Retirement Plan Blog

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 | 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!

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 | 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. 

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 | 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. 

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 | 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 | 19 | 2009 Posted By Jerry Kalish

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

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.

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 | 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!

07 | 14 | 2006 Posted By Jerry Kalish

The IRS has just released, A Virtual Small Business Tax Workshop (Publication 1066C), which helps small business owners and self-employed understand and meet their federal tax obligations. Lesson 5 deals with how to set up a retirement plan.

While the IRS focuses strictly on SEPs and SIMPLE IRAs, the lesson does effectively communicate why new or younger small business owners should start a retirement plan now. The Workshop can be ordered directly from the IRS in DVD format or click here  to access the Online Classroom to download Lesson 5's 18-minute video or printed transcript.