group confirms that automated plan administration functions, such as electronic payroll submission, electronic funds transfer and data downloads, are rapidly becoming must-have capabilities for plan sponsors of all sizes. And because of the competitive nature of the retirement plan market, "must-haves" are "can-haves" even for the smallest plan sponsor.

11 | 13 | 2007 Posted By Jerry Kalish

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.

11 | 4 | 2007 Posted By Jerry Kalish

• Daily valuation
• Loans
• Self-directed brokerage
• Web access
• Investment education tools
• Multi-share classes
• Co-fiduciary responsibility
• Advice tools

10 | 18 | 2007 Posted By Jerry Kalish

There's an important deadline on the horizon if an employer has a SIMPLE in 2007 but would like a 401(k) in 2008. It's November 1. The employer must provide notice to employees at least 60 days prior to the start of the next calendar year or no later than November 1, 2007 that the SIMPLE will not be maintained in 2008.

So why change from SIMPLE to 401(k)? A  SIMPLE retirement plan is called "simple" for obvious reasons. It’s easy to establish, relatively inexpensive, and also easy to maintain. But if an employer wants to:

• Not cover practically all employees
• Make larger contributions
• Favor owners and highly compensated employees
• Not have 100% vesting of employer contributions
• Maybe have better investment options
• Have the Roth option
• Allow for plan loans
• Be able to buy tax deductible life insurance
• Have better creditor protection

Then, the employer needs a profit sharing/401(k) plan. And yes, it is more complicated to maintain and accordingly more expensive. Retirement planning is a lot like life. It’s a series of trade offs.

Side Note: A SIMPLE can be rolled over to a 401(k) plan after a "2-year period" which begins on the date which the individual first participated in the SIMPLE.

10 | 16 | 2007 Posted By Jerry Kalish

A few days ago, I wrote about the Department of Labor's new interactive website called elaws-ERISA Fiduciary Advisor which provides an overview of the basic fiduciary responsibilities applicable to retirement plans under the law.

The Internal Revenue Service adds to the tools to help retirement plan sponsors deal with common 401(k) mistakes. It's a 43 page PDF document that includes hypertext links that take the reader from a particular item in a chart to a detailed discussion within the document about that item. In addition, the discussions include hypertext links that jump to other IRS documents on the web (if connected to the Internet), such as checklists and revenue rulings. The chart lists 11 common, potential mistakes in 401(k) plan operation and documentation.

Here is the link for you to download it.

10 | 14 | 2007 Posted By Jerry Kalish

The Department of Labor, the Federal agency responsible for overseeing the fiduciary aspects of ERISA, last week released an interactive website called elaws-ERISA Fiduciary Advisor. The website is designed to provide an overview of the basic fiduciary responsibilities applicable to retirement plans under the law. The intended audience is employers and third party service providers. Additional information for employees is listed in the Resource section. And it's extremely well done.

Here is the link to it.

10 | 7 | 2007 Posted By Jerry Kalish

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.