The intersection of annuity products and intellectual property law

By Jerry Kalish on Posted in Annuities

I started writing about annuities almost two years ago when I asked the question (rhetorical, of course), Are 401(k) plans transforming into defined benefit plans?

Since then, the financial industry’s race to develop and distribute retirement income products has been accelerating, and I’ll be increasing my coverage of this emerging area accordingly.

And one piece of recent news struck me as how competitive the retirement income market is becoming.  

It was the announcement that Lincoln National Life Insurance Company, part of Ft. Wayne, Indiana-based Lincoln Financial Group, won a  $13.1 million jury verdict in a variable annuity patent infringement case against three Aegon USA companies, Transamerica Life Insurance Co., Transamerica Financial Life Insurance Co., and Western Reserve Life Assurance Co. of Ohio.

The patent claim at issue related not to the variable annuity itself but to a computerized method for administering variable annuity products that combine guaranteed minimum payment features with systematic withdrawal programs.

The patent also includes data processing methods used to administer variable annuities in the payout phase and withdrawals from mutual funds, particularly systematic withdrawals from funds.

I’ll let the intellectual property lawyers slice and dice this case, but from a marketing standpoint – priceless.

“I asked you what time it was, not how to make a watch”

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Annuities, Audio/Visuals, Cash Balance Plans, Defined Benefit Pension Plans, Employee Stock Ownership Plans, Individual Retirement Accounts, Pension Protection Act of 2006, Public Employee Plans

Every once in a while I’ll start to wander off into “Pensionspeak” when I’m talking to a client. And when I do, I’ll catch myself by remembering what one of our important business partners once told me when I started to get too technical. Or even technical at all depending on the audience. He told me that when someone asks you what time it is, don’t tell them how to make a watch. 

And in that spirit, I pass along a better understanding of something that affects us all of us – as plan sponsors, participants, and retirement plan service providers. That’s the credit crisis. So here’s a nifty video created by designer Jonathan Jarvis called The Crisis of Credit Visualized that helps make it more understandable than would a watchmaker.

http://vimeo.com/moogaloop.swf?clip_id=3261363&server=vimeo.com&show_title=1&show_byline=1&show_portrait=0&color=&fullscreen=1

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

 Now if I could only communicate the 401(k) discrimination rules like this.

Footnote: Jonathan’s video is picking up buzz in the blog world. Two influential bloggers, Dan Ariely on his predictably irrational blog and Garr Reynold on his Presentation Zen blog recently featured it.

Life Insurance in Qualified Retirement Plans: Presentation to Lake County Estate Planning Council

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

I was honored to be a guest speaker today to The Lake County Estate Planning Council. The group is an interdisciplinary organization for professionals involved in estate planning to better serve the needs of the public in estate planning.

The title of my presentation is:

LIFE INSURANCE IN QUALIFIED RETIREMENT PLANS:
The Impact of the New Economic Realities on Business Owners, Employees, Beneficiaries and Financial Service Providers

Here it is:

 Life Insurance in Retirement Plans

http://www.authorstream.com/player/player.swf?p=264503_633927405903692500
See more presentations by JerryKalish | Upload your own PowerPoint presentations

Need a retirement plan for 2008? Consider a SEP

By Jerry Kalish on Posted in Individual Retirement Accounts

If you’re a business owner that didn’t quite get around to establishing a retirement plan for 2008, you still have time to establish a SEP. Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about SEPs with a comparison to IRAs. Check out Smart Retirement Investing for 2008 (You’re Not Too Late!).

“Bad boys, bad boys whatcha want”…your retirement plan benefits too?

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

If you’re a TV reality show fan, you’ll recognize the quoted part of the headline as the opening from Bad Boys, the theme from Fox’s long-running show COPS, by Inner Circle, the Jamaican raggae group.

The second part of the headline can be viewed as life imitating art. As the economy tanks, crime rises. Marc Tracy over at my other blog home, Bizbox – a special promotion by OPEN from American Express on Slate, writes about that in Sniffing Out Employee Fraud.

But it’s not just white collar crime. Just this week, the CFO of a client called me about a terminated employee caught shopping at the company warehouse using a ten-fingered midnight discount. The terminated employee has now applied for a profit sharing plan distribution. He asked me whether the company could impose a forfeiture of his vested account balance.

In other words – and the focus of this post – may a nonforfeitable benefit ever be forfeited?

Back in the day (pre-ERISA), retirement plans did have “bad boy clauses” in which forfeitures were imposed because of employee dishonesty or a violation of a promise not to compete.

But now in the modern era, bad boy clauses are generally not permitted. Generally, I say, because the Pension Answer Book, one of our “go-to” resources cites a number of court cases and Internal Revenue Service regulations that vested benefits in excess of the benefits required to be nonforfeitable under the ERISA alternative vesting schedules may be forfeited because of an employee’s misconduct or dishonesty

So paraphrasing one of the Pension Answer Book’s examples, suppose an employer’s plan had a five-year graded vesting provision. The plan provides for forfeiture of benefits if an employee with less than three years of service terminates employment and works for a competitor or is dishonest. Permissible because the plan could have had three-year cliff vesting.

The Pension Answer Book points out that the qualified plan must provide the specific criteria for application of this bad boy clause, and it can not be discriminatory in operation.

Whatever. A bad boy clause isn’t even going to be an option for most employers today since most employers use pre-approved plan documents, e.g., prototypes and volume submitter, which won’t have such clause.

And to use an individually designed plan with such clause would be many times more expensive for both preparation of the document and the IRS determination letter process. And add additional cost if protracted discussions with the IRS is required.

Sorry. 

How entrepreneurs can succeed in this economy

By Jerry Kalish on Posted in Posts on SLATE

Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about how entrepreneurs can succeed in this economy. Bhaskar Chakravorti, a senior lecturer of business administration at the Harvard Business School was recently interviewed by Martha Lagace for the Harvard Business School’s Working Knowledge newsletter.

Mr. Chakravorti says that while the present economy removes opportunities and resources, it has also managed to add new and different opportunities. Here is a link to my article, Four Rules To Follow During This Economy, which contains a link to Ms. Lagace’s complete interview, Creative Entrepreneurship in a Downturn.

This Book Has Issues – Adventures in Popular Psychology: Book Review

By Jerry Kalish on Posted in Book Reviews

So what’s a nice book about psychology doing on a blog like this. Take a seat on the couch, and we can talk about it. 

It’s a small world when it comes to blogging. One day I came across the British Psychological Society’s Research Digest Blog, which is written and edited by Christian Jarrett, Ph.D., a British psychologist. I’ve referenced studies that Christian wrote about in several of my blogs. (See One More Reason to Consider A Commuter Transit Benefit, ERISA, It’s Not Elementary, and What We’ve Got Here Is Failure To Communicate.

So when I learned that Christian and his American co-author, Joannah Ginsburg, an American psychotherapist and journalist, published a book, I was eager to see whether it was as interesting and as helpful as the BPS blog. The answer is a resounding yes.

 

Here’s how the publisher describes it:

 

This Book Has Issues delves deep into the human consciousness and casts light onto the reasons why we think, feel, and act the way we do. Packed with illuminating real-life examples, introductions to groundbreaking psychologists, and plenty of experiments and tests to unveil the way your own mind works, This Book Has Issues has the power not just to intrigue and entertain, but also to change the way you think. Divided into eight fascinating chapters, This Book Has Issues covers everything from the real reasons we fall in love to the science behind a good night’s sleep. From extreme disorders to the truth behind the ways we live our everyday lives, This Book Has Issues takes you on a journey through the amazing landscape of the mind.

 

That’s from the publisher’s marketing department. So let me translate it from “popular psychology” into “retirement plan psychology”.

 

The success of any retirement plan depends on how the needs and expectation of the plan sponsor, participants, and beneficiaries can be met. In other words, the human factor drives the plan’s success.

 

So in that context, if you want to:

  • Learn how our brains can sometimes make mistakes
  • Get tips to boost your memory abilities
  • How to look at problems some people have with language and counting
  • Challenge your basic ideas on behavior and communication
  • Get the latest research on relationship, leadership, and brainstorming
  • Get to know yourself better using a range of tests
  • Learn how to deal better with stress
  • Learn how to get better sleep

Then This Book Has Issues is for you.

 

It travels well also. You can listen to two excellent book reviews from Radio New Zealand (MP3 file), and on the Australian radio show, Faster Than Light.

 

Christian’s and Joannah’s book is available in the U.S. from Barnes and Noble and in the U.K from Amazon U.K.

 

Author’s Note: Here are links to the other book reviews I’ve done: Josh Itzoe’s timely Fixing The 401(k) and Fran Hawthorne’s controversial Pension Dumping: The Reasons, The Wreckage, The Stakes for Wall Street.

 

How the stimulus package affects employee benefits

By Jerry Kalish on Posted in Commuter Benefits, Posts on SLATE

Over at Slate’s BizBox blog, a special promotion by Open from American Express, I posted an article about the impact of the stimulus package affects employee benefits, specifically COBRA and Commuter Transit Benefits under Section 132 of the Internal Revenue Code. The stimulus package provides extended and subsidized COBRA benefits and increases the amount of transit benefits that can be provided on a pre-tax basis. Check out the details in COBRA and Transportation: How The Stimulus Affects Employee Benefits.

How bad was it really: the impact of the market meltdown on 401(k) participants in 2008

By Jerry Kalish on Posted in 401(k) Plans

There has been as lot of discussion and media attention on the impact of the financial markets’ meltdown on 401(k) accounts – most of which was either anecdotal or generalized.

For example, much commentary that in 2008 during which major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37%, participants in 401(k) plans suffered corresponding losses.

But here’s the reality in an analysis published yesterday by the nonpartisan Employee Benefit Research Institute (EBRI).

I’ve written about the EBRI before (see Employee Benefit Research Institute (EBRI) Relaunches Website) and the research they make available for us retirement industry folk and policy makers.

The analysis used the EBRI/ICI 401(k) database of more than 21 million participants to estimate the impact of market activity on 401(k) account balances from Jan. 1, 2008, to Jan. 20, 2009. The ICI (Investment Company Institute) is the organization that represents the mutual fund industry.

Because of the importance of this issue, I don’t want any summary I would do to dilute the significance of their analysis which showed that participants’ losses were largely determined by their account balance, age, and job tenure.

So following are the key points directly from their press release:

Impact Varies By Account Balance

Not surprisingly, how the recent financial market losses affect individual 401(k) account balances is strongly affected by the size of a participant’s account balance. Those with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions: Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, since contributions had a bigger impact than investment losses. However, those with more than $200,000 in account balances had an average loss of more than 25 percent.

Impact Varies by Age and Job Tenure

401(k) participants on the verge of retirement (ages 56–65) had average changes during this period that varied between a positive 1 percent for short-tenure individuals (one to four years with the current employer) to more than a 25 percent loss for those with long tenure (more than 20 years).

Short-Term vs. Long-term

While much of the focus has been on market fluctuations in the last year, investing for retirement security is (or should be) a long-term proposition. When a consistent sample of 2.2 million participants who had been with the same 401(k) plan sponsor for the seven years from 1999–2006 was analyzed, the average estimated growth rates for the period from Jan. 1, 2000, through Jan. 20, 2009, ranged from 29 percent for long-tenure older participants to more than 500 percent for short-tenure younger participants.

Recovery Time and Future Stock Market Performance

The analysis also calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the sharp stock market decline. Because future performance is unknown, this analysis provides a range of equity returns: At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.

Near-Elderly With Very High Equity Exposure

Estimates from the EBRI/ICI 401(k) database show that many participants near retirement had exceptionally high exposure to equities. Nearly 1 in 4 between ages 56–65 had more than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 percent. As a result of the Pension Protection Act of 2006, many 401(k) plan sponsors appear to be offering lifecycle/target-date funds, which automatically rebalance asset investments into more "age appropriate" allocations. Had all 401(k) participants been in the average target-date fund at the end of 2007, 40 percent of the participants would have had at least a 20 percent decrease in their equity concentrations, and consequently, might have mitigated their losses, sometimes to an appreciable extent.

Here is a link to the full February 2009 Issue Brief, The Impact of the Recent Financial Crisis on 401(k) Balances (24 pages, PDF). 

Giller and Calhoun launch new blog, the Business of Benefits

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Crunch Time Series, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Individual Retirement Accounts, Pension Protection Act of 2006, Public Employee Plans

We welcome a new blog to the employee benefit blogging community. It’s the Business of Benefits, the focus of which is issues facing insurance companies, financial service providers, and plan sponsors.

It’s being published by the law firm of Giller & Calhoun. The named partners are Evan Giller in New York City and Monica Dunn Calhoun, Denver. Bob Toth in Ft. Wayne, Indiana has recently joined Evan and Monica as of counsel to the firm. Bob, you may recall, was my co-author in our recent 403(b) Crunch Time Series.

Each of the three attorneys who comprise the firm – what I call a "boutique, virtual law firm" – have over 20 years experience in the "business of benefits." That is, a law practice which combines elements of ERISA, tax law, insurance law, securities law and investment law that affect 403(b) and qualified retirement plans.

I’m looking forward to hearing what they have to say.

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