American Taxpayer Relief Act of 2012 can be beneficial to ESOPs

By Jerry Kalish on Posted in Employee Stock Ownership Plans

As planning opportunities continue to emerge from the American Taxpayer Relief Act of 2012 (ATRA), the increase in federal income tax rates and capital gains tax rates may make qualified plans more attractive to higher wage earners.

According to a PwC HRS Insights report, there is more likelihood the compensation may be subject to tax at lower marginal rates when it is received.

There’s an ESOP aspect to the new law also. ATRA can favorably impact ESOPs in two ways.

  1. The higher capital gains tax rates can increase the value of Internal Revenue Code Section 1042. This Code Section allows sellers of stock to C corporation ESOPs to defer capital gains tax on the sale proceeds, subject to meeting certain requirements.
  2. ATRA’s income tax rate may also increase the value of the S corporation tax benefit.
    The law provides that any profits attributable to the ESOP’s ownership of stock in an S corporation are not subject to federal income tax.

For more information on ESOPs, here is a link to our ESOP Overview. 

Survey says: Pounds Over Dollars for 2013 Resolutions

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

No, this post isn’t about resolutions by hedge funds or currency traders. It’s finance of an individual sort: the results of the annual New Year’s Resolution Survey from Allianz Life Insurance Company of North America.

The survey respondents said they are most likely to keep the following resolutions:

  1. Exercising and dieting: (44%)
  2. Managing money better (41%)
  3. Spending  more time with family and friends (26%).

Exercise and diet remains the top selection since the initial survey in 2009 but down five percentage points from the 2011 survey’s high of 49%.

Understandable perhaps. But here’s the disturbing part. For the fourth consecutive year, the top reasons that respondents left financial planning out of resolutions were their beliefs that they:

  • "Don’t make enough to worry about it": 32%
  • Already "have a solid financial plan": 26%
  • "Don’t have an advisor/financial professional,": 20%

Pretty good case, wouldn’t you say, for ramping up worksite financial education as part of 401(k) plan communication.

Here’s a link to the press release for the survey.

Managing Your 401(k) Plan: How Do You Know Where You Are Going If You Don’t Know Where You Are?

By Jerry Kalish on Posted in 401(k) Plans

The ultimate goal of a 40(k) plan should be, simply stated: to provide employees with an opportunity to have adequate income at retirement. But you need a starting point in order to establish objectives and then measure progress.

In other words, a reference point by which you are able to navigate, not unlike the “you are here” icon on one of the navigation apps on your smart phone.

I’m not talking about benchmarking but rather using technology to capture and develop 401(k) plan metrics for the most important driver of retirement plan success: adequate savings. It’s also the one that has the least amount of focus in most 401(k) plans; and thus, the least amount of success.

The primary gauge of retirement readiness should no longer the amount accumulated at retirement. Rather, it is the extent to which there is an adequate income replacement. The metrics you need to measure, historically track, focus upon, and improve the key retirement readiness metrics include:

  • Plan participation rates
  • Employee contribution rates
  • Monthly income projected at retirement
  •  Income replacement ratio

Armed with this information, a 401(k) plan can:

  • Implement an education plan that addresses individual employee participation, savings rate, and asset and asset allocation.
  • Have meetings with individual employees at each employer location to review their current contribution rate, and how changes to their contribution rate can impact their projected income at retirement.
  • Follow-up initial education with recurring one-to-one employee meetings to track individual progress.

Historically, participants have looked at their account balances from two perspectives. First, how much is in my account; and second, how have my investments performed? The new focus should be to ultimately improve the result that matters most: the number of participants who will retire with adequate retirement income.

Back in 1865 when Lewis Carroll wrote Alice in Wonderland, he didn’t have 401(k) plans in mind.of course. But with due respect to Charles Lutwidge Dodgson, the author’s real name, let me make a literary stretch. In thinking about setting 401(k) plan objectives, consider the following exchange between Alice and the Cheshire cat:

One day Alice came to a fork in the road and saw a Cheshire cat in a tree.

 Would you tell me, please, which way I ought to go from here?

That depends a good deal on where you want to get to, said the Cat.

I don’t much care where— said Alice.

Then it doesn’t matter which way you go, said the Cat.

–so long as I get SOMEWHERE, Alice added as an explanation.

 Oh, you’re sure to do that, said the Cat, if you only walk long enough.

Picture Credit: The artist, Rue Mollar, whose "You Are Here" is available as a print and on other products.

The funded status of public employee pension plans: no longer out of sight, out of mind

By Jerry Kalish on Posted in Public Employee Plans

Back in 2008, I blogged about The Funded Status of Public Employee Pension Plans, Out of Sight, Out of Mind.

Not any more. In the post-2008 New Economy, there’s been a lot of media attention being given to developments – or not – on pension plans for State public employees. It’s a complicated matter about which to understand and to follow the now almost daily developments.

You can find that information on Pension Tsunami, which I mentioned in that 2008 blog post. It’s a website project of the California Public Policy Center edited by Jack Dean, and now completing its 8th year.

While its primary focus is on California’s public employee pension crisis, it also monitors developments in other public employee retirement programs, plans in the private sector, and social security. Irrespective of your politics, you should keep in on your radar screen.

Picture Credit: Interior Design, "No longer out of sight, out of mind. Moving important documents off the desk and onto the wall, the thermoplastic rubber Clip comes in two sizes and four colors: black, white, red, and blue. 11 Via Prealpi, 20034 Giussano (Milan), Italy; 39-0362-35351; conecon.it."

Fiscal Cliff? “It ain’t over till it’s over”

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

"It ain’t over till it’s over" is the famous quote ascribed to baseball Hall of Famer, Yogi Berra.

In today’s political climate, we can stretch Berra’s quote to  encompass "the Fiscal Cliff  Deal". The formal name of which is the American Taxpayer Relief Act of 2012 passed by Congress on January 2, 2013.

What the Act covers has been all over the media in bits and pieces. But if you want the "Executive Summary", here’s it is, The Fiscal Cliff Legislation: An Executive Summary of What You Need to Know, an article in the National Law Review by attorneys Michael L. Pate and Elizabeth L. McGinley, Partners in the Bracewell & Giuliani LLP law firm.

In our corner of the world, there were two specific retirement plan provisions in the Act.

  • In-Plan Roth Conversions Expanded. Under prior rules, a 401(k), 403(b) or 457(b) account balance could only be converted to Roth if the amount is otherwise distributable. Effective January 1, 2013, a 401(k), 403(b) or 457(b) plan which permits Roth elective contributions can allow any amount in a non-Roth account to be converted to a Roth account.
  • IRA Charitable Rollovers Extended. The $100,000 IRA charitable rollover provision has been extended through 2013 with two special rules: 1) A rollover during January of 2013 can be treated as a 2012 rollover; and 2) individuals who took a distribution in December of 2012 will be able to contribute that amount to a charity and count it as an eligible charitable rollover.

But despite the passage of the Act, it isn’t over yet. There are still unresolved, contentious political issues over federal spending and debt. Time is running short. This country officially hit our debt limit on January 1, 2013, and Treasury has been undertaking “extraordinary measures” to put off default. If Congress does not raise the ceiling by late February or early March, this country will not be able to pay all of its bills.

While tax incentives for qualified retirement plan contributions were not reduced in the Act, many of us  in the retirement plan industry are concerned that retirement plan tax preferences will be a target as part of the upcoming and continuing "fiscal cliff".

That term again. If you’re one of those people that consider use of the term "fiscal cliff" overused or not even appropriate, you’re not alone. It tops the 2013 edition of the 38rh annual list of Lake Superior State University’s List of Banished Words. Since the University is not the Word Police, the "banned" words seem to stick around. Words like "viral," "epic" and "refudiate" on last year’s list aren’t going away anytime soon.

Journalist Adam Davidson speaking on TED, put the term in this light:

“The ‘fiscal cliff’ — I was told that that’s too partisan a thing to say … so I just call it the ‘self-imposed, self-destructive, arbitrary deadline about resolving an inevitable problem.’”

As for me, I see it in the political arena of demographics and entitlements. In pop culture terms, it goes to the question made famous by the title track in the 1975 album, Why Can’t We Be Friends? written and recorded by the funk band, War. Interesting juxtaposition, eh?

Baseball Note: Sorry to bring back bad memories if you’re a Cubs fan. Yogi’s quote was in July, 1973 when his Mets trailed the Chicago Cubs by 9½ games in the National League East/ The Mets rallied to win the division title on the final day of the season. But if you’re a baseball memorabilia collector, the autographed baseball pictured above is available at the Yogi Store, on the official Yogi Berra website.

Updating the Moat: Modern Risk Management Strategies for Fiduciaries

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

Back in the Day – the Day being as far back as the ancient Egyptian settlement of Buhen in 1860 BC – moats were excavated around castles and settlements as part of their defensive system.

In today’s terms, we would call it “risk management”. So with some editorial license, I’ll use the moat metaphor to discuss how fiduciaries can shore up their defenses and improve their governance practices. Here are a few suggestions to accomplish those objectives.

1. Appoint an individual or committee as plan administrator.

Formally designating a plan administrator is required by ERISA. Practically, it accomplishes two key things: It lays the groundwork for a clearly delineated claims procedure that might better meet the test of challenge, and it exempts the employer/plan sponsor, senior management and board of directors from being involved in any benefit disputes.

2. Carefully review the principal policy provisions of fiduciary liability insurance you have/are considering.

This includes the insuring clause, persons or organizations not insured insurance exclusions, recourse, subrogation and the deductible. Also, consider whether you are covered against ERISA civil penalties. DOL levies a 20% penalty for an amount recovered through either a court decision or settlement for breach of any fiduciary responsibility.

3. Be aware of the scope of indemnification coverage.

ERISA voids any indemnification provision that relieves a fiduciary of responsibility: A fiduciary cannot be indemnified from plan assets. DOL has interpreted that to mean that it is permissible to have an indemnification agreement between the employer and a plan fiduciary. In other words, a fiduciary can be indemnified from the assets of the employer. However, the employer’s bylaws may have to be amended to provide indemnification to employees, officers or directors who are acting as fiduciaries, if permitted by state law.

4. Make sure investment responsibility has been properly delegated.

Here are a few questions to answer:

  • Does the plan document expressly authorize the delegation of responsibility to an investment manager?
  • Is the investment adviser a bank, registered investment adviser or an insurance company qualified under state law to manage plan assets?
  • Has the named fiduciary, with respect to control or management of plan assets, appointed the investment manager?
  • Most important, but often overlooked: Has the investment manager acknowledged in writing that he or she is a plan fiduciary?

If the answer to the last question is no, then you may still be responsible for the investment decisions of an otherwise qualified investment manager.

5. Understand that selection of service providers is a fiduciary decision.

Among the obvious criteria is selecting a service provider are qualifications, references and industry standing, and reasonableness of fees. Remember that there is a further fiduciary obligation to monitor your provider’s performance. And, of yes, make sure that you meet the requirements of the new Department of Labor fee disclosure regulations.

6. Assume your plan will be audited.

There are two federal agencies with oversight over defined contribuion plans: the IRS oversees tax aspects of retirement plans, while DOL manages reporting, disclosure and fiduciary aspects of retirement plans.

The IRS wants to ensure that the plan actually exists; plan documents and amendments have been executed; contributions have actually been made; participation, funding, vesting and other requirements and limitations have been met; prohibited transactions have not occurred; and there are no discrepancies between the various reports filed by the employer and the plan, such as corporate tax returns, plan tax returns, W-2s and 10dstment policy statement.

Picture: Caerlaverock Castle, shown from the air, built in Scotland in approximately 1220.

Risk Management Strategies for Business Owners for New Department of Labor Fee Disclosure Rules

By Jerry Kalish on Posted in 401(k) Plans, Audio/Visuals, Events, Fiduciary Matters, Seminars and Speaking Engagements

Today our firm and Mike Cavanaugh and Tim Webb, Registered Investment Advisors at Know Your Options, Inc., sponsored a special briefing for corporate attorneys on the new fee disclosure regulations impacting their clients.

Our briefing at the University of Chicago Gleacher Center was provided  to help them provide their clients with the guidance and strategies necessary to successfully manage their fiduciary responsibilities.

Special thanks to our Guest: Speaker Attorney Tim McCutcheon, General Manager of ftwilliam.com , Wolters Kluwer Law & Business.

Our presentation follows: 

The New Retirement Plan Fiduciary Environment


More PowerPoint presentations from Jerry Kalish

Highway funding bill begets important pension plan provisions

By Jerry Kalish on Posted in Defined Benefit Pension Plans

Pension law changes can come in many forms.

They can be in the form of such specific tax laws as the Pension Protection Act of 2006 (PPA).

They can be included in technical corrections acts (See Technical Corrections To The Pension Protection Act Of 2006: Another Bite Of The Apple?

Or, they can be included in any other legislation where they can find a home, see (Pension Funding Relief For Airlines Lands In Iraq Funding Bill).

New pension funding rules took the other legislation route (pardon, the pun) as part of the recently passed Moving Ahead for Progress in the 21st Century Act (MAP-21). The bill which funds surface transportation programs at over $105 billion for fiscal years 2013 and 2014 also included several significant changes as to how defined benefit pension plan can be funded. MAP-21, by the way, also, included interest rate relief for student loans).

I’ll nicely skip the political commentary and the actuarial jargon and get right to what the new rules are all about, and how they impact defined benefit pension plans. Specifically, in two key areas:

  • Pension funding, and
  • Pension Benefit Guaranty Corporation (“PBGC”) premiums.

Pension Funding

The PPA required employers to use to use a rolling 2-year average of corporate bond rates to value their plan’s liabilities for funding purposes. Because of historically low interest rates, there were large increases in pension liabilities, and a corresponding increase in minimum funding requirements.

MAP-21 allows employers to use a 25-year average of corporate bond rates, i.e., higher interest rates. Higher interest rates mean lower liabilities and a reduction in the minimum funding requirements. In addition, lower liabilities may permit the removal of benefit restrictions for those plan that have funding shortfalls. The estimated reduction could be as much as 10% to 20%.

PBGC Premiums

Not all good news to CFOs, however. MAP-21 substantially increases PBGC premiums as shown on the table below. (Note:  Flat rate premiums for 2015 and 2016 and variable rate premium for 2016 to be adjusted for inflation).

Plan Years 

 Flat Rate Premium Per $1,000 of Unfunded Liability Variable Rate Premium Per Participant
2012  $35    $9
2013  $42    $9
2014  $49  $13
2015  $49  $18
2016  $49  $18

There could be a further hit to underfunded plans since the new interest rate rules do not apply in calculating a plan’s variable rate premium.

Impact of the New Rules

Short-Term

The new rules are effective for plan years beginning in 2012. Employers, however, can elect to wait until 2013 for all purposes, or just for the purposes of determining whether benefit restrictions apply.

Even if the valuation has been done for 2012, it may be helpful to use the new rules to revalue liabilities.

Long-Term

While employers may be able to dramatically reduce contributions over the next few years, it’s only a temporary solution for under-funded plans, especially frozen plans waiting to be sufficiently funded in order to terminate. Shortfalls will have to be made up through contributions in the future.

In addition, PBGC premiums which are slated to increase may also increase further as a result of lower contributions.

Maybe the real solution is developing a strategic investment strategy that matches plan liabilities with investments, a/k/a liability driven investing (LDI).

For a discussion of the "funded" status of a pension plan, here is a link to my blog post, Inside The Actuarial "Black Box": What Employers Need To Know To Better Manage Their Pension Plans.

“Don’t Worry, Be Happy” shouldn’t be the theme song of 401(k) fee disclosures

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

Don’t Worry, Be Happy, is, of course, the title of Bobby McFerrin’s 1988 hit song. Since then, it’s seeped into our culture. If you want to fully incorporate it into your life, you can download the ring tone.

I’m suggesting, however, that it shouldn’t be the attitude of employers who have received 408(b)(2) service provider fee disclosures, and think that’s all there is to it.

Rather, once received, employers and other fiduciaries have the affirmative obligation to determine whether there are any conflicts of interest and whether fees are "reasonable" for the services being provided. What’s "reasonable" you’re going to ask. Stay tuned. 

Bobby McFerrin is very much around these days. He tours regularly, and September13-15, 2012, he will be opening the 25th anniversary of Jazz at Lincoln Center in New York.

401(k) plans can seem like rocket science to participants, but it doesn’t have to be

By Jerry Kalish on Posted in 401(k) Plans

If you need a reminder that 401(k) participants need help in managing their accounts, then consider the recent Investing Sentiment Survey done by MFS Investment Management:

  • 34% of investors feel overwhelmed by all the investment choices available to them.
  • 25% put off decisions out of fear of making the wrong choice.
  • 51% of Gen Y investors agree that investment products are overly complex, more than the 40% average for the survey and older age groups (Gen X, 39%; Boomers, 40%).

True that the MFS Survey covered only individual investors, but experience suggests that there would be no appreciable difference among 401(k) participants. Those sentiments are what’s driving some 401(k) providers to offer a wider range of investment packages.

Notice I said "packages" rather than "funds" since the offerings attempt to address the needs, concerns, investment objectives, and the sophistication level of the participants such as:

  • Asset allocation tools
  • Risk-based funds, i.e., asset allocation funds
  • Target date funds, both managed and indexed
  • Individual investment advice

By themselves, these packages are only a partial solution. The necessary ingredient, of course, continues to be an effective and ongoing investment education program.

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