Good news: “Household wealth rises as retirees age”, or is it?

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

This is one of those Good News/Bad News stories. The Wall Street Journal on March 27 reported that “Household Wealth Rises as Retirees Age” citing a paper posted on the Federal Reserve’s website. The Journal quotes the authors as saying that adjusted for inflation,

The median’s household’s wealth declines more slowly than its remaining life expectancy, so that real annualized wealth actually tends to rise with age over retirement (emphasis mine).

Good news, right? Well, maybe not. The authors defined “annualized wealth” as stocks and homes, the value of Social Security, defined benefit pensions, and transfer payments like Food Stamps.

Ain’t government economics grand?

Here is the link to the story in the Journal.

Divorce: the next Boomer frontier and its impact on retirement

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

Add one more trend to Boomer demographics. Recent research has revealed that Boomers continue to push the limits regarding the prevalence of divorce. While just 33% of married adults from the two preceding generations has experienced a divorce, almost half (46%) of all married Boomers have already been divorced. They will be almost certain to become the first generation for which a majority has been divorced.

And a big part of the divorce, of course, is dealing with retirement assets acquired during a marriage which are considered marital property in most states. Consumer Reports/Money Adviser’s experts say that it is important to know the following:

  • Find out who has what. figuring out what retirement assets an individual owns should be easy, but finding the spouse’s might require some digging.
  • Get documents in order.
  • Consider tax ramifications.
  • Protect survivor’s benefits.
  • Change beneficiaries.
  • Monitor any distributions.

The complete report as covered by The Morning Call can be found here.

The ERISA part can be found in my post, Dividing retirement benefits on divorce, and what ERISA has to say about it.

ERISA. It’s not elementary

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

That’s Basil Rathbone, of course, portraying Sherlock Holmes,  in one of the many reruns of the  Holmes’ movies I used to watch as a kid on Sunday mornings on our non-flat screen, non-color TV set.

Little did I know that years later he would add to the growing research on expert behavior. It’s an important issue for fiduciaries who must select service providers to help manage their retirement plans. Tim Burns, writing in his Fiduciary Investor Blog, provides us some excellent direction in his post, Selecting Investment Experts-I. (Tim promises us a further post on the markers of investment expertise).

Sherlock Holmes fits into the search for excellence in an article in the February, 2008 issue of the British Journal of Psychology (Didierjean, André; Fernand, Gobet), Sherlock Holmes – an expert’s view of expertise. The researchers use the Sherlock Holmes character to illustrate expert processes as described by current research and theories, and then discuss a number of issues that current research on expertise has barely addressed. They conclude that “although nearly 120-year-old, Conan Doyle’s books show remarkable illustrations of expert behaviour, including the coverage of themes that have mostly been overlooked by current research.” Here is a link to the Abstract with the full text available for purchase.

See Mom, all that time watching TV wasn’t wasted.

More on Basil Rathbone: Here is a link to information on the 14 films in the Sherlock Holmes’ series featuring Basil Rathbone.  Also, here is a link to a wonderful video montage of Basil Rathbone as Sherlock Holmes, made by Julie, the Ravin’ Maven of Classic Film.

Hat tip to our friend, Christian Jarrett, the Writer and Editor of the British Psychological Society’s Research Digest Blog, "Cutting edge reports on the latest psychology research".

There’s no such thing as a bullet-proof 401(k) plan

By Jerry Kalish on Posted in 401(k) Plans

The Lawrence Berkeley National Lab calls KEVLAR® the "Wonder Material" on it’s website because of its strength. The material is used by law enforcement, the military, and by civilians.

Police wear bulletproof vests made of KEVLAR® which we know from watching cop shows. The U.S. Navy uses KEVLAR® cables to support sonar facilities to find out how much noise submarines make because it is 20 times stronger than steel under water. And windsurfers use sails that are made with KEVLAR® which can withstand the force of 60 mph winds and don’t rip easily.  But unfortunately, we can’t use the Wonder Material to make a 401(k) plan.

LaRue, understandably, has brought out all the pundits. A few have suggested the best protection is allowing participants to self-direct their investments, a few have suggested not allowing participants to self-direct, and a few have said to not permit self-directed brokerage accounts. 

But in my opinion, most of the commentators have nailed it. It’s not about the structure, it’s about process. Specifically, "procedural prudence", a concept that has been part of the fiduciary world long before ERISA.

But what exactly does it mean? In my view,  it’s having a process in place that can answer the following questions about plan investments:

  • Is there an investment policy statement?
  • What objective criteria were used to evaluate the investments?
  • What was done when a choice failed to meet the criteria?
  • What other service providers were considered?
  • How were the employees educated?

Questions that might be asked by the Department of Labor or plan participants (or their attorneys). It’s both risk management and prudent management.

Yes, it’s that simple, and that difficult.

KEVLAR® is a registered trademark of E.I. du Pont de Nemours and Company.

 

How not to hire a 401(k) service provider

By Jerry Kalish on Posted in 401(k) Plans

Just to your left is a picture of one of the 10 vehicles damaged in a parking lot at a hospital by a fire that started in the trunk of someone’s car. Fire firefighters suspect that fumes built up inside the trunk and were ignited by an electrical source, such as the taillights or brake lights. The gas containers did not have the lids on tight. They only had the spouts with caps, which would allow vapors to leak.

You can see this visual metaphor coming a mile away, can’t you? It’s about plan sponsors making good decisions, one of which is the selection of 401(k) service providers. LaRue has retirement plan sponsors refocused  on that – or they should be. LaRue, after all, was about a participant who claimed that the plan’s fiduciaries failed to follow his investment instruction to sell securities. This failure, he claimed, resulted in a loss of $150,000 in the value of his account.

Selecting 401(k) service providers in a prudent manner (it is, in fact, a fiduciary function) may avoid such problems down the road. And so, here’s just a short list of how plan sponsors should not select 401(k) service providers. 

  • Not understanding service and investment models
  • Not understanding fees
  • Not listening to employees about what matters to them
  • Making the decision-making based solely on company politics and other relationships
  • Looking solely at “costs”

It’s a new day out there, folks.

Picture credit: How Not to Transport Gasoline on the Naval Safety Center website. 

April 1 is deadline for RBD for RMD

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

One of those wonderful tax benefits that a qualified retirement plan and IRA provide is the tax deferral of contributions and earnings. But nothing lasts forever including the payment of benefits (and the taxes thereon).  So the tax laws require RBDs and RMDs. That’s tax talk for  “required beginning date” and “required minimum distribution” respectively.

The law requires that certain minimum benefits from a qualified retirement plan and IRA (the RMD)  must commence no later than the participant’s RBD which generally speaking means the April 1 of the calendar year following the calendar year in which he or she reaches age 70 ½. Got it? And except, of course, when it  isn’t required.

Obviously, it’s a complicated set of rules, and taxpayers should always consult with a qualified tax adviser. Failure to meet the requirements can be expensive: an excess accumulation tax of 50%  of the required distribution that the participant didn’t take.

Here is a link to an excellent explanation of RBDs and RMDs by McKay Hochman.

Retirement planning vs. March Madness(R)

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

It starts tonight, the 2008 NCAA Men’s basketball tournament (the play-in game between Mt. St. Mary’s and Coppin St. with the winner having the dubious honor of playing North Carolina on Friday). And a lot of money is going to be lost. No, not just by most of the bettors, but by employers whose employees will be focusing more on the games than on work.

However, according to a recent survey by the Lincoln Retirement Institute, a research arm of Lincoln Financial Group, employees will be spending more time thinking and planning for retirement than focusing on the tournament. Their survey indicated that 72% of those surveyed will spend less than one hour in making their picks while 87% said that they will spend up to 5 hours in March thinking about and planning for retirement.

But if I were a betting man, I’d put my money on Jim Challenger’s view. Mr. Challenger, CEO of outplacement firm Challenger Gray & Christmas, Inc., estimates that the NCAA basketball tournament could cost employers $1.7 billion in wasted work time over the 16 days business days of the tournament. His estimate is based on 37.3 million workers in office pools and 1.5 million watching games online at their desks.

More time spent, I would guess, than checking 401(k) balances online.

 

“Decumulation”: a concept about which you will hearing more

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

See full-size image.

“Decumulation”, in definitional terms, means the conversion of pension assets accumulated during an employee’s working life into pension income to be spent during retired life. But in practical terms, decumulation embodies a significant new risk for the record number of future retirees moving from the accumulation phase of their lives to the distribution phase. The actuaries call it “longevity risk”. But those of us in the financial service industry simply call it “running out of money”.

It will require a major change in thinking for them. Away from concepts which have been discussed as part of most 401(k) providers investment education programs: asset allocation, dollar cost averaging, and the cost of waiting. But rather requiring them to think about having to make a whole new set of decisions such as:

  • Whether to continue to work
  • When to apply for Social Security benefits
  • What to do, if anything, about housing
  • What choices to make about insurance and health care
  • How financial assets should be invested
  • What distribution options to take from employer retirement plans and IRAs

So you’ll be hearing more about "decumulation" as it becomes a major focus of future research, public policy, and financial services.

Picture credit: Water Secrets Blog.

What do employee ownership and hedge funds have in common?

By Jerry Kalish on Posted in Employee Stock Ownership Plans

Employee owners in Europe and the U.S. now hold approximately 1.260 billions Euro (1.934 billion US Dollar) quite similar to the global capitalization of all hedge funds across the world in 2007 (1.160 billions Euro (1.780 billion US Dollar). Any further comparisons are a matter of opinion.

Hat tip to our friend Marc Mathieu, Secretary General of the European Federation of Employee Share Ownership.

“Orphaned 401(k) accounts” and LaRue

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

I had never heard the term "orphaned 401(k) accounts" until I came across the survey, Competing in the Retirement-Dominated Future, which I referenced last month in my post, Banks Lag Far Behind in Race for Boomers’ Retirement Dollars. The survey used the term in referring to those 401(k) accounts still held in plans of previous employers.

The numbers are huge. According to the survey research, more than a third of mass affluent households have at least one orphaned 401(k) account with an average balance of over $100,000. Total amount of assets in orphaned 401(k) accounts: in excess of $1 trillion.

Does this put LaRue into perspective?

Note: The survey, Competing in the Retirement-Dominated Future, was conducted by BIA Research, a professional organization focused on enhancing employee and organizational performance, and Mercatus LLC, a financial services with  strategy and investment firm. They surveyed 2,997 "mass affluent individuals"– those with investable assets between $50,000 and $2 million who are between 35 and 70 years old – to better understand how they prepare for retirement and to provide banks with insights to reestablish their footing in the retirement marketplace.

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