I’ve seen the future, and it’s “Joe The Plumber”

“Joe The Plumber” has had his 15 minutes of fame, and then some. Our friends at Slate’s Bizbox blog for whom I regularly contribute went beyond the political rhetoric when they said Keep Helping Small Business.

And here’s why the new administration should do more for “Joe The Plumber” and all the other small businesses than tax credits. They will be an important part of the changing nature of the American business landscape according to a recent research study by Intuit, the maker of QuickBooks, and the Institute for the Future, a non-profit research organization.

The study, the Intuit Future of Small Business Report, gives us a peek into our future, when it says that by 2017, small businesses will be formed and run by a new and more diverse group of entrepreneurs, with a new outlook based on the changing nature of the American business landscape. Here’s a summary:

  • The Changing Face of Small Business

Entrepreneurs in the next decade will be far more diverse than their predecessors in age, origin, and gender. These shifts in small business ownership will create new opportunities for many, and will change both the will become increasingly common and diverse, new forms of small and personal U.S. and the global economy.

A new breed of entrepreneurs will emerge. Entrepreneurs will no longer come predominantly from the middle of the age spectrum, but instead from the edges.People nearing retirement and their children just entering the job market will become the most entrepreneurial generation ever.

Entrepreneurship will reflect an upswing in the number of women. The glass ceiling that has limited women’s corporate career paths will send more women to the small business sector.

Immigrant entrepreneurs will help drive a new wave of globalization. U.S. immigration policy and the outcome of the current immigration debates will affect how this segment performs over the next decade.

  • The Rise of Personal Businesses

Personal businesses—one person businesses with no employees—have become an important part of the U.S. economy and will increase in number over the next decade. The growth will be driven by shifts in larger company employment practices and changes in technology.

Contract workers and accidental and social entrepreneurs will fuel a proliferation of personal businesses. Economic, social, and technological change and an increased interest in flexible work schedules will produce a more independent workforce seeking a better work–life balance. 

 See?

New road ahead for 403(b) plan sponsors starting January 1, 2009

If you’re one of the many 403(b) plan sponsors just getting started in dealing with the impact of the new 403(b) regulations on administration and compliance requirements, this post may provide you some guidance in focusing on the issues that need to be addressed by the rapidly approaching January 1, 2009 effective date. These are some of the major issues you will need to address:

  • Requirement for a Plan Document. Both Non-ERISA and ERISA 403(b) plan sponsors must have a signed document in place by January 1, 2009.
  • Non-Discrimination Rules. This requirement applies to both Non-ERISA and ERISA 403(b) plans.
  • Contribution Limits. Plan sponsors will be responsible for the compliance of 403(b) contributions with the Internal Revenue Code including the correction of excess amount contributed.
  • Timing of Contributions. Plan sponsors must deposit contributions to plan providers within a “reasonable period” of time.
  • Transfers to Other 403(b) Contracts. New rules affect participants’ moving their assets to other 403(b) annuities or 403(b) custodial accounts.
  • Plan Termination. The new rules permit 403(b) plan sponsors to terminate their plan and distribute the assets under specified conditions.

The IRS has constructed this "road" by providing comprehensive guidance for 403(b) plans for the first time in over 40 years. It doesn’t have to be a Toll Road.

Taking Social Security benefits: now or later?

A while back I wrote that there’s been a Social Security "early bird special" taken by most married men. Recent experience has been that approximately 50% of those eligible for taking Social Security at age 62, the earliest possible age do so. The financial implications can be huge. If you’re a married man and have been the primary wage earner. Then, your decision to take early Social Security benefits can result in a reduction in your wife’s survivor benefits.

But taking Social Security sooner can also result in a reduction in benefits – for anyone – of approximately 25% if you’re one of the Boomers. Here’s a chart  published by the Women’s Institute for a Secure Retirement (WISER) who also maintain a blog. The chart illustrates the percentage of reduction in benefits for those retiring at age 62 and the percentage increase in benefits for those working beyond full retirement age.

That is, if you can afford to do that.

Picture above, Waiting in Repose, by artist Dale Wicks.

Does a reduction in force or layoff beget a partial temination of a retirement plan?

I’ve been reminded again of that old Mac Davis song, Texas in My Rear View Mirror, in recent discussions with clients and their other advisors regarding the impact of reductions in force and layoffs on their retirement plans. 

My fellow Lex Blogger, Michael Moore, nicely discusses the employment law aspects of this economic fallout in his post, Managing Layoffs and Reductions in Force, on his Pennsylvania Employment and Labor blog.  

Now here’s where the Mac Davis reference comes in. A partial termination of a retirement plan is perfectly clear in the rear view mirror. That is, it’s based on facts and circumstances, an expression I’ve heard on many occasions from my attorney friends over the years. There is no objective set of rules.

So what’s a plan sponsor to do? Two things come to mind:

  • Consider the partial termination rule in the context of the planning for the reduction in force and layoffs about which Mr. Moore writes.
  • Determine whether it would make sense to submit the plan to the IRS for a ruling as to whether a partial termination occurred.

If you want to get into the nitty gritty of partial terminations, here is a link to the IRS’ 401(k) Resource Guide – Plan Participants-Plan Termination.

The bailout bill, the stock market, and 401(k) plans: what’s ahead for us?

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I was certainty premature yesterday in thinking the bailout bill was going to pass when I wrote the bailout bill is like a Christmas tree – something for everyone including retirement plans. And I wasn’t alone. The stock market reacted with the largest one day drop in its history.

No one knows the road ahead, but Tim Chapmen, President of PMFM, the firm that provides managed individually managed accounts via its 401(k) Toolbox program had a perspective today about all of this that I want to share with you. (Full disclosure: 401(k) Toolbox is used by many of our clients). Yesterday Tim wrote:

Today we had the largest one day drop in the history of the stock market. The Dow was down 777 points (6.98%); the S&P 500 lost 106 points (8.79%) and the NASDAQ was down 199 points (9.14%).

Stocks were lower most of the day but the sell-off really accelerated when Congress voted down the $700 billion ‘bail-out’ package. It will be interesting to see where the market – and Congress – go from here, but the question I’ve been asked most often is, "How did we get in this mess in the first place?"

First, a little background. In 1977, Congress passed the Community Reinvestment Act (CRA) to require banks to make real estate loans in areas they might not otherwise consider. In 1995, some additional teeth were put into the CRA regulations and banks had to step up the effort or else run afoul of the banking regulators.

In 1999, to continue the effort to extend the possibility of home ownership for low and moderate income earners, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") loosened their loan requirements, which gave birth to more adjustable rate mortgages, no documentation loans, lower down payments, etc. (Today we call those riskier loans ‘sub-prime’.)

It is important to understand that banks and mortgage companies typically only ‘originate’ home loans to collect a fee and then sell them. With Freddie and Fannie’s lower standards for buying the loans, the mortgage lenders could pay less attention to the borrower’s qualifications, write new loans and collect more fees to their hearts content. Wall Street jumped on board and bundled these mortgages into ‘packages’ called Collateralized Mortgage Obligations and Collateralized Debt Obligations (CMOs and CDOs). They would split these packages into pieces, even get mortgage insurance on some of them to get an AAA rating, and sell them to other investors. This gave banks and mortgage companies another outlet, in addition to Fannie and Freddie, to sell the loans which means they could write even more.

More people were enjoying the American Dream, banks were booking nice fees that helped the bottom line, and Wall Street was making a fortune selling these ‘derivatives’ that represented a pool of loans. Everybody in the loop was happy as could be . . . while real estate prices were going up.

Warren Buffet once said "When the tide goes out you can see who’s been swimming naked." When the real estate market started to soften a couple of years ago, there were definitely a lot of folks feeling pretty naked.

When the real estate bubble began to leak air the situation turned ugly quickly. Homeowners struggling to make their payments started to default in huge numbers, when it was apparent their homes weren’t worth what they’d borrowed. That started a chain of events that resulted in the market for sub-prime paper drying up.

One factor that accelerated this problem was a change in the accounting rules that required firms to ‘mark to market’ their holdings on a regular basis. (Mark to market means ‘tell me what it’s worth today, not what you expect to get at maturity’.) It was a post-Enron legislative action to create transparency and ‘protect’ investors, but as these investment banks were forced to continually write down the value of their holdings, they were in turn required to put up more capital. When the appetite for sub-prime loans went away – there were no buyers to be found – companies without additional collateral to put up, like Bear Stearns and Lehman Brothers simply went out of business.

The problem from my perspective is what I call the Law of Unintended Consequences. The idea of home ownership is certainly a noble one that is tough to argue against; greater transparency for investors is a noble idea too. But these legislative initiatives set in motion a chain of events that have taken the past 9 years to completely unfold. There’s plenty of other blame to go around here too. Mortgage lenders selling loans to folks who obviously couldn’t afford them, home buyers buying homes beyond their means, and Wall Street pouring gasoline on the fire by providing the vehicles to really accelerate the opportunity. The resulting financial meltdown was no doubt unintended, but it is very real nonetheless.

So the question is this: Politicians got us into this mess, can politicians get us out of it? And my answer is, I simply don’t know. I can understand the argument that something needs to be done to keep our markets liquid and operating efficiently. It’s like a drunk driver in an auto accident – he’s clearly at fault but that doesn’t mean the paramedics ignore him.

My worry is just like it’s taken a long time for the ramifications of the change in lending restrictions to come to fruition, it will likely be years before we know the effects of any current Congressional actions.

Picture taken by the author a short two weeks ago in Canmore, Alberta, Canada, gateway to the Canadian Rockies. 

Bailout bill is like a Christmas tree – something for everyone including retirement plans

The bailout bill working its way through Congress now has something for everyone – including retirement plans. The legislation is being called TARP, ("Troubled Asset Relief Program"), and it’s an acronym that some retirement plans will get to know better. In addition to bailing out financial institutions, TARP also permits the Treasury to protect "the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan." Presumably that means both defined benefit and defined contribution plans. If passed, there will obviously be direct involvement by the Labor Department regarding the ERISA aspects, e.g., fiduciary and disclosure obligations.

Stay tuned for the details.

Rocky mountains, rocky financial institutions

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While I was off exploring the Canadian Rockies with my friend and certified mountain guide Peter Amann, I found out when I returned that quite a bit had happened back here in the States. Bank of America buying Merrill Lynch, the largest brokerage firm; Lehman Brothers filing bankruptcy; and AIG, the largest insurance company in the world asking the Fed for $50 billion to tide them over until they can sell enough assets to spruce up their credit rating.

All of this, of course, has 401(k) participants concerned about how these events affect their account balances. They’re also concerned about how secure their account balances really are. David Pitt writing for Netscape addresses this issue in his recent article, Is Your 401(k) Plan Protected? 

Q: What safety measures are in place to protect the money I have invested in my company’s 401(k) account?

A: The federal government has established rules for the people running your 401(k) plan, whether it’s company officials – common in small companies – or a provider working with your company to administer the retirement plan.

What Mr. Pitt is referring to and what the rest of his article discusses are the ERISA  rules that govern fiduciary conduct overseen by the Department of Labor and the protection from a plan sponsor’s bankruptcy. But with all due respect to Mr. Pitt, it’s a little more complicated than that. 

The real focus, it seems to me, should be on potential insolvency issues involving those entities holding plan assets. I discussed one aspect of this issue back in April in my post, What Every Fiduciary Should Know about Their Brokers … and Also Their Custodial Banks, and Financial Contracts

Fiduciaries should also know about the protections plan assets should have from creditors of insurance companies offering 401(k) plans under group annuities. The degree of protection will vary depending on how the retirement plan account is funded which may include:

  • Investments in a separate account insurance product issued by the carrier
  • Investments held in a trust or custodial account with a Trust Company affiliated with the carrier
  • Guaranteed investments through the general account of the carrier
  • Self-directed brokerage accounts held at a broker/dealer
  • Mutual funds that are advised or sub-advised by investment firms experiencing financial difficulties

If you’ve been around long enough like me, you’ll recall the 1990s during which we struggled with insolvency issues affecting ERISA plans. I’m not suggesting that history is repeating itself. I am, however, suggesting that fiduciaries should evaluate whether their retirement plans are sufficiently protected by knowing their contractual and statutory remedies.  

403(b) and 401(k), “same, same, but different”

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"Same, same, but different" is a familiar saying in Thailand, and as shown on the left, the subject of a book of objects photographed in Thailand by Thomas Kalak, the photographer from Munich. It means, I understand, similar but not exactly the same. Kinda like, 403(b) plans and 401(k) plans.  

And that’s a good jumping off point for me to answer a question posed to me  the other day in an email from one of this blog’s readers. Asks the reader, "Are the 403(b) regulations the same as the 401(k), as far as the 7-day rule for a small sponsor to deposit 401(k) contributions". It’s an important question as the distinction between 403(b) plans and 401(k) plans is starting to blur with the 403(b) regulations effective January 1, 2009.

What the reader is referring to, of course, is the recent Department of Labor Proposed Regulation that employee contributions to a "small"retirement plan (one with less that 100 participants) will be deemed to be made in compliance with the law if those amounts are deposited with the plan within 7 business days of receipt or withholding. (See my post, Department of Labor Proposes Safe Harbor Rule for Deposit of Employee 401(k) Contributions…Finally).

So the answer is yes, a 403(b) plan would be subject to the 7-day requirement if it’s an ERISA plan. Now that’s an important "IF". A 403(b) sponsor could find that their newly required plan document if not carefully drafted could cause them to wake up New Year’s Day with an ERISA plan. And, thus, subject to all the ERISA rules (old and new) including reporting, disclosure, prohibited transactions, and fiduciary obligations. And, of course, the afore-mentioned 7-day deposit rule as part of the mix.

But 403(b) plan sponsors do have an obligation to make timely deposits of employee contributions. The 403(b) regulations require an employer to transfer contributions to the plan “within a period that is not longer than is reasonable for the proper administration of the plan”. For example, within 15 business days of the month the amount would have otherwise been paid to the participant.

So thanks, kind reader, for your question. I hope I’ve answered it to your satisfaction.

Here’s a link to fellow blogger Bob Toth’s post on 403(b) plans inadvertently becoming ERISA plans, The New 403(b) Documents and ERISA. He and his partner, Nick Curabba, provide excellent – and understandible – coverage of 403(b) plans and the new ERISA "stuff" on Baker & Daniels’ Benefits Biz Blog.

 

 

401(k) plan not a slam dunk decision for business owner

Our fellow bloggers at Slate magazine’s BizBox blog have been following what the general business media have saying about 401(k) plans for small businesses. Their most recent post on the topic, The 401(k) Question Continued …  picked up on an article in U.S. News and World Report, What Small Business Owners Need to Know About 401(k)’s, that focused solely on 401(k) plans as the best retirement vehicle for business owners.

But as I indicated in an earlier post, Which way to the best retirement plan?, what’s best is  based on the specific set of facts and circumstances. One size doesn’t fit all.

While you don’t read a lot about them, SIMPLEs and SEPs do have their advantages for the business owner. SIMPLEs permit salary reduction contributions and matching contributions, and SEPs allow employer contributions of up to 25% of compensation. Both have substantially less documentation and compliance requirements (and expense) compared to a qualified retirement plan, i.e., 401(k)/profit sharing plan, but the trade-off is less design flexibility and plan features. 

So 401(k) as a slam dunk? Maybe more like a jump ball.

 

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