How to communicate 401(k) to Generation X

By Jerry Kalish on Posted in 401(k) Plans

Pardon my generation gap, but I don’t always effectively communicate the importance of saving for retirement to the Generation X employee. So the index card below is another way of "looking" at it. For us verbal folks, index cards are that old school analog method of organizing information. Jessica Hagy, however, uses the centuries-old 3-by-5 card (76 by 127 mm if you’re on the metric system) as a canvas to express her creativity.

You can see more of her work on her blog, Indexed, on which she uses charts, graphs, and Venn diagrams drawn on index cards to make social commentary in her own humorous way. She has a new book of the same name, Indexed, in which she’s taken 100 of her "greatest hits" and new material that expresses relationships better than most of us can express in words.

ESOP as an Exit Strategy: Presentation to Chicago Bar Association Financial Institution Committee

By Jerry Kalish on Posted in Employee Stock Ownership Plans, Events, Publications, Seminars and Speaking Engagements

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Exit strategies for business owners – particularly the baby boomers – is a matter to which they are giving increased attention. And so are their attorneys. Yesterday I participated in a continuing education program sponsored by the Financial Insitution Committee of the Chicago Bar Association for its members on this topic.

Our particular focus was ESOP as an Exit Strategy. I was joined by Grant McCorkhill, a Partner at Holland & Knight who specializes in transactional matters; and David Blum, a commercial banker and Vice President of First American Bank, an ESOP lender. We discussed:

  • Exit Strategies for the Business Owners
  • ESOP Essentials
  • How an ESOP Gets Done

Click here to download a copy of our presentation (PDF, 20 pages).

Employee ownership in the global economy

By Jerry Kalish on Posted in Employee Stock Ownership Plans

It’s a global economy, of course, and most of us – irrespective of size – are doing business outside the U.S. In our case, we have non-U.S. company clients with employees here. So I’m always interested what benefits non-U.S. companies are providing their employees in the home country.

I’ve posted before that employee ownership is not just for U.S. workers. The  European Federation of Employee Share Ownership (EFES), the leading voice of  employee ownership in Europe, has just published their first Annual Economic Survey of Employee Ownership in European Countries.

The main finding is that employee ownership is growing faster in Europe than expected. Projections are that employee ownership is going to double within the next 5-10 years, from 8.2 million employee owners to 16 million, from 26.2% of all employees in large European companies to 40-50%, and capitalization held by employees going to increase from 2.35% now to 4 – 4.5%.

Here is a link to subscribe to the EFES newsletter if you’re interested in more information about employee ownership outside the U.S. It’s also an opportunity for you to practice your Spanish, Italian, German, Dutch, Portuguese, Danish, Greek, Finish, Swedish, Hungarian, Polish, Bulgarian, Czech,Estonian, Latvian, Lithuanian, Romanian, Slovakian, Slovene, Turkish, Russian, Chinese, or Japanese.

What do modern art and a mutual fund prospectus have in common?

By Jerry Kalish on Posted in 401(k) Plans

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Both modern art and a fund prospectus can be totally incomprehensible. 401(k) participants may not be exposed to modern art, but they sure are provided mutual fund prospectuses – at least by those plan sponsors looking for 404(c) protection.

Understanding modern art will have to wait for an Art Apprec course. The Securities and Exchange Commission ("SEC") is trying to do something about making the fund prospectus more user-friendly.

Last November, the SEC proposed changes to the prospectus that would make it more streamlined while still requiring the funds to make the more complete prospectus available to investors. The deadline for submitting comments was February 28, 2008. Most were favorable. The mutual fund industry as represented by the Investment Company Institute (“ICI”) supports the SEC proposal. Commentators have projected the proposal to be finalized as early as this summer.

Sounds good, doesn’t it. But I’m a little bit concerned because of its name. It’s called a Summary Prospectus like that ERISA document that also has the word Summary in its name as in Summary Plan Description (SPD). Hopefully, the Summary Prospectus will not get the sometimes response by a plan participant who upon receipt of the SPD asks, Yes, but what does it mean?

Photo by shutterberry via flickr of Autumn Rhythm (Number 30), 1950 by Jackson Pollack.

National Institute on Retirement Security, new national organization, launches website and issues first Research Brief

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

Retirement is not about the proverbial gold watch any more. Today, our focus is on retirement security, and the newly created National Institute on Retirement Security (NIRS) is adding to the dialogue. The NIRS was established in in 2007 by the Council of Institutional Investors (CII), the National Association of State Retirement Administrators (NASRA), and the National Council on Teacher Retirement (NCTR).

Their goal was to create an organization "dedicated to fostering a deep understanding of the traditional pension system in the U.S.", and they’re off to a quick start. The NIRS has just launched their new website, nirsonline.org, and issued their first Research Brief, Retirement Readiness: What Difference Does A Pension Make?

The Brief written by Beth Almeida, NIRS’ first Executive Director, 

… reviews the evidence on the role DB pensions play in ensuring that older Americans have the resources they need to be self-sufficient in retirement. It examines recent trends in pension coverage and discusses the effect these trends have had on the state of retirement readiness among American workers. Finally, it points in the direction of areas worthy of exploration for policymakers seeking to address specific retirement security goals.

You can download the Brief here (PDF).

Social Security “early bird special” taken by most married men

By Jerry Kalish on Posted in Social Security

If you happen to be near a Texas Roadhouse (and there’s 300 locations in 44 states from which to choose) on any Monday to Friday from 3:00PM – 6:00PM, you can enjoy their Early Bird Special. That’s two hand-cut USDA Choice 8oz. sirloins and 4 made-from-scratch side items – all for only $16.99. Pretty good deal, and you don’t even have to be a senior citizen to take advantage of it.

Folks joke about these early bird specials at restaurants and the geriatric crowd they attract. But the Social Security "early bird special" is no joke if you happen to be one of the oldest baby boomers who are turning 62 this year. That "early bird special" is when you can start taking retirement benefits at this earliest eligibility age.

And about 50% of the Social Security eligibles are expected to claim their benefits as soon as they resulting in an estimated 25% reduction in benefits compared to waiting until full retirement age. If you’re a single male, then your decision only affects you. But if you’re married 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.

It’s a serious matter, and goes beyond the pop psychology of Men Are From Mars and Women Are From Venus. Recent academic research has focused on Why Do Married Men Claim Social Security Benefits So Early? Ignorance or Caddishness? I’m pleased to report on behalf of my gender that the reason was neither. Here’s how the researcher phrased it: 

Regression results found no association between early claiming and caddishness or the ability of husbands to make claiming decisions independently. The one statistically significant finding is the association of college education and later claiming, which cautiously take to indicate greater financial awareness.

It’s a public policy issue that needs addressing. It’s not going to happen overnight. So if you’re a married man eligible for Social Security (or for that matter anyone who is eligible), don’t make this important decision on your own. There are qualified financial professional out there who can help.

Now that we know exactly when 401(k) contributions have to be deposited, just who’s responsible for it?

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

We finally got clarity about when 401(k) contributions must be deposited when the Department of Labor (DOL) on February 28 announced a proposed safe harbor of 7 business days.  But it’s the DOL’s directive in Field Assistance Bulletin (FAB) No. 2008-01 on fiduciary responsibility for collection of delinquent contributions that will have more impact on fiduciaries.

I blogged about this FAB back in February in my post, In the shadow of LaRue, Department of Labor Issues a Directive on Fiduciary Responsibility for Collection of Delinquent Contributions. Looking back at it, it may have been a situation akin to someone asking me what time it was, and me telling them how to make a watch.

But Jim Farley, Director Retirement Research, Lord Abbett & Co., got to the heart of matter better than did I in his Guest Article, Contribution Timing and Collection Responsibility, a Q&A, for 401(k) Help Center. Here is an excerpt from about collection responsibility in Q&A format:

What must a plan sponsor do to fulfill its responsibility?

Essentially a plan sponsor must take action. The FAB points out that "authority over a plan’s assets subject to the trust requirement of Section 403(a) of ERISA…must be assigned to i) a plan trustee with discretionary authority over the assets, ii) a directed trustee subject to the proper and lawful directions of a named trustee, or iii) an investment manager." The trustee, especially in small plans, is often the business owner.

What if the fiduciary has not assigned responsibility?

The FAB answers this directly: "[I]f no trustee or investment manager has the responsibility, the fiduciary with authority to hire the trustees may liable for plan losses due to a failure to collect contributions because the fiduciary failed to specifically allocate this responsibility."

What about plans such as a SIMPLE IRA or SEP IRA that have no trustee?

The FAB answers this question via a footnote that states, "In the case of SIMPLE IRAs and SEPs, the plan sponsor generally will be a named fiduciary because the documents establishing the plan provide the employer with the authority with respect to management and administration of the plan…"

What happens when one trustee, who has no direct responsibility for collecting contributions, knows that contributions are delinquent?

ERISA has a section, 405(a) (3), that makes one trustee (fiduciary) liable for the breach (failure to perform assigned duties) of another trustee (fiduciary) if the trustee has knowledge of the breach of another unless the trustee makes a reasonable effort to remedy the situation.

The FAB points out various actions that could be taken including contacting the DOL, notifying other fiduciaries that contributions are delinquent or seeking a court order. It then says, "The documents and instruments governing a plan cannot serve to absolve a co-fiduciary from liability for failing to take steps to remedy a known breach of another fiduciary."

You can read Jim’s complete article by clicking here.

Solo 401(k) compliance can get lost in translation

By Jerry Kalish on Posted in 401(k) Plans

Click here for larger image.

They’re called Solo 401(k), Solo(k), and Individual 401(k). But by whatever name they are called, they provide an opportunity 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.

While 401(k) plans were introduced 30 years ago as part of the Tax Reform Act of 1978, the Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) made it possible for self-employed or small business owners to enjoy enhanced tax benefits. Staring in 2002, employers could contribute the maximum 25% tax deductible profit sharing contribution in addition to any pre-tax contributions made by an employee/participant. Pre-EGTRRA the employer had to reduce the profit sharing contribution by the amount of the 401(k) contribution.

The new rules applied to both incorporated and unincorporated businesses. Any business that employs only the owner and his or her spouse is a candidate-including C corporations, S corporations, single member LLCs, partnerships and sole proprietorships.

And now 8 years later, practically every major financial service company, e.g., insurance companies, brokerage firms, and mutual funds, offers a low cost Solo 401(k) plan. That’s the good news.

The trade-off is that a Solo 401(k) plan, like a regular 401(k) plan, must meet certain ERISA and Internal Revenue Code requirements. And one of those requirements is the obligation to file Form 5500-EZ if plan assets exceed $250,000. And here’s where there could be bad news.

But sometimes that requirement gets lost in translation, and a self-employed or small business owner whose plan exceeds that threshold doesn’t file the return. It may be because he or she missed the filing after being exempt for several years before the $250,000 threshold was crossed. Or it may be that the financial services firms at which these plans were established did not inform the self-employed or business owner of the filing obligation.

And here’s where the bad news can result. Delinquent Form 5500-EZ is not eligible for the Department of Labor’s Delinquent Filer Voluntary Compliance (DFVC) program which caps penalties at $750 for one delinquent Form 5500 and $1,500 for more than one year, however many years are involved. Thus, there is a potential $15,000 penalty for each delinquent year which plans with at least one non-owner can avoid. And many such plans with lots of employees do take advantage of the DFVC program.

Doesn’t sound fair, does it? It isn’t, and Alex M. Brucker, an attorney with the ERISA law firm Brucker Morra, sent an open letter to the IRS, The Time is Now to Remedy the Inequity Applied to American Small Businesses Respecting the Filing of IRS Form5500-EZ. And according to Mr. Brucker, the IRS is reevaluating the application of the DFVC program to self-employed/owner-only retirement plans. One can only hope. Here is the link (PDF) to his letter by way of BenefitsLink.

Picture credit: The picture above is Lost in Translation which can be found on the Art Day Out on-line gallery. It is hand painted by Brisbane, Australia artist and gallery owner Ania Rigato using artist quality materials and is presented on quality canvas stretched around a 35mm thick wooden frame. The painting continues around the edges allowing a modern frameless look.

Indiana basketball season over, “ESOP Season” begins

By Jerry Kalish on Posted in Employee Stock Ownership Plans

Indiana State Treasurer Richard Mourdock announced last Thursday a new state program to encourage the formation of Employee Stock Ownership Plans (ESOPs) in the state. The new program, called Indiana’s ESOP Initiative (ICI), will invest up to $50 million in state money in Indiana banks that specifically lower their interest rates in loans made to employee-owned businesses.

Here is the text of the Indiana State Treasurer’s May 8, 2008 press release:

State Treasurer Richard Mourdock announced the designation of $50 million and the launch of IEI for the purpose of assisting Indiana businesses to become ESOP companies, which will preserve Hoosier jobs.

It’s not only critical that the state continues to bring new jobs to Indiana, but it’s absolutely essential that Indiana keeps the jobs it currently has, asserted Treasurer Mourdock. IEI’s mission is to encourage Indiana businesses to become ESOP companies and preserve Hoosier jobs.

Treasurer Mourdock has placed the IEI within the Treasurer of States Office and has created an ESOP toolbox of information regarding current Hoosier ESOP companies, organizations that provide professional services to ESOP companies, and educational materials about ESOP governance.

The $50 million designated for IEI and its mission is set up as a linked-deposit program through the Treasurer of State’s Office. In the ESOP Linked-Deposit Program, the Treasurer of State will purchase certificates of deposit from local financial institutions at reduced rates of interest, and in turn the financial institutions will provide loans at reduced rates of interest to Indiana businesses becoming Hoosier ESOP companies.

The initial rate financial institutions will be charging to Indiana businesses through the ESOP Linked-Deposit Program will be 4.25%. The State of Indiana will not be a guarantor or man any of the risk of default on loans made under this program.

ESOP companies have a track record of creating wealth, encouraging the entrepreneurial spirit, and increasing productivity, explained Treasurer Mourdock. Furthermore, no group of employee-owners has ever, ever, ever, ever moved their company to Mexico or China!

Treasurer Muourdock says that there are slightly more than  200 employee owned businesses in Indiana, and he is hoping to have 20 additional businesses each year become employee owned.

Nothing but net!

Here is the link to the IEI and ESOP Linked-Deposit Program.

“Should I stay or should I go?” The factors influencing an employee’s decision to retire

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

https://youtube.com/watch?v=V1Gn0e7kvTA%26hl%3Den

It was 1982, and many of today’s baby boomers were listening to the song, “Should I Stay or Should I Go” that was on The Clash’s album, Combat Rock. According to NME, Mick Jones, the lead guitar on the song, wrote it about singer Ellen Foley, who sang the backing vocals on Meatloaf’s Bat Out Of Hell LP. The lyrics seemed to reflect the ups and downs of their relationship and whether to stick with it or end it.

Now let’s fast forward some 25 years later. Many of those boomers are asking the same question, “Should I stay or should I go?” But the relationship in question is with their employers. Should they continue to work or should they retire?

Watson Wyatt, the international consulting firm, provides insight on this important matter affecting not only employees but also their employers in the firm’s recently published Technical and Policy Paper, Predictive Factors for Retirement Timing. Here are the key findings:

  • Increases in all categories of wealth accumulation (e.g., retirement plan, housing equity and other financial wealth) increase the probability of retiring while good earnings prospects, implying high opportunity cost for retirement, induce continued employment.
  • The type of retirement plan available to workers has a significant impact on when they retire. Workers entitled to traditional DB plan benefits are more likely to retire than those who are not, while workers with significant assets from DC plans tend to significantly delay their retirement.
  • New evidence supports the hypothesis that business cycles (stock market booms and busts) increase the probability – and thus timing – of retirement for DC plan participants.
  • Health insurance (HI) has a large effect on the retirement decision. HI, if conditional on employment, strongly discourages retirement, while alternative sources of health insurance, such as employer-sponsored retiree HI, spouse’s HI or public HI, facilitate or encourage labor force exit.
  • The retirement behavior of older workers is significantly linked to Social Security policy. The ongoing increase in the normal retirement age for Social Security and the cohort-specific actuarial adjustment of SS benefits, as defined by the law, will encourage younger cohorts to work longer.

Here is a link to the page to download Watson Wyatt’s Paper (PDF, free registration required).

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