“How to Rock a Part Time Job”. But benefit coverage is another matter

By Jerry Kalish on Posted in 401(k) Plans, Fiduciary Matters

 That’s a picture from Episode 12, How to Rock a Part Time Job, that ran on the Nickelodeon sitcom, How To Rock, on  April 21, 2012.

In case you haven’t seen the show, here’s the premise courtesy of Wikipedia:

The show centers on Kacey Simon (Cymphonique Miller), a popular girl who was once mean, and whose status goes down after she must briefly wear braces and glasses. Ignored by her fellow mean girls, Kacey finds a new way to express herself through music by becoming the lead singer of the pop/hip-hop band Gravity 4 with Stevie (Lulu Antariksa), Zander (Max Schneider), Nelson (Noah Crawford), and Kevin (Christopher O’Neal). The success of the band, now renamed Gravity 5, begins a rivalry with Kacey’s former group The Perfs, a rival band featuring her former friends, and now archrivals Molly (Samantha Boscarino) and Grace (Halston Sage).

In the aforementioned Episode 12, Stevie helps Kacey gets a job at Danny Mango’s so Kacey can pay her mom back for a large credit card bill. But when Kacie finds out that employees can get free smoothies, she gives too many away getting herself and Stevie fired.

Got it?

So kids, here’s the question. Other than free smoothies, are Kacey and Stevie covered under Danny Mango’s benefit programs?

In the new world of health care, it’s a relevant question. There’s much discussion now about the extent to which employers will move many of its employees to part-time status, i.e., the less than 30 hours a week threshold under the Affordable Care Act, so they would not be required to provide health insurance benefits.

Sarah Kliff, who does an excellent job covering health policy for the Washington Post, recently reported on this matter in her regular Health Reform Watch, Will Obamacare lead to millions more part-time workers? Companies are still deciding.

But from a retirement plan standpoint, there really isn’t much to decide. Many employers do not want to include part time employees for both cost and discrimination testing purposes. However, the IRS issued guidance in 2007 regarding the extent to which part-time, temporary, seasonal, and project employees can be excluded under qualified plans, including 401(k).

Plans that are improperly drafted to exclude part-time and other non–full-time employees or exclude them in actual operation of the plan can be disqualified resulting in significant adverse tax consequences.

So here are the takeaways for an employer concerned about this issue:

  1. Review both the plan document and plan operation to determine whether these employees were validly excluded from plan participation.
  2. Make any necessary corrections either to the plan document or corrective contributions  under an appropriate IRS correction program.

Now as to providing health insurance coverage for part-time employees. That’s definitely a "kids don’t try this home" issue. Talk  to an attorney experienced with health insurance.

Fiduciary, Benjamin, Fiduciary

By Jerry Kalish on Posted in 401(k) Plans, Fiduciary Matters

With apologies to anyone associated with the 1967 ground breaking movie, The Graduate, my headline is a riff on the scene to your right featuring a young Dustin Hoffman as Benjamin, and the late character actor, Walter Brooke, as Mr. McGuire.

Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.
Benjamin: Exactly how do you mean?
Mr. McGuire: There is a great future in plastics. Think about it. Will you think about it?

If the Graduate were made today, there’s a good chance that the one word would be “fiduciary”. Well, maybe not “fiduciary” exactly, but a word (or two) related to it like “investments”, “stock market”, or “financial services”.

And there’s also a good chance that one of those jobs in the financial service sector would be with a 401(k) service provider in which fiduciary services have become an integral part of its offering.

Since the beginning of 401(k) plans in the early 1980s, 401(k) service providers have introduced an increasing number of services to stay competitive with other providers. Not surprisingly, most 401(k) plan providers now offer some sort of fiduciary support to help employers manage their fiduciary responsibilities with respect to plan investments.

There are different levels of fiduciary support in the marketplace; and thus, it’s important for plan sponsors (themselves, fiduciaries) to understand the differences. In general (very general), here are the five levels of fiduciary support services available in the marketplace in the order of highest to lowest fiduciary support:

  1. ERISA Section 403(a): Trustee with full discretion.
  2. ERISA Section 3(38): Independent advisory firm with full responsibility for selecting and monitoring plan investments.
  3. ERISA Section 3(21): Independent advisory firm providing participant directed investment choices.
  4. Due Diligence Support: An evaluation process with regard to the investment options providers offer under their retirement programs.
  5. Fiduciary Warranty: A Certificate of Warranty that is generally available to plan sponsors if they select at least one fund in designated asset classes.

Which one of these fiduciary support services is best? There is no “best” one. Each plan sponsor must decide based on individual facts and circumstances such as availability, cost, and other factors.

And here’s the important takeaway: All fiduciary responsibilities cannot be delegated away. The plan sponsor always retains the responsibility to monitor the service provider on a periodic basis.

The language of savings

By Jerry Kalish on Posted in 401(k) Plans, Behavioral Finance

As 401(k) plans have matured, so has the academic research around it. The relatively new field of behavioral economics which blends micro-economics and psychology is being used to help employees make better decisions about their 401(k) plans.

But for those of us in the financial service business, the underlying process of helping employees save for retirement is about communication – which is to say, the language we use.

Recent research by behavioral economist Keith Chen goes to that very concept when he added the linguistic dimension to how and why people make savings decisions.

In late 2011, an idea struck me while reading several papers in psychology that link a person’s language with differences in how they think about space, color, and movement. As a behavioral economist, I am interested in understanding how people make decisions. Could a person’s language subtly affect his or her everyday decisions? In particular, could the way a person’s language marks the future affect their propensity to save for the future?

Seeking an answer to that question resulted in his research study, The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets, recently published in the American Economic Review: Vol. 103 No. 2 (April 2013). The Abstract for which says

Languages differ widely in the ways they encode time. I test the hypothesis that languages that dramatically associate the future and the present, foster future-oriented behavior. This prediction arises naturally when well-documented effects of language structure are merged with models of intertemporal choice. Empirically, I found that speakers of such languages: save more, retire with more wealth, smoke less, practice safer sex, and are less obese. This holds both across countries and within countries when comparing demographically similar native households. The evidence does not support the most obvious forms of common causation. I discuss implications for theories of intertemporal choice.

You can find the layman’s version from his June, 2012 TEDtalk, Could your language affect your ability to save money. Posted last month to the website, it generated a lot of discussion. But you can see it and decide yourself. As for me, I hope the practical application arrives soon.

http://embed.ted.com/talks/keith_chen_could_your_language_affect_your_ability_to_save_money.html

Marshmallows and 401(k) Plans

By Jerry Kalish on Posted in 401(k) Plans

When I was a right-brain undergraduate and long before my left-brain discovered ERISA, I took a number of psychology courses.

In one of those courses, we discussed the famous marshmallow experiment conducted by social psychologist Walter Mishchel at Stanford in the 1960s.

It went something like this. Mishcel put marshmallows in front of a room full of 4-year olds, and told them that they could have one marshmallow now, but if they could wait several minutes, they could have two. The experiment, of course, had to do with delayed gratification.

The children who waited longer went on to get higher SAT scores. They got into college and had, on average, better adult outcomes. These individual differences in the ability-to-wait were attributed to self-control.

A recent study jogged my memory about this experiment, and got me thinking about the link between marshmallows and 401(k) plans. The study, Rational snacking: Young children’s decision-making on the marshmallow task is moderated by beliefs about environmental reliability, was an update of the original experiment.

The researchers, Celeste Kidd, Holly Palmeri, and Richard N. Aslin at the University of Rochester,  were concerned that the results in the early experiments were attributable to more than self-control. In fact, they found that the results also reflected the child’s belief about the practicality of waiting.

So now how does this relate to 401(k) education programs?

FPA/Plans Tools Blog added to our Blogroll

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Fiduciary Matters

Welcome to FPA/Plans Tools and their new blog to the group of us that blog about retirement plan matters.

Their goals are to provide informative content on ERISA cases, as well as their proprietary  ERISA Litigation Index, which discusses cases filed in federal court so that advisers and plan sponsors can stay current on litigation activity.

The blog and index are written by David J.Witz, managing director; Thomas E. Clark, Jr., director of fiduciary oversight; and Justin D. Witz, IT director.

You can subscribe here.

The 401(k)/403(b) Investment Manual: Book Review

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Book Reviews, Fiduciary Matters

In the almost 7 years I have been writing this blog, I have written a number of book reviews about 401(k) plans and investing that have tracked the retirement plan industry.

Not surprising since all of the authors are experienced, independent professionals that have something – let’s make that a lot – to say, and have significantly added to the dialogue about retirement savings. All of which are well worth the purchase price in either their print or digital versions.

Now here’s another. It’s James Watkin’s recently published book, The 401(k)/403(b) Investment Manual.

In addition to meeting all of the aforementioned characteristics, the subtitle adds another dimension: What Plan Participants and Plan Sponsors REALLY Need to Know. It’s one of the few recent books that speaks to both the employer and the 401(k) participant.

Jim is both an attorney and investment professional with a string of professional designations, and his book focuses on:

  1. Helping both employers and 401(k) participants better understand the financial service industry, and
  2. Doing so in a relatively short period of time.

You can buy it on Amazon for $13.23 with two day delivery if you’re an Amazon Prime member.

You can also follow Jim on his two blogs:

ERISA, take me back to 1982

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Employee Stock Ownership Plans

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

"Kia, take me back to 1992."

There he meets himself and learns valuable life lessons.

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

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

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

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

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

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

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

401(k) plans: “putting the wrong emphasis on the wrong syllable”

By Jerry Kalish on Posted in 401(k) Plans, Automatic Enrollment

The headline is a spin-off of a Mike Myers quote in the 2003 movie, View From The Top.

Didn’t see the movie? A lot of folks didn’t since it only grossed $15,614,000 domestically and $3,912,014 internationally, totaling $19,526,014 worldwide.

So let me fill you in. It’s about a young woman from a small town who sets out to fulfill her dream of becoming a flight attendant played by Gwyneth Paltrow.

That’s Myers pictured above as legendary flight attendant trainer, John Witney, humorously mocking the poor pronunciation skills of a trainee flight attendant when he says:

You put the wrong emPHAsis on the wrong syllable.

So what’s the 401(k) connection?. Simply this – and let’s put the mocking tone aside –many plan sponsors are not emphasizing what really drives retirement plan success for participants.

While much of the attention has understandably been on fees, the most important drivers are deferral rates and plan design.

That’s what the research is beginning to show. A recent Putnam Institute study suggests plan sponsors should redirect their focus from fund performance to increasing deferrals as a means of increasing plan participants’ retirement assets.

While fund performance is important, the fund-centric focus may not be the best means of preparing participants for retirement, according to the Putnam research.

  • Fund Selection. Putnam found that, regardless of the fund selection strategy, fund selection generated roughly the same amount of retirement wealth.
  • Asset Allocation. Putnam cautioned, however, that while asset allocation can be a bigger driver of portfolio return than the composition of the underlying funds, changing asset allocations carries the material risk of a severe decline in uncooperative and volatile markets.
  • Rebalancing. Putnam noted that rebalancing a portfolio produced a slight increase in retirement wealth, but with considerably reduced volatility. The moderate growth and better return/risk ratio placed account rebalancing between asset allocation changes and fund selection as a driver of long range returns.
  • Participant Deferral Rates. In the most noteworthy finding of the analysis, Putnam determined that even incremental increases in participant deferral rates can be one of the most effective drivers of long-term return.

You can view the complete,aptly named study, Defined contribution plans: Missing the forest for the trees?, here.

My takeaway: it’s a good opportunity for plan sponsors to consider or re-examine auto-enrollment with auto-escalation.

Help! They need somebody: 401(k) participants setting retirement savings goals

By Jerry Kalish on Posted in 401(k) Plans, Financial Education

Over to the right is Help!, the 1965 soundtrack album for the movie of the same name. It’s also the title song which begins:

Help, I need somebody
Help, not just anybodys
Help, you know I need someone, help

It’s my pop culture segue to important findings in a recent publication by the Employee Benefit Research Institute (EBRI). 

The publication is, A Little Help: The Impact of On-line Calculators and Financial Advisors on Setting Adequate Retirement-Saving s Targets: Evidence from the 2013 Retirement Confidence Survey, by Jack VanDerhei, Ph.D., and Nevin Adams, J.D.

Here’s a summary of what the EBRI found:

  • Those using an on-line calculator or asking a financial advisor appear to set more adequate savings targets, as measured by the probability of not running short of money in retirement.
  • Those in the lowest-income quartile show a 9.1% to 12.6% improvement (depending on family/gender) in the probability of not running short of money in retirement if a financial advisor has been asked, and a 14.6% – 18.2% increase if an on-line calculator is used.
  • Those who “guessed” at a retirement savings target were less likely to choose an adequate target

Important information, but there’s two takeaways for me:

First, it not just about the “Who” (no pun intended). It’s also about the “When”. Goals should be reviewed on a regular basis and changes made, if necessary..

Second, kudos to plan sponsors who make retirement goal setting and follow up as part of their 401(k) plans.

Help! Trivia from Wikipeda:

In February 1985, "Help!" became the first Beatles song licensed for a US television commercial. The Lincoln–Mercury division of Ford Motor Company paid $100,000 for the rights to the song, but not for the use of the original Beatles’ recording. The song was re-created by a sound-alike group with assistance from George Martin.

IRS releases Final Report for 401(k) Compliance Check Questionnaire

By Jerry Kalish on Posted in 401(k) Plans

Not quite two years ago, I blogged 1,200 employers to receive IRS 401(k) Compliance Check Questionnaire. My post discussed the letter and instructions that the IRS would be sending to 1,200 employers sponsoring 401(k) plans asking them to complete a 46-page 401(k) Compliance Check Questionnaire.

According to the IRS, the purpose of the survey was to:

  • Measure the health of section 401(k) plans in terms of compliance levels and risk factors
  • Better understand compliance issues related to section 401(k) plans
  • Evaluate the effectiveness of voluntary compliance programs and tools
  • Determine how the IRS can best foster compliance

Today, the IRS announced the results of that questionnaire in its Final Report generalized to the 401(k) plan population that filed Form 5500 for the 2008 Plan Year, and stratified to highlight the differences in the results by plan size stratified as follows:

  • Small Plans: 0-5 participants
  • Medium Plans: 6-100 participants
  • Large Plans: 101-2,500 participants
  • Very Large Plans: more than 2,500 participants

You can find the highlights of the Questionnaire’s findings here for the requested information in the following areas:

  • Demographics
  • Plan participation
  • Contributions
  • Designated Roth features
  • Distributions
  • Top-heavy and nondiscrimination testing
  • IRS correction programs
  • Plan administration 
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