401(k) FIDUCIARY SOLUTIONS: Book Review

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

If you’re in and around the 401(k) world, you know who Chris Carosa, CFTA, is. And if you don’t you should. Most of us know him as a prolific author who is the Chief Contributing Editor of FiduciaryNew.com, a superb source of information and commentary about the fiduciary aspects of retirement plans.

Chris now has put it all together in his new book, 401(k) FIDUCIARY SOLUTIONS, which covers all 401(k) compliance issues (and how to deal with them), in a single reference source, the official publication date of which is today.

So what’s exactly in his book? The book’s subtitle says it all:

Expert Guidance for 401(k) Plan Sponsors on How to Effectively and Safely Manage Plan Compliance and Investments by Sharing the Fiduciary Burden with Experienced Professionals

Here are just some of the nuggets found in the 320 pages that comprise Chris’ book:

  • The Best Way 401(k) Plan Sponsors Can Benchmark Their Plans
  • 4 Essential Elements the DOL Requires of Every Retirement Plan
  • 5 Important Duties Every ERISA Fiduciary Must Fulfill
  • Everything an ERISA/401(k) Fiduciary Needs to Know About
  • Who Is and Who Isn’t a Registered Investment Adviser?
  • How Should a 401(k) Plan Sponsor Construct an Appropriate Investment Policy Statement?
  • 3 Reasons Why the 401(k) Fiduciary Should Use Both Active and Passive Funds to Reduce 
  • Avoiding Decision Paralysis: How to Create the Ideal 401(k) Plan Option Menu
  • 3 Ways 401(k) Plan Sponsors Can Help Employees Make Better Investment Decisions

You get the picture.

So where to get the book? It’s available on Amazon, of course, but Chris is offering a special $5 discount off the $34.95 retail price through April 30, 2012. You can click here, and then enter the $5 coupon code: 29WLLWA9.

EGTRRA Restatement Deadline for Defined Benefit Pension Plans Fast Approaching

By Jerry Kalish on Posted in Defined Benefit Pension Plans, EGTRRA Restatement Series

While much of the retirement plan world is understandably focused on the upcoming fee disclosure deadlines, there’s another deadline that’s looming closer. It’s April 30, 2012, the date by which pre-approved defined benefit pension plans must be restated for EGTRRA.

Here are frequently asked questions that should be helpful in helping you understand this important compliance process.

Why do I need to restate my Defined Benefit Pension Plan at this time?

IRS procedures concerning pre-approved Plans require your Plan to be restated in order to remain in compliance with changing rules governing qualified Plans. The restatement incorporates new compliance language into the document that has been pre-approved by the IRS that are reflected in our documents.

Should I file my restated Plan with the IRS?

An employer may apply for a Determination Letter, a document issued by the IRS formally recognizing that the Plan meets the qualifications for tax-advantaged treatment. The IRS has already reviewed the language used in the pre-approved Plans mentioned above. Employers using pre-approved Plans automatically have assurance that the language used in their Plan satisfies the IRS requirements (assuming no changes are made to what was approved).
 
If you have not changed the pre-approved document language, there is really no need to submit the Plan for a determination letter, but IRS procedures permit you to do so. However, if language changes have been made in the pre-approved document, a determination letter assures you that the custom language is acceptable.

What happens if I fail to amend or restate my Plan on a timely basis?

If you miss the deadline for amending or restating your Plan, then you can avoid Plan disqualification by using an IRS correction program. Under this program, the IRS will require that you pay a sanction and submit an updated Plan. The sanction can vary depending on the circumstances. However, it is significantly higher if the IRS discovers the missed deadline than if you voluntarily go to the IRS when you discover the missed deadline. In addition, there would be the cost associated to update the Plan and prepare the application to the IRS.

Conclusion

It is the responsibility of the plan fiduciary to ensure that the Plan is updated and signed by the April 30, 2012 deadline.

FROM VISION TO EXIT: The Entrepreneur’s Guide to Building and Selling A Business: Book Review

By Jerry Kalish on Posted in Book Reviews

The recent, premature death of Steve Jobs brought the concept of entrepreneurship back into our economic lexicon.

Tim Kane wrote about Steve Jobs after his retirement, but before his death, in Growthology, the blog created by the Kaufmann Foundation of Entrepreneurship, said:

The American economy has been the strongest in the world for nearly a hundred years.  Its growth has been built on the innovations of great entrepreneurs like Henry Ford and the Wright brothers. Thanks to the boomer entrepreneurs, that legacy has been reaffirmed.  Best of all, we now know that hard work and competitiveness are what matter, not class. Jobs represents the triumph of intelligence, of merit, over fate. You could not script the American dream with a more compelling central character.

But it’s not just the American economy that has been positively impacted by entrepreneurial enterprise. Entrepreneurship has gone global.

The spotlight on a global effort to promote entrepreneurial activity to foster innovation and create jobs takes place this week starting today, November 14 and ending November 20 under the umbrella Global Entrepreneurship Week (GEW). The URL, by the way, is fittingly, www.unleasingideas.org. 

GEW is the world’s largest celebration of the innovators and job creators. This initiative, launched in 2008 by former UK Prime Minister Gordon Brown and Carl Schramm, the president and CEO of the aforementioned Kauffman Foundation, now involves 115 countries with nearly 24,000 partner organizations planning more than 37,000 activities that directly engage more than 7 million people.

That it’s a global movement is evidenced by the book pictured above, The Entrepreneur’s Guide to Building and Selling A Business, that was recently published in the U.K. I spoke to the author, Guy Rigby, last week via Skype.

Guy said that that he’s directed his book to those business owners who understand that it takes more than a great idea for their businesses to have long-term success. He knows of what he speaks.

Guy is a chartered accountant (the U.K equivalent of our CPA). He’s has had an unusually varied career as a business owner, advisor to entrepreneurs, and someone who has built and sold his owner accountancy firm. He now heads up the entrepreneurial services group at Smith & Williamson, a diversified financial services group based in the U.K.

Guy says in the Introduction that

These experiences have driven me to write this book. It’s not just a book for start-ups, although much of its content is relevant to them. It’s main purpose is to help established businesses – those that have already overcome the initial obstacles of foundation. It recognizes that if you want to build a great business, there are a host of things you’ll need to control and do better than anyone else. 

Guy’s book provides a road map to building a great business. There’s no short-cuts to this goal, but his book can help cut down the number of  potholes, the detours and the tolls.

IRS announces 2012 dollar limits on contributions and benefits

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

Each year the Internal Revenue Service announces the cost-of-living adjustments applicable to qualified retirement plans for the following year. Unlike 2001 in which most limits did not change from the prior year, most limits increased:

Following are the key retirement plan limits announced yesterday by the IRS:

  • The 401(k) and 403(b) limit for employee contributions increases to $17,000 from $16,500.
  • The catch-up contribution limit for participants age 50 and older remains the same at $5,500.
  • The maximum allocation to a defined contribution plan increases to $50,000 from $49,000.
  • The maximum annual benefit payable from a defined benefit pension plan increases to $200,000 from $195,000.
  • The maximum annual compensation that can be recognized for retirement plan purposes increases to $250,000 from $245,000.
  • The threshold compensation for Highly Compensated Employee increases to $115,000 form $110,000.

Here is a link to our chart listing all the retirement plan limits for 2012 compared to 2011.

The New World of 403(b) and 457 plans

By Jerry Kalish on Posted in 403(b) Plans, Events, Seminars and Speaking Engagements

That’s a map of the New World circa 1540 by Sebastian Munster, a German cartographer. It depicts the European view about the New World and especially North America.

It’s my visual metaphor about where the 403(b) and 457 markets are now – almost three years after the final regulations became effective January 1, 2009.

The final regs have become the focal point for a new and rapidly changing 403(b) and 457 world.  One in which the Old was a 40-plus year old environment characterized by limited employer involvement done on a retail basis. The New is becoming one with ERISA-like best practices in an institutional setting.

That was the theme of my presentation on October 7, 2011, a part of the course at John Marshall Law School, L.L.M. in Employee Benefits Program, “Non-Traditional Retirement Programs”, which follows:

John Marshall Law School 403(…

More PowerPoint presentations from Jerry Kalish

This was year three of this program which has been organized and led by attorney Bob Toth who regularly comments on 403(b) and other retirement plans on his blog, The Business of Benefits.

Book Review: THE VIGILANT INVESTOR: A Former SEC Enforcer Reveals How To Fraud Proof-Your Investments

By Jerry Kalish on Posted in 401(k) Plans, Book Reviews, Cash Balance Plans, Defined Benefit Pension Plans

My blogging buddy security lawyer Bill Singer on his blog, Broke and Broker, An Irreverent Wall Street Blog (always a good read), posts frequently about investment scams and scoundrels. In one of his latest, Bill writes that Feds Bust Bank Guarantee Scam.

But the Feds don’t have the manpower and resources to get to all of the $40 billion a year that the FBI says investors lose to fraud. In other words, watch out, you’re on your own.

So how do you go about protecting yourself?  Educate yourself, and here’s an excellent starting point.

It’s Pat Huddleston’s recently published book pictured above, THE VIGILANT INVESTOR: A Former SEC Enforcer Reveals How To Fraud Proof-Your Investments.

Intriguing title, eh? But before I tell you about the book itself, let me tell you a little about Pat and how this book came to be written.

After leaving the U.S. Securities and Exchange Commission where he was an Enforcement Branch Chief, Pat was a private attorney for ten years representing defrauded investors. As Pat tells it in the Introduction, he closed his law practice in July 2006 after meeting with a 70-year old man who lost his entire savings in a Ponzi scheme. But since the con man had no assets to go after, chances for recovery were slim.

So says Pat, that was when he launched Investor’s Watchdog, LLC, a firm providing investment protection services to investors and subsequently acting as court-appointed receivers in SEC fraud cases.

Pat’s experience and writing style has resulted in a book from which investors can learn how to better protect themselves. He uses real stories and provides checklists in his book organized in two easily readable sections:

  • PART 1: The Wide World of Fraud: First Steps and Advanced Tactics on the Path to Vigilant Investing
  • PART 2: The Securities Industry: Hunting the Wolf with the Million-Dollar Smile

It’s not just seniors that are vulnerable, of course. Retirement plans can be at risk also. In fact, Pat estimates that approximately 20% of investment fraud is perpetrated against retirement plans including small plans.

Attorney and Susan Wynn wrote about that very subject in February 2009 in her post, Madoff Victims Include Small Pension Plans. Note her comment about the efficacy of the enforcement agencies:

One of the interesting points of the Madoff story when it comes to retirement and pension plans is that none of the 4 governmental agencies which regulate and audit retirement and pension plans saw Madoff coming.

So if you’re a fiduciary of a retirement plan, in addition to Pat’s book, there are other resources available. Here’s an excellent one, the webcast, Fiduciary Lessons Learned from Scoundrels and Thieves presented in 2009 by Blaine Aikin and Rich Lynch, CEO and COO respectively of fi360.

Meet the “ERISA Account”, the newcomer to the small 401(k) plan scene

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

Let me introduce you to the “ERISA Account”, a relative newcomer to the small 401(k) plan market. It’s been part of the large and medium plan market for some time. Only recently has it migrated down stream because of (yes, you guessed it) the increased regulatory emphasis and fiduciary attention to fee disclosure.

Overview

ERISA Accounts are sometimes referred to as “ERISA Budget Accounts”, “ERISA Expense Accounts, “Expense Recapture Account”, or “Revenue Sharing Account”. We use the term ERISA Account because it succinctly describes the essence of what it is:

A plan level account that captures excess income collected by the recordkeeper that can be used to pay eligible plan expenses or even allocated to participants.

Let’s separate this discussion into its elements: 1) where the income comes from, and 2) how it can be used.

Where the Income Comes From

A mutual fund charges a fee that encompasses all the various fees that a participant is charged to invest in the particular fund. It’s usually referred to as the Expense Ratio. In addition to the management fee charged by the fund manager to manage the fund assets, the Expense Ratio may include:

  • 12(b)(1) Fee: the fee paid by the mutual fund to a 401(k) provider or broker for including in it in the plan and servicing it after the sale.
  • Sub Transfer Agent (Sub-TA) Fees: the fee paid by the fund when it subcontracts the participant accounting to transfer agents, e.g., bank or trust company, to execute, clear, and settle trades, and maintain shareholder ownership records. These organizations are called Sub-Transfer Agents.
  • Provider Compensation: the fee paid by the fund to the service provider, sometimes referred to as Revenue Sharing, for administrative or contract owner or participant services provided on behalf of the fund.

The Expense Ratio is usually stated as a percentage of assets under management, and is netted from mutual fund performance rather than being paid directly by the plan.

How the Income Can Be Used

At some point, the income received by the recordkeeper becomes excessive, i.e., more revenue that is needed to run the plan, and can be used to pay plan level expenses or reallocated to participants.

Plan Expenses

The expenses that can be paid by the plan are part of that ERISA basic: a fiduciary must “act for the exclusive purpose of providing benefits to plan participants and defraying reasonable expenses of administering the plan.”

The Department of Labor says that reasonable administrative expenses could include:

  • Plan amendments required by change in law
  • Plan amendments necessary to maintain tax qualified status
  • Nondiscrimination testing
  • Recordkeeping
  • Plan accounting
  • Preparation of Form 5500

Plan assets, however, cannot be used for “Settlor Functions”, i.e., those expenses that are for the benefit of the employer. Settlor Expense could include:

  • Studies of options for amending plan to maintain tax qualified status or for meeting new legal requirements
  • Terminating plan
  • Testing to explore plan design
  • Union negotiations about plan provisions

The Department of Labor also permits participants to be charged for the reasonable cost of transactions attributable to individual participants, e.g., loans, QDROs, hardship withdrawals, calculations to determine benefits under various distribution alternatives, and benefit distributions.

Allocation to Participants

In addition to paying for reasonable plan expenses, funds in an ERISA Account may be reallocated to participant accounts pro-rata based on their account balances at the end of the year, or on a per capita basis. Note, however, that funds must be used by the end of the plan year. They cannot be rolled over to another plan year, or returned to the employer.

Plan Documentation

As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.

Conclusion

Not all 401(k) plans will see excess income that can be used in an ERISA Account. However, as we move more into the “Age of Transparency”, expect to see ERISA Accounts more prevalent in the small plan market. And what’s a “small plan’? We’ve seen $1 million plans with ERISA Accounts.

Balance Forward Plans: The More Things Change, The More They Stay The Same

By Jerry Kalish on Posted in 401(k) Plans

If you’re a Bon Jovi fan, you’ll recognize the expression in the headline, “The More Things Change, The More They Stay The Same”.

But, of course, that’s not Jon pictured here. It’s Jean-Baptiste Alphonse Karr (November 24, 1808 – September 29, 1890), a French critic, journalist, and novelist, to who was attributed the epigram, “plus ça change, plus c’est la même chose” which usually translates to “the more things change, the more they stay the same”.

Never heard of Monsieur Karr? Well, he’s actually got a Facebook page.

So you’re asking, what this has to do with balance forward plans? You may also be asking what exactly is a balance forward plan?

Let me fast forward to the bottom line (literally and figuratively).

Balance Forward is an industry term given to those original participant directed 401(k) and profit sharing plans, many of which are still around. Unlike the more common daily valuation plans, participants’ accounts are valued monthly, quarterly or annually. After all the balance forward plan accounting takes place, it can be 4-8 weeks after the valuation date before participants receive statements.

What’s the problem you might ask? Let’s hearken back to November, 2008 at which time I blogged, Balance Forward 401(K) Plans: Someone’s Gotta Win, Someone’s Gotta Lose and Balance Forward Plans Revisited.

Now consider these two alternative scenarios of a participant in a balance forward plan with a $50,000 account balance as of September 30, 2008. The participant receives a distribution for $50,000 on November 1, 2008, but between September 30 and the distribution date, the plan lost 20%. Thus, the plan – which is to say – all the remaining participants had to eat the $10,000 loss.

But say, instead of October, 2008 being October 2008, the plan’s assets increased by 20%. That  participant receives the same $50,000 distribution, but only the remaining participants share in the $10,000 gain.

See the problem.

So now here we are again today (“the more things change, the more they stay the same”), when there could be a decided difference between the June 30, 2011 valuation and September 30, 2011 valuation.

What’s the solution? Maybe balance forward plans should provide for interim valuations. But with all matters ERISA, there are complicated legal, tax, fiduciary and human resource issues involved. No easy answers, but definitely a situation that should be discussed with advisors.

Picture Credit: The photograph above: Woodburytype circa 1870s. Photo by Antoine Samuel Adam-Salomon.

What do modern art and defined benefit pension plans have in common?

By Jerry Kalish on Posted in Defined Benefit Pension Plans

The answer is obvious. Both can be difficult and often impossible to understand.

Modern art enthusiasts do have help. They can turn to the Understand Modern Art instantly Breath Spray as shown here from the website Photography Uncapped.

Unfortunately, there is no such canned (pardon the pun) explanation to help communicate a defined benefit plan to employees. Hence, no surprise with the results of a recent Fidelity survey conducted online by Versta Research, an Evanston, IL based market research and public opinion polling firm.

The 506 respondents who were participants in both current and frozen defined benefit pension plans indicated that:

  • 31% don’t know their plan’s vesting schedule.
  • 40% percent don’t know what their distributions will be at retirement.
  • 27% don’t know don’t know at what age they can begin to receive payments.

That’s what they said they don’t know. I can tell you directly from working with defined benefit pension plans for more than a few years, it’s just the tip of the iceberg. So let’s approach it from the standpoint of what employees need to know about their defined benefit pension plan. Here are some of the basics:

Type of Plan

  1. The plan is funded by the employer and promises to pay a participant a specific benefit at retirement.
  2. If the Plan is covered by the Pension Benefit Guaranty Corporation (PBGC), a certain amount of retirement benefits are guaranteed if the if the plan is terminated without enough money to pay all of the promised benefits.
  3. There is no PBGC coverage for for defined contribution plans such as 401(k).

Plan Provisions

  1. When an employee becomes eligible..
  2. How benefits accrue (accumulate).
  3. How benefits vest (become non-forfeitable).
  4. When distributions can be taken.
  5. What distribution options are available.
  6. Whether benefits can be reduced or the plan terminated.

It’s obviously a more difficult and complicated employee education process than for 401(k) plans. Instead of explaining 401(k) concepts like dollar cost averaging, compounding, and asset allocation, employee education programs have to deal with more esoteric concepts like actuarial equivalence, joint and survivor, and the plan’s funded status.

Nonetheless, the effort has to be made so that employees can understand when and how much monthly retirement income they could expect and to factor that into their personal planning. That is, of course, for those still fortunate to be part of a defined benefit pension plan.

E-Commerce Note: Lest you think I was joking about the Understand Modern Art instantly Breath Spray, it’s available online from Hyatt’s All Things Creative. But suffice it to say, you’re on your own.

On a clear day, you can see … a QDRO?

By Jerry Kalish on Posted in 401(k) Plans, Defined Benefit Pension Plans

That’s the album cover of the original Broadway cast recording of the 1965 musical, On a Clear Day You Can See Forever (which subsequently went on to become a movie starring Barbara Streisand in 1970 and which will be returning to Broadway starring Harry Connick, Jr. this Fall).

It’s the story of clairvoyant Daisy Gamble who attends a class taught by a psychiatrist for help in kicking her smoking habit. While undergoing hypnosis, it is discovered she had a past life in late 18th century England. And until the recent Appellate Court decision in Brown v. Continental, she might have had a future as a Plan Administrator dealing with QDROs.

That’s the acronym for Qualified Domestic Relations Orders which is 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.

Maybe Daisy could have helped two years ago when Continental Airlines claimed that nine pilots used sham divorces to collect their pensions early, a situation about which I blogged, QDROs:The View From 30,000 Feet.

Continental went on to sue those pilots alleging 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 alleged that after they got the money, the couples remarried.

Continental claimed 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) was less than a typical airline pilot pension.

But now, in the aforementioned Brown v. Continental case, The United States Court of Appeals for the Fifth Circuit agreed with the District Court (Southern District of Texas) decision that ERISA does not does not authorize a Plan Administrator to investigate or even consider the good faith, or lack thereof, underlying a divorce.

So what are the takeaways here.

From a legal standpoint, William McMahon, an attorney with Constangy Brooks and Smith, LLP writing in his firm’s blog, Employee Benefits Unplugged, says

… the Court is promoting simplicity for administrators. Look at the court order, confirm that it complies with the criteria for a QDRO set forth in Section 206(d)(3)(D), and then stop. Don’t out-think yourself.

From a moral standpoint, you’re on your own.

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