Timing now is really everything for defined benefit pension plans

By Jerry Kalish on Posted in Defined Benefit Pension Plans, Pension Protection Act of 2006

ERISA, of course, requires adherence to a host of deadlines, and the failure to meet some of them can have serious consequences for a retirement plan sponsor. Here’s a new batch of such deadlines added by the Pension Protection Act of 2006 (PPA) that could affect defined benefit pension plans for 2008 calendar year plans.

The PPA provides benefit accrual and payment restrictions for underfunded pension plans. I’ll neatly bypass the technical stuff because the point is that timing is everything with respect to when the actuarial valuation is performed. If it’s not done "timely", even a well funded pension plan can be swept under these restrictions.

For example, if the actuarial valuation of a pension plan is not performed before October 1 for a calendar year plan, then the plan is presumed to be less than 60% funded -regardless of actual funded status – and the most severe benefit restrictions would apply.

There are a number of administrative practices that a plan sponsor can do to avoid such adverse consequences. But everyone involved – the plan sponsor and advisors – have to stay in the moment.

Hat tip to Ron Willour, Enrolled Actuary, owner of Indianapolis-based Omega Retirement Plans, Inc. 

Picture by Chris Garrett on his DSLR Blog, Adventures in Digital Photography.

Dilbert (and others) on public employee pension funding

By Jerry Kalish on Posted in Defined Benefit Pension Plans, Public Employee Plans

The funded status (or lack thereof) of public employee pension plans doesn’t get a whole lot of coverage by the mainstream media.

That’s unfortunate because it’s an important public policy issue with extremely significant long-term financial implications for all of us taxpayers. But leave it to cartoonist Scott Adams to weigh in on the topic via his Dilbert strip for August 8, 2008:

But via the internet, it is an area that is covered by several knowledgeable bloggers.Two who I follow regularly via my RSS reader are John Bury and Jack Dean.

John Bury’s blog is NJ Voices. John’s one of us. That is, he’s in the retirement plan business. He’s an Enrolled Actuary with his own firm in Montclair, New Jersey. He’s also a community activist who writes regularly about state, county and local government including the New Jersey state pension plan. And if you read his posts, he is – with all due respect – an actuary with attitude. And, in my opinion, that’s a good thing.

Jack Dean is on the other side of the country in California. He edits Pension Watch. He also edits PensionTsunami.com, a project of FACT — the Fullerton Association of Concerned Taxpayers. FACT’s primary focus is on California’s public employee pensions and the state’s funding issues.

Hat tip to Mr. Dean for his post about Dilbert, Unfunny Pension Issue Hits the Funnies. 

GAO issues new report on fiduciary obligations of 401(k) plan sponsors

By Jerry Kalish on Posted in 401(k) Plans

The Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. The GAO investigates how the federal government spends our taxpayer dollars and has often been called the “congressional watchdog,”

I blogged about the GAO just the other day in my post, Getting ready for the first wave of Baby Boomers reaching retirement age: the Social Security Administration’s big challenge. That post discussed the GAO’s report assessing how the Social Security Administration’s reduced workforce will manage the increased number of Social Security recipients as the Baby Boomers retire.

401(k) plans have also been on the GAO’s project list with particular emphasis on the fiduciary aspects of ERISA. Back in December, 2006, I blogged that GAO’s 401(k) fee report, Congressional comments picking up buzz in local papers. The political result of that report was the introduction of legislation in Congress requiring more fee disclosure. That legislature was put on hold when Congress adjourned while the Department of Labor has made significant regulatory initiatives in this area.

All this is background for the most recent GAO report issued last month, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors Highlights of GAO-08-774, a report to the Chairman, Committee on Education and Labor, House of Representatives. While it doesn’t break any new ground, it does provide an excellent overview of where the retirement plan industry is now with respect to:

  1. Common 401(k) plan features, which typically have important fiduciary implications, and factors affecting these decisions.
  2. Challenges sponsors face in fulfilling their fiduciary obligations when overseeing plan operations.
  3. Actions the Department of Labor takes to ensure that sponsors fulfill their fiduciary obligations, and the progress Labor has made on its regulatory initiatives.

The GAO also renews its recommendations to Congress to pass legislation that would help the Department of Labor’s fiduciary oversight. From the report’s conclusion (and note the section I have highlighted in italics):

Since our 2006 report, Labor has made progress on its disclosure initiatives but some important fiduciary issues have yet to be fully addressed. In our previous reports, we asked Congress to consider amending ERISA to (1) explicitly require 401(k) service providers to disclose to plan sponsors the compensation they receive from other service providers and (2) give Labor authority to recover plan losses against certain types of service providers, even if they are not currently considered fiduciaries to that plan under ERISA. While Labor has proposed a regulatory change that could eliminate some of the confusion surrounding certain fiduciary obligations, it is unclear how closely the final regulation will follow the proposed rule. We continue to believe that changes to ERISA would help Labor in its efforts to promote sponsors’ fiduciary oversight and be in the best interest of participants.

Here’s the link to the complete report, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors.

 

Which way to the best retirement plan?

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

Just recently, I thought that it might be the dog days of summer as far as setting up a retirement plan is concerned.

But it may be the “retirement plan season” is here after all – at least in the minds of our fellow bloggers at Slate magazine’s BizBox blog. Their post today is What Retirement Plan Should You Offer? 

So let me take a stab at answering. One way to answer it is to start with the types of retirement plans that are available:

  • Payroll Deduction IRA
  • Simplified Employee Pension (SEP)
  • SIMPLE IRA Plan
  • 401(k) Plan
  • SIMPLE 401(k) Plan
  • 403(b) Plan 
  • Profit-Sharing Plan
  • Money Purchase Plan
  • Defined Benefit Plan

The Internal Revenue Service provides excellent thumbnail sketches on their website, Choosing A Retirement Plan: Retirement Plan Options. But that’s really taking the horse before the cart. The starting point, we believe, should be the business owner answering two questions:

  1. What is my objective? Is it to maximize my own contributions, or is it to attract, motivate, and retain the high performing employees I need to grow my business? Or, is it a combination of both?
  2. Where am I in the life cycle of my business? Is my business in a start-up, fast growth, stable growth, or transition/exit stage?

Then, he or she will be able to decide upon the “best plan” or combination of plans that fits their circumstances at this time. A decision that should be periodically reviewed on a regular basis once a retirement plan is put in place. 

Which Way? quilt pictured above via Doodle’s Quilts.
 

Getting ready for the first wave of Baby Boomers reaching retirement age: the Social Security Administration’s big challenge

By Jerry Kalish on Posted in Social Security

Over the last several years, the Social Security Administration (SSA) has been faced with staffing reductions and an increased demand for services challenging its field offices to manage work while continuing to deliver quality customer service.  Now consider that the first wave of approximately 80 million baby boomers is reaching the age of retirement eligibility, and the SSA has a massive challenge ahead of it.

So how is the SSA going to manage this challenge? That’s what Congress wants to know and the Senate Finance Committee asked the U.S. Government  Accountability Office (GAO) to find out. The GAO is an  independent, nonpartisan agency that works for Congress. The GAO investigates how the federal government spends our taxpayer dollars and has often been called the "congressional watchdog,".

The GAO’s recent report, Social Security Administration Field Offices: Reduced Workforce Faces Challenges as Baby Boomers Retire, assesses how the SSA is managing these challenges to determine:

  1. The effect that reduced staffing levels may be having on field office operations
  2. The challenges that SSA faces in meeting future service delivery needs

This statement is drawn from GAO’s ongoing study on field offices for the Committee which is expected to be issued later this year. But for now, here is what the the GAO found:

Growth in claims from the nation’s baby boomers and a retirement wave of its most experienced staff may pose serious challenges for SSA if the agency does not have a clear plan. The first wave of approximately 80 million baby boomers is reaching the age of retirement eligibility, and SSA estimates that retirement and disability filings will increase the agency’s work by approximately 1 million annual claims by 2017. To further compound this challenge, SSA projects that 44 percent of its workforce will retire by 2016. Because retirements will occur among the agency’s most experienced staff, this will have a serious impact on field offices’ institutional knowledge. SSA is planning on hiring an additional 2,350 new employees this fiscal year for regional and field office operations, almost all of whom will go to the field offices. Agency officials stated, however, that it typically takes 2 to 3 years for staff to gain the experience they need to function independently. SSA is using various strategies to recruit new employees to fill knowledge gaps. SSA is finalizing its Annual Strategic Plan which will describe the agency’s strategies for addressing these issues.

Here is a link to the full report (PDF, 26 page).

Photo above by Maya Hasson via flickr.
 

January 1, 2009 is tip-off time for new 403(b) regulations, but switch to 401(k) is option

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

See full-size image

 403(b) plans are going to look a lot like 401(k) plans starting January 1, 2009 when the new final regulations become effective. (See my posts last year, If it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b) Part 1 and Part 2). 

Non-profits can generally also sponsor a 401(k) plan, and some are considering making a switch. But while the plan document requirement is now common to both, there are some important differences that non-profits should consider about making a change. Here are just a few:

  • Discrimination Testing. 401(k) plans are subject to testing. 403(b) plans are not, but must make deferrals "universally available".
  • Investment Options. 401(k) plans have a wide-range of investment options. 403(b) plans are restricted to custodial accounts invested in mutual funds or annuity contracts issued by insurance companies.
  • Catch-up Contributions. Qualifying 403(b) plans can permit up to an additional $3,000 in catch-up contributions by eligible employees in addition to the $15,500 and $5,000 catch-up limits applicable to both types of plans.

It’s a little more involved than this, of course., and here’s a link to Ft. William’s more comprehensive discussion of the choices, Should Nonprofits Switch From 403(b) to 401(k).

Picture credit:  Artist Robert L. Barnum’s Jump Ball, a sculpture on Ferris State University’s Michigan Art Walk in Big Rapids, Michigan.  

It may be the dog days of summer, but sooner rather than later may be better for setting up a retirement plan

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

dog days 100For those of us who work with business owners, we buckle up our seat belts during the last quarter of the year. Buckle them up a little tighter in December, and tighter still at actual year end.

We call it the “retirement plan season”, the time when many business owners decide to set up a retirement plan before the year end deadline. We’ve “celebrated” New Year’s Eve on more than one occasion by waiting for a signed plan document to be faxed or emailed to us.

It’s not that business owners aren’t usually aware of what a qualified plan retirement plan can accomplish, but procrastination is part of human nature – and sometimes a business owner’s nature. He or she may say, “I’m going to wait until year end to put a retirement plan in place since I can still get the tax benefits for the whole year.” The owner (and maybe even the accountant) believes that setting up a retirement plan today, next month, or at year end are all the same thing.

That ain’t necessary so. There can be a real cost of waiting until the year end deadline. Here are some reasons why sooner rather the later is the time to set up a retirement plan.

1. Not enough compensation for a shareholder-employee of an S corporation.

Many owners will minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. (Not always looked on kindly by the IRS who may say that isn’t “reasonable compensation” as discussed in an earlier post, “So now what exactly is ‘reasonable compensation?’). However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.

2. Not enough time to maximize 401(k) contributions.

Adopting a 401(k) 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.

3. Timely notice not given 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 who does not give the requisite termination notice by November 1, 2008 means no profit sharing/401(k) plan for 2009. An employer with a SIMPLE should keep November 1, 2008 in mind if a different plan type is intended in 2009.

Timing can be everything.

Elder law, new legal specialty, addresses Social Security and other concerns of aging population

By Jerry Kalish on Posted in Social Security

The elderly are the fastest growing part of our population. They’re more active and living longer than every before, and as a result they have legal needs and concerns that prior generations haven’t faced. And a new field of the law is evolving to address those needs and concerns.

It’s called Elder Law and it combines estate planning, wills and trusts, guardianship, elder rights, health care planning, and Social Security. And one of the elder issues on the minds of virtually every Boomer becoming eligible for Social Security is “when should I start taking Social Security benefits?”

I addressed a part of that issue recently in my post, Social Security "early bird special" taken by most married men. The decision to take early Social Security benefits would result in a reduction in a wife’s survivor benefits.

Someone who has, however, addressed the totality of the Social Security decision is Richard Kaplan, a law professor at the University of Illinois College of Law, who teaches elder law. Professor Kaplan, a prolific author on elder law issues, has just had published, A Guide to Starting Social Security Benefits, that appeared in the July-August, 2008 issue of the Journal of Retirement Planning. Here is the Abstract of his article:

When a person should begin taking Social Security retirement benefits is a critical question for planning one’s retirement. This article explains the various factors at play in determining the optimum starting point, including: longevity considerations; spousal implications, whether for a previously employed or a previously unemployed spouse; the impact of post-retirement employment; the availability of health insurance prior to Medicare eligibility for the worker and the worker’s spouse; alternative sources of retirement income, including distributions from retirement savings plan assets and lifetime liquidation of nonretirement assets (and the pertinent income tax ramifications); and anticipated investment strategies.

Here is a link to download Professor Kaplan’s complete article from the Social Security Research Network (free but registration required).

Hat tip to Rick Bales, my fellow blogger, one of the Editors at Workplace Prof Blog.

Defined benefit plan seminar handout available for download

By Jerry Kalish on Posted in Cash Balance Plans, Defined Benefit Pension Plans, Events, Publications, Seminars and Speaking Engagements

Here is the link to my presentation handout (43 pages, PDF) for the August 5, 2008 Seminar, Defined Benefit Pension Plans: What’s Old is New Again and better than ever. This was a 3 hour continuing education seminar sponsored by the Lanny D. Levin Agency, Inc., a General Agent for the Guardian Life Insurance Company.

If you’re wondering about the picture up top, that’s Fleetwood Mac ("new website coming soon") who after many years apart are getting back together and will be touring next year. And just like defined benefit pension plans: what’s old is new again and better than ever.

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