Solo-Ks and Form 5500

By Jerry Kalish on April 30, 2009 Posted in 401(k) Plans

I’ve written about Solo-Ks before over at my other blog home, Slate’s BizBox. (See The Wonderful Solo-K). It’s a special retirement plan for the self-employed or small business owner with no employees (other than their spouse) to establish 401(k) plans and to max out their deductible retirement plan.

But as we creep toward 5500 filing time for 2008 calendar plans (July 31, 2009 unless extended to October 15, 2009), there is a yellow caution light out. And that’s whether Form 5500 has to be filed for these so-called "owner-only" plans.

I cover the basics on that topic in Don’t Miss Out On Your Solo-K over at Slate’s BizBox, a special promotion by OPEN from American Express. And yes, even blogs have "product placement."

Hard times mean more 401(k) hardship distributions

By Jerry Kalish on April 23, 2009 Posted in 401(k) Plans, Audio/Visuals

Hardship distribution provisions in 401(k) used to be one of those retirement plan matters on which plan sponsors didn’t spend a whole lot of time.

Lately, however, that’s not the case. From our vantage point, we’re seeing more requests for hardship distributions than ever before.

That being the case, I’m going to take a few moments to discuss 401(k) hardships in the context of the current economic situation.

Background

While hardship provisions, like loans, are allowed by law, employers are not required to provide for them in a 401(k) plan. Many do because they provide a sense of security to participants as they balance between retirement savings and current financial needs. In other words, a safety value in case they ever need the money for a financial security. And that time is now for many participants.

So is an overview of what constitutes a hardship and they should be administered. Hardship distributions from a 401(k) plan can be permitted under two general rules: safe harbor rules and general rules for an immediate and heavy financial need (more about that later).

Safe Harbor Rules

Under these rules, a hardship distribution would only be made upon the finding by the Plan Administrator of an immediate and heavy financial need where such Participant lacks other available resources. The IRS says the following are the only financial needs considered immediate and heavy:

Expenses for (or necessary to obtain) medical care that would be deductible under Code section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);

Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
Payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the employee, or the employee’s spouse, children, or dependents;
Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence;
Payments for burial or funeral expenses for the employee’s deceased parent, spouse, children or dependents;
Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under Code section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income);

And Safe Harbor means exactly that. Follow the rules listed above, and a plan sponsor will automatically be in compliance with IRS regulations.

General Rules

Under these rules, a hardship distribution shall only be made upon the finding by the Plan Administrator of an immediate and heavy financial need where such Participant lacks other available resources. But unlike the Safe Harbor rules, whether a Participant has an immediate and heavy financial need is determined based on all relevant facts and circumstances.

For example, the need to pay the funeral expenses of a family member would constitute an immediate and heavy financial need and a distribution made to a participant for the purchase of a boat or television would not constitute a distribution made on account of
an immediate and heavy financial need.

The General Rules for hardship provide flexibility for the employer to allow distributions based on the facts and circumstances of the employee and are not listed in the safe harbor rules. Whether that is desirable or not is another matter. This flexibility, however, is achieved only if the appropriate language is included in the plan.

So now finally, what exactly is an immediate and heavy financial need of an employee? IRS regulations say that a hardship distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if:

The employee has obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer;
The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution (Safe Harbor only).
Hardship distribution may not exceed the amount of the employee’s need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.

A withdrawal made by a 401(k) plan participant, either under general or safe harbor rules, is subject to heavy tax and penalty consequences and should therefore only be done as a last resort. And let’s hope that the “last resorts” don’t continue to be situations with which 401(k) participants are confronted.

For the official version of hardship distributions, here is a link to the IRS’ FAQs regarding hardship distributions.

The times they are a-changin’ for Wall Street and Big Law

By Jerry Kalish on April 21, 2009 Posted in 401(k) Plans, Defined Benefit Pension Plans, Posts on SLATE

The album cover pictured above is of The Times They Are a-Changin’, singer-songwriter Bob Dylan’s third studio album, released in January 1964.

The title track is one of Dylan’s most famous. Many at the time felt that it captured the spirit of social and political upheaval that characterized the 1960s.

Now let’s fast forward some 45-plus year later. There’s another type of upheaval going on. This time it’s financial. And we’re seeing some profound changes taking place in the financial services industry.

Over at my other blog home, Slate’s Small Business blog, a special promotion by Open from American Express, both Marc Tracy and I see these changes taking place in two different areas. Marc on Wall Street, and me on “Big Law” (that’s the colloquial expression given to the 250 largest American law firms, with about 15 of them having more than 1000 lawyers).

Marc writes that The Great Rearranging Hits Wall Street when he says

Indeed, the essential disappearance of the investment-banking industry–with all five of the major i-banks having either switched to less flexible and more regulated bank holding companies (Goldman, Morgan Stanley), been bought by bank holding companies with the aid of ample federal government subsidy (Bear Stearns, Merrill Lynch), or, er, filed for bankruptcy and disappeared (Lehman Brothers)–has left an absolutely gigantic vacuum for start-ups who now know that the only way to survive is to stay relatively small.

In Big Law and Small Business, I noted that the ABA Journal reports that for the first quarter of the year approximately 7,000 attorneys and staff have lost their jobs in addition to canceled summer programs, postponed first-year associate start-dates, and pay cuts across the board including partners. Not a pretty picture for the 43,000 imminent law-school graduates about to enter the legal job market. But at the same time, many of the smaller law firms and boutique law firms are doing very well, thank you.

So what does it all of this mean? Well, there are at least two ways to look at it.

There’s Seth Godin who said in his brilliant blog post, Small is the New Big. In the recent recession, it seem more right-on and prescient. And if all this seems pretty obvious to you, Seth wrote this in June, 2005.

And then there’s Dylan who in the climatic lines of the final verse of The Times They Are a-Changin’ wrote and sang:

The order is rapidly fadin’
And the first one now
Will later be last
For the times they are a-changin’.

Here, take a look and listen yourself:

https://youtube.com/watch?v=lZ_XwLSN45I%26rel%3D1

http://widget.lyricsmode.com/i/scroll2.swf?lid=63050&speed=4

Lyrics | Bob Dylan lyrics – The Times They Are A-Changin’ lyrics

Bill Singer’s Broke and Broker Blog added to our blog roll

By Jerry Kalish on April 14, 2009 Posted in 401(k) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Individual Retirement Accounts, Pension Protection Act of 2006

Much of what’s out there on blogs is pretty vanilla at best. Except for those individuals that combine their expertise with a definite point of view. It’s makes for interesting reading and provides context for what’s going on in their particular field – and sometimes in the larger picture of the economy and business environment.

And that’s been the criteria for adding blogs to our blog roll. So here’s one more. It’s Bill Singer’s Broke and Broker Blog, the tag line of which is An irreverent Wall Street Blog. Spot-on!

Bill is a securities industry attorney who advocates on behalf of small- and mid-sized broker-dealers, registered persons, whistleblowers, and defrauded public investors. And yes, he does have a P.O.V. Bill also publishes the legal/regulatory/compliance site of RRBDLaw.com.

And now here’s full disclosure. Bill has just recently included us as a featured blog on Broke and Broker. But honestly, we would have added him even if he hadn’t featured us. And here’s just one reason why: one of last’s week’s posts, Blowin’ in the Wind: The Art of Stock Market Forecasting. P.O.V. indeed.

Train pulling out of the station for annuities in 401(k) plans

By Jerry Kalish on April 9, 2009 Posted in 401(k) Plans, Annuities

With so much going on in the retirement plan arena, I nearly missed the subhead in Pensions & Investments article, Borzi strong on DC fee disclosure issue. (Free registration may be required).

"Borzi", as those of us in the benefit business know, is Phyllis C. Borzi, just nominated by President Obama to be Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). It’s the federal agency which has oversight over ERISA reporting, disclosure and fiduciary requirements.

The headline isn’t exactly breaking news. Fee disclosure – the word of art is transparency – has been and will continue to be a high priority for the Department of Labor.

The subhead that made me sit up was Annuities, DB concerns also on radar for nominee to lead EBSA (emphasis supplied). The article itself says that Ms. Borzi "also might require 401(k) plans to offer annuities to plan participants to help ensure they have an adequate income at retirement".

It’s starting to happen, folks, the annuitization of 401(k) plans: new products being developed, distribution ramping up, and now what may be regulatory and even legislative mandates. And it may be sooner rather than later.

If common sense was so common, more people would have it

By Jerry Kalish on April 9, 2009 Posted in Defined Benefit Pension Plans

Common Sense Fail

The picture above is from the FAIL blog which daily posts user-submitted funny FAIL pictures and videos. The "fail" relates to so many people not having enough common sense not to sit down on a wet park bench that this sign actually had to posted.

Which then lead me back to today’s headline, "if common sense was common, more people would have it".

It’s an old expression that inspired one family I know to create the website, If Common Sense Was So Common……, to collect and share humorous absurdities. If you have a story about the absence of common sense, then send it to them and it may get published.

Now what does all of this have to do with retirement plans? Simple. One of the family members who created the website is an actuary with whom we work on mutual retirement plan clients. And this is, after all, a blog about retirement plans. Yeah, I know it’s a stretch, but sometimes you have to give a shoutout for your friends.

Video: Investing Money in Plain English

By Jerry Kalish on April 7, 2009 Posted in 401(k) Plans, Audio/Visuals

Making complex ideas easy to understand is a topic I’ve blogged about before. Last month, I blogged, I asked you what time it is, not how to make a watch, which included Jonathan Jarvis’ excellent video The Crisis of Credit Visualized.

Here’s another example. It’s the video, Investing Money in Plain English. It was created by Common Craft, superbly talented producers of videos for training and education, whose product they say is "explanation".

Maybe it’s time for 401(k) investment education to get back to basics.

So how we doing?

By Jerry Kalish on March 31, 2009 Posted in Posts on SLATE

In whatever what we’re in now – recession, economic downturn, financial crisis. So the answer to the "how we doing" question is not uniform across the board. The sectors I see are our business owner clients and their employees who participate – or not – in their company’s retirement plan. And each has an entirely set of feelings as to where they are now.

I’ve written about both groups in my other blog home, Slate’s Small Business blog, a special promotion by Open from American Express.

Business Owners are generally optimistic as I noted in my column, An Optimistic Optimism Index. That’s the findings of the new Small Business Success Index launched just this month by Network Solutions and the University of Maryland’s Robert H. Smith School of Business.

Employees on the other hand are understandably concerned about job security and losing health insurance coverage as I noted in my column, New Grim Report on Small-Business Employees. That’s the findings of the recently released Well-Being Index for the first quarter of 2009 by Principal Financial.

Picture above: Half Empty or Half Full by Jaxxon by way of Flickr.

Whatever happened to asset allocation?

By Jerry Kalish on March 27, 2009 Posted in 401(k) Plans

Maybe the visual metaphor is an extreme answer to the question raised above. But asset allocation for participants investing their accounts in employer stock seems to be an investment strategy on the decline.

Asset allocation is, of course, that strategy of a 401(k) participant distributing his or her investments among different asset classes so as to diversify. It’s one of those concepts that has been de rigueur as part of 401(k) investment education.

Asset allocation seemed to be getting traction with those employees who invested in employer stock. According to a December 2008 Issue Brief, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007, published by the Employee Benefit Research Institute, those 401(k) participants continued to seek diversification of their investments.

Since the Enron debacle, the share of 401(k) accounts invested in employer stock continued to shrink, falling by 0.5% to 10.6% in 2007. That continued a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend, but they were less likely to hold employer stock.

But between then and now things changed. Earlier this month, The Wall Street Journal reported that Despite Risks, Workers Guzzle Employer Stock. The article noted a study by Hewitt Associates that in January, for the first time in more than seven years, a large group of 401(k) participants invested more money into employer stock than any other type of investment. Employees invested $65 million in employer stock that month.

Employer securities are a big part of retirement plans. According to the above-mentioned EBRI Issue Brief, almost 2/3 of 401(k) plans with more than 5,000 participants offered employer stock as an investment option in 2007. And about 8% of participants in those plans had more than 80% of their account invested in employer shares.

So how much stock is too much stock? The Financial Industry Regulatory Authority (FINRA) issued an investor alert, Putting Too Much Stock in Your Company—A 401(k) Problem. (FINRA is the non-governmental regulator for nearly 5,000 brokerage firms, and was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange).

FINRA says that says that if a participant has than 20% of his or her assets in company stock, and this investment also constitutes more than 20% of their overall investment portfolio, they should consider rebalancing their investments to increase diversification.

Many retirement experts say that is even too much, and that employees should keep no more than 5% to 10% of their balances in company stock, and some believe such shares don’t belong in retirement plans at all.

Obviously, more work needs to be done on 401(k) investment education.