Department of Labor proposes safe harbor rule for deposit of employee 401(k) contributions…finally

By Jerry Kalish on Posted in 401(k) Plans

We had been waiting for this for some time: a safe harbor rule for the time by which retirement plan sponsors must deposit employee 401(k) contributions. On February 28, 2008, the Department of Labor (DOL) announced 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. The DOL said in its announcement that the department would not accuse a plan sponsor of an ERISA violation while the proposal is being finalized if 401(k) contributions are deposited within the 7-day time limit.

In addition, the DOL requested information and data regarding a possible safe harbor for plans with 100 or more participants to enable it to evaluate the current contribution practices of these large employers.

This "7-day safe harbor rule" will add clarity to "small plan" sponsors. Prior to the proposed regulation, many plan sponsors relied on the so-called "15-day rule". The rule required that employee contributions be deposited in the 401(k) plan on the earliest date that they can reasonably be segregated from the employer’s general assets, but not later than the 15th business day of the month following withholding or receipt by employer.

Except there never actually was such rule. The DOL had taken the view in its audits that the deadline under the timely standard almost always occurs prior to the 15th day of the month following withholding. The deadline in almost every case had turned out to no more than one to two weeks following withholding. In many cases, the DOL interpreted the deadline to be no more than a few days following withholding depending on the employer’s individual facts and circumstances, i.e., the manner in which payroll taxes are withheld.

Sounds reasonable doesn’t it? Well, maybe not according to Nick Curabba and Bob Toth in their blog post, A Potentially Dangerous ‘Safe Harbor’ on Baker & Daniels’ new blog, Benefits Biz Blog. They caution that:

As with any safe harbor, of course, the seven-day safe harbor could easily become the expected standard practice. We might even expect future investigations by the Department to focus on whether contributions were forwarded within seven days, rather than attempt to determine when assets were reasonably segregable. In other words, everything outside of the safe harbor could become dangerous waters for plan sponsors.

Mr. Curabba and Mr. Toth also cautioned about the potential for trouble in light of the DOL’s recent Field Assistance Bulletin 2008-01 that make Trustees responsible for the collection of employee contributions, a topic about which I wrote in my recent post, In the shadow of LaRue, Department of Labor issues a directive on fiduciary responsibility for collection of delinquent contributions.  

Click here to download (PDF) a copy of the proposed regulation.

“It’s for retirement stupid…”

By Jerry Kalish on Posted in 401(k) Plans

That’s the title of yesterday’s post by Eve Tahmincioglu on her blog CareerDiva. Eve writes about the disturbing trend of more 401(k) participants taking out loans. I’ve written about it myself, 401(k) Participant Loans on the Increase, But Not Always a Good Thing to Do.

Here’s what Eve has to say about it: 

Looking for a quick fix, which is your retirement savings, could spell doom. People, this is a temporary Band-aid, and it’s going to hurt when you have to rip it off.

You know, sometimes the direct approach is the best!

More about Eve. She’s the Your Career columnist for MSNBC.com, and author of the book, From the Sandbox to the Corner Office: Lessons Learned on the Journey to the Top.

Boomerang employees? No worries if employers keep ERISA rules in mind

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

They’re back! They’re employees who back in the day we called "rehires", those former employees who were hired back. Now they’re called "boomerang employees". Diane Stafford, the Kansas City Star’s workplace columnist, writes about the trend for employers to re-hire former employees as reported by Management Recruiters International, an executive search and recruiting firm. In her blog, Workspace by Diane Stafford, Ms. Stafford offers advice to these rehired employees in her blog post, Are you a boomerang?

It’s something I wrote about last year, "Boomerang" Workers and 401(k) Plans, from the employer’s perspective,  and I suggested that employers rehiring former employees keep the following considerations in mind.

  • Make sure that your plan and your Summary Plan Description clearly spell out how returning workers are treated. It’s ERISA, and everyone has to be treated the same.
  • Review how their vesting and forfeitures were handled when they left. Those same ERISA rules govern how non-vested benefits should be treated when an employee returns.
  • Use the appropriate eligibility rules to bring these employees back into your 401(k) plan. Those ERISA rules referenced above may – or may not – allow them to come in immediately.
  • Keep the recent changes to the Pension Protection Act in mind. The Act made changes to vesting schedules that may affect these employees.

As  Ms. Stafford points out, boomerang employees can be a valuable resource for employers. But employers should should plan for the benefit matters in advance.

The picture above of traditional Australian boomerangs is from the website of Dr. Hugh Hunt, Unspinning the Boomerang . Dr. Hunt, who hails from Melbourne, is a Lecturer in the Department of Engineering at Cambridge University, and a Fellow of Trinity College. 

In the shadow of LaRue, Department of Labor issues a directive on fiduciary responsibility for collection of delinquent contributions

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

See full-size image.

It didn’t get quite the attention that did the landmark Supreme Court ruling in LaRue v. DeWolff that defined contribution participants can bring fiduciary breach suits to recover individual damages. The "it" is the Department of Labor’s recent Field Assistance Bulletin (FAB) No. 2008-01, and it’s long-term implication may be as profound.

The Department of Labor (DOL) said that it issued its FAB after a number of pension plan investigations revealed:

  • Agreements that purport to relieve the financial institutions serving as plan trustees of any responsibility to monitor and collect delinquent contributions.
  • Circumstances where no other trust agreement or plan document assigns those obligations to another trustee or imposes the obligations on a named fiduciary with the authority to direct a trustee.
  • Plan documents and trust agreements silent or ambiguous on the matter.

The issue, said the DOL, is "what are the responsibilities of named fiduciaries and trustees of ERISA-covered plans for the collection of delinquent employer and employee contributions?"  The answer, said the DOL, is that

The responsibility for collecting contributions is a trustee responsibility. If a plan has two or more trustees, the duty may be allocated to a single trustee. A plan may also provide that a named fiduciary may direct a trustee as to this responsibility or may appoint an investment manager to take on this duty. To the extent the nature and scope of the trustee’s responsibilities are specifically limited in the plan documents or trust agreement, it is generally the responsibility of the named fiduciary with the authority to hire and monitor trustees to assure that all trustee responsibilities with respect to the management and control of the plan’s assets (including collecting delinquent contributions) have been properly assigned to a trustee or investment manager.

And so if plan language alone will no longer be sufficient to protect plan providers, where does it  leave them. McKay Hochman, a firm that provides products and technical services to retirement plan providers, offered their commentary on the matter:

  • For Banks serving in the trustee role (directed or discretionary), are they not now responsible for forcing the employer to forward contributions due to the plan, not just participant deferrals; unless some other party is made responsible for that function.
  • For TPA/Recordkeepers the answer would appear to be it is dependent on their actual role. If the TPA/recordkeeper is purely in the role of recordkeeper with no responsibility for asset investment, apparently nothing has changed.
  • For TPAs/recordkeepers who are now acting in the investment advisory role, unless responsibility is specifically allocated elsewhere, it is their job to make sure contributions are made, especially for self-trusteed employer plans.
  • A positive note about this change is that for an employer who is not timely depositing the employees’ deferrals, there is now guidance that can be used to let the employer know that he or she may have to be reported to the DOL or sued if the contributions are not made.
  • As to discretionary contributions, it appears that the rules will apply once the employer has declared that a discretionary contribution is being made. At that point, the contribution becomes due and owing to the plan.

Here is a link to McKay Hochman’s complete Commentary on this issue. This will not be, I am sure, the last word on this issue.

Picture above from the website, BLENDER-DOC.FR.

IRAs increasingly being used to invest in alternative investments

By Jerry Kalish on Posted in Individual Retirement Accounts

I’ve written about IRAs in the past. (See IRA is not a kid anymore and IRAs are becoming increasingly important, but rules can be confusing). But those discussions were in the context of tax planning for distributions. IRAs are, of course, also a tax-advantaged investment vehicle. And as retirement dollars start to increasingly become available, you”ll start hearing more about "self-directed" IRAs particularly as a way to invest in "alternative investments".

So before going any further, here is some background. Of course, all IRAs can be "self-directed". It simply means that the IRA account holder can choose his or her own investments. And that’s what most investment firms and banks offer, but they’re limited to so-called traditional investments. That is, stock, bonds, mutual funds, money market funds, etc. But many of the Boomers who are retiring want to diversify their retirement funds beyond these traditional investments.

And it’s axiomatic that if there is a need for specialized financial services, there will be service providers available to meet investors’ needs. There is now a small segment of the financial service industry that allows an IRA holder to invest in "alternative investments". Penso Trust Company, one of those service providers, estimates that that while the self-directed component of the IRA market is only 3%-4%, it’s the fastest growing segment at 25% annual growth versus 8% growth for the total IRA market.

What’s considered an "alternative investment" is usually framed as anything except what the IRS does not allow IRAs to invest in. The except is a short list and includes collectibles, life insurance contracts, or stock in an  "S" Corporation.

The longer list includes what the approximately 20 companies in the marketplace who provide special asset custodial services do permit. They are usually regulated trust companies who will act as custodians for such assets as real estate in many of its forms, e.g., raw land, rental properties, commercial properties, and even real estate-related entities such as limited liability companies (LLCs) that invest in real estate. Some of these custodians also allow private placements that are used to fund a startup company, e.g., IRAs that are rollovers from an employer plan to start a new business.

Self-directed IRAs for alternative investments are not for all investors, of course, and should be established only with the help of experienced professionals. This is really one of those "kids, don’t try this at home" situations.

Memo to future retirees: plan on working a few years longer

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

That’s the message provided by a recent study released by the Center for Retirement Research (CRR) at Boston College. According to the study, 44% of Baby Booomers (people born between 1946 and 1964) and Generation Xers (people born between 1965 and 1974) are "at risk" of being unable to maintain their standard of living in retirement. That’s the good news if you don’t consider health care costs. Add in rising health care costs, and the "at risk" number jumps to 61%. Alicia Munnell, the CRR’s Director, has been quoted as saying, "The most effective step is to plan on working a few years longer" because that "cuts the percent at risk by about 10 percentage points.

Or, consider the answer to the question posed in my recent post,  What’s 1% Worth? Using an example provided by Alliance Bernstein, the global asset management firm, a 1% increase in returns, compounded over a lifetime, makes an enormous difference. In their example, it translates into about $220,000 extra at retirement—and an extra 10 years of spending – and maybe not having to continue to work as long.

Here is a link to the CRR’s study online.

Hat tip to Dave Baker and his BenefitsLink.

Banks lag far behind in race for Boomers’ retirement dollars

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

The retirement market is in the trillions, but banks will have to play catch-up to acquire a significant share of those dollars. According to a recent survey, only 14% of “mass affluent consumers” cited their banks as primary providers of retirement services, compared to 53% for investment and brokerage firms. And in the past year, just 18% of 401(k) rollovers were captured by banks compared to 67% for investment and brokerage firms.

The survey 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.

The study suggests that banks focus on three key opportunities:

  1. Capture 401(k) rollovers
  2. Capitalize on retirement asset consolidation
  3. Establish a retirement dialogue with customers

But it’s going to be a tremendous chanllenge. Banks have been focused on transactions instead of advisory services. Investment and brokerage firms have already figured out how to do that.

Here is a link to BAI’s press release about their study.

New study says cash balance plans can provide more retirement security than traditional defined benefit plans

By Jerry Kalish on Posted in Cash Balance Plans

The Urban Institute, a nonpartisan economic and social policy research organization, has just published a major study on cash balance plans. Here is the abstract from that study, Cash Balance Plans: What Do They Mean for Retirement Security?, authored by Richard W. Johnson and Cori E. Uccello:

The conversion of traditional defined benefit plans to cash balance plans is among the most controversial aspects of pension policy today. Because the controversy has focused on the treatment of older workers, however, the debate has generally ignored the long-term implications for retirement security. In fact, cash balance plans can often provide more retirement security than traditional defined benefit plans or defined contribution plans, especially for workers who change jobs frequently.

Here is the link to the complete study (PDF, 14 pages).

Conference of State Bank Supervisors Trust Forum

By Jerry Kalish on Posted in Events, Pension Protection Act of 2006, Seminars and Speaking Engagements

I am honored to be a guest speaker at the 2008 Trust Forum sponsored by the Conference of State Bank Supervisors (CSBS) in San Antonio  on April 14-16, 2008. The CSBS is the national organization for state bank supervisors, and the nations leading advocate for the state banking system. The Trust Forum is the annual gathering of approximately 50 state bank examiners who supervise trust departments of banks and independent trust companies in their respective states.

The title of my presentation is:

The Pension Protection Act of 2006 and the Changing Financial Services Industry: New Challenges for State Bank Examiners.

I’m looking forward to meeting the attendees.

Wading through the alphabet soup of financial service designations

By Jerry Kalish on Posted in 401(k) Plans, Defined Benefit Pension Plans, Individual Retirement Accounts, Pension Protection Act of 2006

See full-size image.

If you’re confused about the various types of designations in the financial service marketplace, you’re not alone. Even the financial service industry and the regulators are having a hard time making sense of the alphabet soup of designations. The American College, a non-profit institution that provides financial services education, has been tracking this matter.

According to the data they have compiled, there are 173 known designations covering banking, accounting and insurance, an increase of 37% since 2000. In addition to the 173 known designations, there are 90 where the date that the designation came into existence is unknown.

There are now so many that it’s tough to tell which are legitimate and have substance and which are not. Some of the new designations are offered by for-profit organizations over a weekend. And many of which – surprise, surprise – are directed towards seniors. So until now, it’s been tough for investors to know the difference, and tough for the industry to do their due diligence to determine which ones to support and allow on business cards.

The American College has recently created a toolkit to assist financial advisers and regulators decide which designations they should consider valid. It includes a tool for companies to use in evaluating the quality of professional designations, and a tool for advisers regarding how to use professional designations with the public.

It will help.

Illustration above by Debbie Ridpath Ohi, a freelance writer and illustrator based in Toronto, whose weblog is Inky Girl: Daily Diversions for Writers.

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