March 15 401(k) compliance deadline can be focal point to re-examine plan design

By Jerry Kalish on Posted in 401(k) Plans

2009 was a challenging year for employers and employees. 

From our vintage point, we are seeing more employers than in recent years finding it necessary to return excess 401(k) contributions to Highly Compensated Employees by the March 15 deadline or provide a supplemental 100% vested contribution called a Qualified Non-Elective Contribution, a/k/a “QNEC”.

 

Unfortunately, passing 401(k) discrimination tests is not as easy as it was for Bill and Ted passing  their history test in the 1989 classic comedy, Bill & Ted’s Excellent Adventure. If you missed it (it comes around from time to time on cable), Bill S. Preston, Esq. played by Alex Winter and and Ted Logan played by Keanu Reeves are two high school slackers that use a time machine to go back in time to bring back a group of famous historical figures to use in their presentation. 

 

Those illustrious individuals, shown above, that were thrust into 1989 California (and what a trip that was) included Napoleon Bonaparte, Billy the Kid, Socrates, Sigmund Freud, Ludwig van Beethoven, Genghis Khan, Joan of Arc, and Abraham Lincoln.

 

Unfortunately, we don’t have a time machine or the late George Carlin who played Rufus from the future who supplied the lads with that time machine.

 

But going forward, the March 15 deadline can be an excellent focal point for employers to rethink those plan design elements that might help improve 401(k) discrimination results. 

 

Returns of excess 401(k) contributions by HIghly Compensated Employees can sometimes be avoided changing the plan to: 

  • Add an employer safe harbor contribution
  • Add an employer safe harbor match
  • Change the waiting period
  • Change the definition of compensation
  • Add automatic enrollment

But any of these changes means, of course, starting the planning process now – or maybe have history repeat itself a year from now. 

IRA says hey, “don’t you (forget about me)”

By Jerry Kalish on Posted in Individual Retirement Accounts

Pictured on the right is the cover of the soundtrack album for the 1985 movie by the late John Hughes, The Breakfast Club, which included Don’t You (Forget About Me) written by the Scottish New Wave band Simple Minds. No, this is not a lead-in to a "Where Are They Now Segment" (they’re still touring by the way).

Rather, this is about not being so involved with the more complicated retirement savings vehicles that we forget about good ole’ Individual Retirement Plans, a/k/a IRAs.

IRAs are back in the financial news as part of President Obama’s budget for fiscal year 2011 which includes a provision for automatic IRAs. But that’s what may be.

What’s now with IRAs is that they continue to be an increasingly important tax planning vehicle for today’s investor particularly for distribution planning made more attractive with new Roth IRA conversion rules. Beginning this year, the $100,000 modified adjusted gross income (MAGI) and tax filing status limits on Roth conversions has been removed.

The rollover rules are, of course, complicated but here is McKay Hochman’s excellent 2010 portability chart updated for the Pension Protection Act of 2006. After all, this is the Age of Decumulation.

The ERISA plan document shouldn’t be maybe yes, maybe no

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

 No disrespect intended to the attorneys for beginning this post with a cartoon from the creative mind of Terry Hart, a/k/a, Hartboy. Rather, it’s intended as an excellent visual metaphor for my takeaway from the recent article written by our friend (and attorney) Andy Williams on his Benefits Law Group of Chicago website.

Andy writes What a Difference a "P" Makes: Hairsplitting Decision Denies Disability Claim. You can delve the details about the outcome of an ERISA case hinged on the difference (not a distinction) between whether a plan provision applied to a "Period of Disability" rather than just "periods of Disability." 

But here’s the takeaway to which I referred above which is very relevant as the EGTRRA restatement deadline is just a few short months away for most retirement plans. (See our EGTRRA Restatement Series).

It’s simply that a retirement plan doesn’t just include Internal Revenue Code qualification requirements for favorable tax treatment. The plan document also defines the rights and obligations of the plan sponsor, participants, and beneficiaries. And that if the application of a particular plan provision “depends”, then maybe, just maybe plan sponsors should invest the time and expense of retaining an experienced attorney to review the matter.

Now about those Summary Plan Descriptions ….

Hard times shouldn’t mean soft ERISA compliance

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

Our friends at Employee Benefit News Legal Alert published one of those "must read" articles. Attorney Cynthia Marcotte Stamer writes Tough Times Are No Excuse for ERISA Shortcuts. Ms. Stamer correctly points out that irrespective of the business hardships that plan sponsors are facing, the Department of Labor (DOL) will aggressively pursue enforcement if they perceive that a plan sponsor has failed take the necessary steps to protect plan participants.

Here are three key points she makes:

  1. Many employers don’t understand their fiduciary responsibilities and potential liabilities associated with sponsoring a retirement plan.
  2. Plan sponsors frequently incorrectly assume that they can rely upon retirement plan service providers to ensure that their fiduciary responsibilities are being met.
  3. Plan sponsors in other cases don’t realize that they meet ERISA’s functional definition of a fiduciary.

For comprehensive and understandable resources on what this "fiduciary stuff" is all about, check out The Fiduciary Education Campaign, a compliance assistance initiative of the Employee Benefits Security Administration (EBSA), the DOL agency responsible for fiduciary oversight.

Employee Benefit News Legal Alert is just one of the free resources provided by Employee Benefit News. Here’s a link to check them out.

First Online 401(k) Rating System Launched By Brightscope, Inc. (One Year Later)

By Jerry Kalish on Posted in 401(k) Plans

That was the title of a blog post I wrote exactly one year ago today when Brightscope, Inc., an independent data analytics company launched their 401k ratings disclosure website.

It featured  the BrightScope Rating™, a quantitative 401(k) plan rating developed by BrightScope, Inc. in partnership with some of the country’s top independent fiduciaries, finance professors, and 401(k) experts. BrightScope Ratings™ take into account over 200 unique data inputs per plan and calculate a single numerical score to define 401k plan quality at the company level.

In noting that it was the nation’s first online 401(k) rating system, I ended my post by saying, As for me, I’m still thinking about the implications of this innovation. Could be huge.

So I thought it would be interesting to see exactly the progress this start-up company has made over the past year.

Here’s a brief quantitative look-back. Then: 5 employees, now: 22. Then: 800 401(k) plans rated, now: 34,000 401(k) plans rated. Then: a few hundred page views a day, now: approximately 12,000 a day.

The buzz about BrightScope started from their initial press release and has been fueled by media coverage in both mainstream and trade media.

Since the beginning of 2009, the Company has launched the following products:

  • July 2009: Plan Management Dashboard for corporate plan sponsors
  • September 2009: Advisor Central for retirement-plan advisers
  • January 2010: Personal 401(k) Fee Report for 401(k) participants.

They have arrived in the middle of the “perfect storm”: increased Congressional scrutiny and involvement in 401(k) plans, stepped up regulatory focus by the Department of Labor, and everyone’s concern about the adequacy of retirement income – or lack thereof.

Only time will tell the extent to which Brightscope will impact the 401(k) plan industry. But impact it they will. Year 2 should be very, very interesting.

Fidelity Displaced as the Top Distributor and Mutual Fund Provider, According to 2010 Investor Study (and what it means for 401(k) plans)

By Jerry Kalish on Posted in 401(k) Plans, Individual Retirement Accounts

That’s the title of a press release I received this week from Cogent Research, a market research and strategic consulting firm based in Cambridge, Massachusetts about the results of their 2010 Investor Brandscape™ report.

According to Cogent, Fidelity Investments has forfeited its position as both the number one distributor and mutual fund provider to key rivals Charles Schwab and Vanguard. Cogent said it is because of significant shifts in brand perceptions, household penetration, as well as changes in investor loyalty.

The Cogent report which is based on a representative survey of 4,000 affluent and high net-worth investors in the United States reveals a decline in the number of investors using 401(k) plans. In fact, for the first time ever, affluent investors now report having more dollars allocated to IRAs than to employer-sponsored retirement plans.

In an interview Meredith Lloyd Rice, an author of the report, made the following key points.

  • The proportion of investors that hold a 401(k) has gone down significantly. As of Oct. 2009, she said, only 59% of investors’ surveyed hold an employee-sponsored retirement account, down from 70% in Oct. 2008.
  • The population is also aging and those closer to retirement are rolling over their employee-sponsored retirement plans into IRAs, another reason for the decrease in participation in 401(k) plans.
  • Younger investors are more likely to start their own businesses or freelance and aren’t necessarily working in traditional full-time jobs that offer employee-sponsored retirement plans.
  • High unemployment is also cutting into contributions.

In big picture terms, the results of this report aren’t about market share or brand loyalty. Rather, It’s how the intersection of our aging population, higher unemployment, and lower 401(k) participation is impacting retirement security – or lack thereof.

The shape of things to come for 401(k) plans in 2010

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

That’s the poster from the not so good 1979 movie, The Shape of Things To Come. You kinda get the picture from the tagline Beyond the earth… Beyond the moon… Beyond your wildest imagination!

The movie was an adaptation of  the 1933 science fiction novel, The Shape of Things To Come, by H.G. Wells which speculates on future events from 1933 until the year 2106.

My own prognostications for the future are not nearly as expansive. But rather limited to the world of 401(k) for 2010. Here’s a link to my January 2010 column in Employee Benefit News, The Shape of Things To Come for 401(k) Plans. 

The 2009 Retirement Plan in Review: The Good, The Bad, and The Ugly

By Jerry Kalish on Posted in 401(k) Plans, Audio/Visuals, Defined Benefit Pension Plans, Employee Benefit News columns

 

 

It’s that season of the year. No, not the obvious holiday season, but the award show season. And I’ve got my own called, The Retirement Plan Year in Review: The Good, The Bad, and The  Ugly.

The reference is, of course, to Sergio Leone’s classic 1966 movie, considered the greatest of the Italian spaghetti westerns, starring Clint Eastwood (the Good), Eli Wallach (the Bad), and Lee Van Cleff (the Ugly).

And so with apologies to the afore-mentioned director and actors, here are my 2009 nominations in each of the three categories.

  • The Good: Increased Consumer Spending
  • The Bad: Job Losses
  • The Ugly: Early Retirements Hurt Social Security System and Many Recipients

You can see the entire "award show" in my December, 2009 column in Employee Benefit News.

So for 2009, that’s a wrap.

Best wishes for a healthy, happy, and prosperous New Year.

 

Pozek On Pension added to our blogroll

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

Welcome to Adam Pozek and his new blog, Pozek On Pension to the cadre of retirement plan bloggers. He is Vice President, Consulting Services for Sentinel Benefits & Financial Group.

In the few posts Adam has published so far, he provides context for what’s happening with retirement plans with a point of view.

And here’s one that immediately caught my eye as a response to a plan sponsor or advisor “shopping” for a retirement plan administrator. I’ll simply link them to Adam’s post, Is Cheapest Always Best?

Right on!

Defined Benefit Pension Plans: What’s Old Is New Again and Better Than Ever

By Jerry Kalish on Posted in Audio/Visuals, Defined Benefit Pension Plans

Our blogging buddy, attorney Bob Toth, blogging from a ski slope in Quebec province, discussed the demise of defined benefit pension plans, Continuing the DB Demise Discussion. He notes that there are only 19,000 defined benefit plans now being covered by the PBGC.

The context in which Bob writes is what is generally perceived to be “Corporate America”. He quotes Nassim Nicholas Taleb from his book, The Black Swan: The Impact of the Highly Improbable:

Consider the following sobering statistic. Of the five hundred largest U.S, Companies in 1957, only 74 were still part of that select group, the Standard and Poor’s 500, forty years later. Only a few had disappeared in merger; the rest either shrank or went bust.

But that’s Corporate America as it used to be. From my vantage point, Corporate America is small business owners, and defined benefit plans are very much alive and well with new plans being adopted.

Just like Fleetwood Mac who after many years apart are back together, defined benefit pension plans are back and better than ever. Here is a presentation I did last year on that theme.

Defined Benefit Plans

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