Communicating 401(k): Is the medium the message?

By Jerry Kalish on Posted in 401(k) Plans, Audio/Visuals

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

https://youtube.com/watch?v=A7GvQdDQv8g%26hl%3Den_US%26fs%3D1%26rel%3D0%26color1%3D0x2b405b%26color2%3D0x6b8ab6%26border%3D1

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.

1,200 employers to receive IRS 401(k) Compliance Check Questionnaire

By Jerry Kalish on Posted in 401(k) Plans

 

 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. 

401(k) plans then and now

By Jerry Kalish on Posted in 401(k) Plans, Employee Benefit News columns

 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.

Investment returns of defined benefit plans and defined contribution plans: which type did better and does it matter?

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

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?

“Watching the Detectives”: The ERISA version

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

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. 

Comparing and contrasting retirement plans for business owners

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

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.

The Woulda, Coulda, Shoulda of retirement tax planning

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

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.

Getting to total 401(k) fee transparency

By Jerry Kalish on Posted in 401(k) Plans

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. 

Guaranteed lifetime retirement income: the message in the bottle

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

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.

The bracketology of 401(k) plans

By Jerry Kalish on Posted in 401(k) Plans

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.

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