¡Three Amigos! of 401(k) fee disclosure opening at a retirement plan near you soon

By Jerry Kalish on Posted in 401(k) Plans

It didn’t have a big box office in 1986 when it was released, but the ¡Three Amigos! movie has gone on to become a comedy classic. And how could it not, 

Now let’s fast forward 22 years to today’s headline, ¡Three Amigos! of 401(k) Fee Disclosure Opening At A Retirement Plan Near You Soon. And in the starring roles (drum roll please) will be:

1. New Reporting Requirements for Schedule C of the 2009 Form 5500. Effective January 1, 2009, the Department of Labor (DOL) will be requiring new and extensive disclosures for service provider fees and other compensation. How extensive? See for yourself. Here’s a link to the DOL’s FAQs About The 2009 Form 5500 Schedule C. Nick Curabba on Baker & Daniels’ Benefits Biz Blog gives us some help in his post, DOL’s New Thinking on Schedule C.

2, The DOL’s proposed amendments to the service provider fee disclosure regulations under Section 408(b)(2) of ERISA. The new regulations mandate disclosures of compensation and conflcts of interest by plan service providers. The effective date will be 90 days after the final regulation is published in the Federal Register. It’s possible that the DOL will make the effective date coincident with the January 1, 2009 Schedule C date discussed above.

3. The DOL’s proposed regulations released July 23 that would impose new requirements for the disclosure of fee and expense information to participants in self-directed retirement plans, i.e., 401(k) plans.  The proposed regulations would be effective for plan years beginning on and after January 1, 2009. At the same time, the DOL proposed changes to the regulations under Section 404(c) of ERISA that would incorporate these new disclosure requirements.

The DOL is, of course, the producer/director of these new ¡Three Amigos!.  But unlike the original, this isn’t a comedy. And unlike the orignal, viewing isn’t discretionary – it’s required.

 

 

Will Form 5500s reveal outdated fidelity bonds or retirement plans without bonds at all

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

July 31st, is of course, the due date (unless extended) for calendar year retirement plans required to file Form 5500 for the 2007 plan year. And, as in the past, there will be a number of plan sponsors who have to indicate on the 5500 thay they have outdated fidelity bonds or none at all.

One of my 2006 posts, It’s Bond. Fidelity Bond, discussed the then requirements. My attempt at humor aside, it is a serious matter. There’s still time for plan sponsors who aren’t in compliance to do so before filing. 

Here’s a link to our Briefing in Q & A format (PDF) on fidelity bond requirements updated for the Pension Protection Act of 2006.

Now they see it, now they don’t: The Social Security beneficiaries who had over $177.7 million (and still counting) in benefits garnished by banks for third party creditors

By Jerry Kalish on Posted in Social Security

Lost in the ocean of billions of dollars from the recent financial scandals and disasters has been the illegal practice of banks garnishing Social Security and disability payments for third party creditors.

Social Security beneficiaries have had the above-mentioned $171.4 million taken from their account that received direct deposits, plus $6.3 million more from accounts that contained only Social Security benefits.

There was been very sparse media coverage of the findings of an investigation conducted by the Inspector General (IG) of the Social Security Administration (SSA). Those findings were published earlier this month in the CONGRESSIONAL RESPONSE REPORT: Financial Institutions Deducting Fees and Garnishments From Social Security Benefits (PDF, 45 pages).

The fee reference, by the way, was the IG’s finding that in some cases banks would freeze accounts and charge penalty fees after the freezes – in excess of $1 million just between September 2006 and September 2007.

It’s just a drop in the bucket of the billions mentioned above, but not if you were one of the Social Security beneficiaries affected. And as mentioned above it’s illegal.

The Social Security Act (Act) provides that

The right of any person to any future payment under this title shall not be transferable or assignable,7 at law or in equity, and none of the monies paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

There are five exceptions, however, which does not include the garnishments currently being done. The Act:

  1. Allows the enforcement of child support and/or alimony for the support and maintenance of a child subject to, and in accordance with, State or local law.
  2. Allows the Internal Revenue Service to collect unpaid Federal taxes.
  3. Allows beneficiaries to elect to have a percentage of their benefits withheld and paid to the Internal Revenue Service to satisfy their Federal income tax liability for the current year.
  4. Allows benefits to be withheld and paid to another Federal agency to pay a non-tax debt the beneficiary owes to that agency.
  5. Authorizes the Internal Revenue Service to collect beneficiaries’ overdue Federal tax debts by levying up to 15 percent of each monthly payment until the debt is paid.

So how is the Act enforced? Not very much. The SSA interprets the Act such that its responsibility ends when it pays the beneficiary. And there are very few states that do offer protection: California and Connecticut. The Governor in New York is expected to sign a bill that is similar to the one in those two states. It would protect up to $2,500 of a depositor’s account from being frozen if benefits are being received via direct deposit.

My suggestion to fix the problem? Impose that same standard of non-alienation or assignment of benefits as is required under ERISA. Beneficiaries should be treated as beneficiaries!

Postscript: One of the few financial writers to pick up on the IG’s report was Laura Rowley who wrote in her July 16, 2008 column for Yahoo!(R) Finance that Banks Continue to Prey on Social Security Recipients. She was also way ahead of other financial reporters in her November 15, 2007 column, Unholy Alliance Fleeces Social Security Recipients. Ms. Rowley’s column is called Money & Happiness, the same name as her blog and book. And finally, a hat tip to My Retirement Blog (no relation) for their post on this subject.

“Why do spouses have to be the automatic beneficiary of a retirement plan?”

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

That’s a question posed to me the other day in an email from one of this blog’s readers. It’s an interesting question, both from a historical standpoint and in the current political environment in which women’s issues are an important component. So here’s the answer for all to see.

Let’s set the dial on the ERISA  Wayback Machine to 1984, a year (aside from the obvious reference) in which there were many memorable events. One of which occurred on October 5, the day that Astronaut Kathryn D. Sullivan, Ph.D. became the first U.S. woman to walk in space.

And that’s an intentional segue to get to the question at hand. 1984 was the year in which women’s issues were paramount in the nation’s political consciousness. It was the year in which Geraldine Ferraro , the Democratic Representative from New York, became the first – and, to date, only – female Vice Presidential candidate representing a major American political party.

Rep. Ferraro was one of the driving forces behind the passage of the Retirement Equity Act of 1984 (REA) which amended ERISA to include important economic protections for women. Under prior law, a widow may have found herself without continuing benefits because her husband signed away her rights without informing her. At that time, an employee could legally opt out of survivors’ benefits without informing his or her spouse.

This would increase the payments to the retiree during his lifetime, but offered no security for the surviving spouse. REA amended Title I of ERISA to require written consent of both the employee and his or her spouse to waive the survivors’ annuity option in a defined benefit plan. Under certain conditions, this rule also applies to defined contribution plans.

If you’re interested in economic history, here is a link to the booklet, The Retirement Equity Act of 1984: Its Impact on Women, published in 1986 by the Education Resources Information Center (ERIC), the world’s largest digital library education literature. ERIC is sponsored by the U.S. Department of Education, Institute of Education Sciences (IES).

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

Defined Benefit Pension Plan Seminar for Financial Advisers

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

On Tuesday, August 5, 2008, I will be a co-presenter at the following seminar:

"GUARDIAN UNIVERSITY"
Tuesday, August 5, 2008
THE LANNY D. LEVIN AGENCY, Inc.

DEFINED BENEFIT PENSION PLANS:
WHAT’S OLD IS NEW AGAIN – And Better Than Ever!
(3 hours CE credit approved for Illinois Insurance Producers)

Speakers:
Jerry Kalish, National Benefit Services, Inc.
Lanny D. Levin, CLU, ChFC, LANNY D. LEVIN AGENCY, Inc.

Some of the topics:

  • Legal and IRS update on 412(i) Plans [now 412(e)(3)]
  • Larger deductions for traditional defined benefit plans under new funding rules
  • The “green light” given to cash balance plans by the Pension Protection Act
  • How profit sharing/401(k) plans can be combined with cash balance defined benefit plans to leverage significant benefits for owners and highly compensated employees
  • How life insurance fits into all three types of defined benefit pension plans
  • Case histories

Coffee & Rolls at 8:00 a.m.
Class begins promptly at 8:30 a.m. (ends at 11:30 a.m.)
Oakton College Business Conference Center, Golf Road, Des Plaines (just west of I-294)

Enroll here, or
FAX registration form (PDF), or
Call Allen Flynn (847) 266-2243 or Email allen_flynn@levinagency.com
(Your Associates and Professional Advisors are also welcome)

The history of Social Security (as we know it today)

By Jerry Kalish on Posted in Social Security

See full-size image

Social Security, it seems, is always in the news. And with the Presidential election process starting to heat up, it is, of course, a major campaign issue. So if you’re interested  in this issue (and you should be), how do you sort your way through all the clutter, the smoke, the mirrors, and the rhetoric? In the words of George Harrison, if you don’t know where you are going, any road will take you there.

So here’s a starting point. It’s an exceptionally well written four-part series on Social Security written by Glen Barr that focuses on how the system actually affects retirees. Mr. Barr’s articles appeared in the Crestline Courier News, a small newspaper serving Lake Arrowhead, California and surrounding communities. (In the "for-what-its-worth-department", Lake Arrowhead is also the Official Home of American Idol Camp).

Mr. Barr writes:

  1. SOCIAL SECURITY: Golden Years or Fool’s Gold? How and why the system got started and its long-term prospects.
  2. SOCIAL SECURITY: PART TWO Politicians Clash. What government, as well as leading presidential candidates, would do to fix the problem, and how much of their Social Security checks future benefit applicants can expect to keep.
  3. "Windfall’ Rule Enriches Feds in Name of ‘Fairness’. Possible benefit cuts for individuals also receiving state or government benefits.
  4. Can Retirees Afford to Work? The cost of losing Social Security benefits by going back to work.

History Matters Mug available from the Minnesota Historical Society.

Terminated 401(k) plans, now what?

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

Two recent 401(k) plan terminations in our little corner of the retirement plan world does not a trend make. But it’s a sign that the economic slowdown is also affecting plan sponsors.

Two clients who had not made employer contributions for some time decided that because of the relatively few employees contributing, it simply was not worth the time, trouble, expense, and fiduciary responsibility to continue. Employee account balances will be distributed, and hopefully rolled over to IRAs.

So now what? Nick Curabba in his post, Ways and Means Committee to Discuss IRAs, on Baker & Daniels‘ Benefit Biz Blog discusses one public policy solution to the retirement savings issue.  Mark Iwry, a former Treasury Department official is advancing the new idea of requiring employers to default employees into an "automatic" payroll deduction IRA.

I blogged about Mark before in my post, 401(k) Automatic Enrollment or How to Overcome Employee Inertia. Mark is now involved with helping make automatic enrollment happen and "simpler". He is the Managing Director of the Retirement Security Project (RSP) and Nonresident Senior Fellow at the Brookings Institution.

While serving in the U.S. Treasury Department, overseeing the regulation of the nation’s private pension system, Mark led the government’s initiative to define, approve, and promote automatic 401(k)s beginning nearly a decade ago.

But ten years is too long a time period as an answer to "now what?".

What’s old is new again: commuter benefits under Section 132

By Jerry Kalish on Posted in Commuter Benefits

The results of a recent survey by Putnam Investments come as no surprise to those of us that are involved with 401(k) plans on a daily basis.

Putnam found that because of the current downturn in the economy employees are putting away less money in their 401(k) accounts: 21% of 401(k) participants are now contributing at a lower rate and 4% have stopped altogether.

But there is a way employers can help employees put more dollars in their paychecks at no additional expense to them. In fact, tax savings are available to both employers and employees.

So what is it, and how does it work? It’s an oft forgotten program that allows employers to offer employees the opportunity pay for certain transportation expenses on a pre-tax basis under Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century (TEA-21).

Pre-tax means before income taxes and FICA. Pre-tax benefits are valuable to employees because they effectively increase take-home pay. These benefits are also valuable to employers because the employer avoids paying its share of FICA.

Qualified transportation expenses generally include payments for the use of mass transportation, e.g., train, subway, bus fares), and for parking. Amounts are indexed for inflation. For 2008 the maximum monthly pre-tax contribution for mass transit is $115.00, and $220.00 for parking.

And there’s one more goodie. While Section 132 benefits are similar to the pre-tax flexible spending accounts available for medical expenses and dependent care under Section 125, there’s one important difference. The transportation benefit does not include a "use it or lose it penalty," as required with medical/dependent care flexible spending accounts.

 

The law of unintended consequences as applied to a business owner’s retirement plan

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

The late Robert King Merton, the distinguished American sociologist, published an article in the December, 1936 issue of the American Sociological Review titled The Unanticipated Consequences of Purposive Social Action. It’s since been popularized as The Law of Unintended Consequences. 

Kinda like, say, trying to drive through a flooded road in one of the storm ravaged parts of this country. Or in case of a business owner using the tax laws to exclude Non-Highly Compensated Employees (Non-HCEs) from his or her retirement plan if asset protection is a key objective.

Why? Because a retirement plan covering only the business owner and/or the owner’s spouse is not an ERISA plan, and does not  qualify for anti-alienation protections under Title I of ERISA. Put another way, what seems like a good idea at the time could turn out to be bummer.

What’s a 401(k) and 403(b) broker to do?

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

That’s the Stock Broker, one of the many characters voiced by Wally Wingert on Family Guy, the animated television sitcom created by Seth MacFarlane and airing on Fox.

If you’re not up on pop culture, the show centers on a dysfunctional family that lives in the fictional town of Quahog, Rhode Island. In the real world of small 401(k) plans and 403(b) plans, however, a broker/adviser/consultant is a critical element in the retirement plan’s ultimate success. And in most cases, his or her compensation is in the form of commissions.

Bob Toth talks about this in the context of 403(b) plans in his recent post, 403(b) Commissions: In Defense Of (Reasonable) Compensation, on Baker & Daniels‘ Benefits Biz Blog:

I do not argue in defense of those unethical salesmen who sell the wrong product at the wrong fee to the wrong person. There are employers and employees for whom some of the products are unsuitable. But, as we issue new RFPs to support the new regulations, we are finding that there are very real services being provided in this market.

The impeding 403(b) changes to which Bob alludes means that 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.

And so what will evolve with 403(b) plans are a set of best practices provided by the the most professional 401(k) brokers. Those individuals who:

  • Identify plan sponsor and participant needs
  • Manage the RFP process
  • Involve themselves in the process of changing service providers
  • Provide an investment policy statement
  • Assist with fund selection and performance monitoring
  • Conduct employee enrollment meetings
  • Provide assistance to individual participants
  • Continually involve themselves with the plan sponsor and the other service providers
  • Communicate rollover and other options to terminating employees

This ain’t Quahog, Rhode Island.

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