“A lie keeps growing and growing until it’s as plain as the nose on your face”

By Jerry Kalish on Posted in 401(k) Plans, Defined Benefit Pension Plans, Public Employee Plans

That’s what Evelyn Venable who voiced the Blue Fairy told Pinocchio about liars getting caught. But that was in the Disney classic. Now it’s a little more high tech. The newest method is Voice Stress Analysis (VSA), a technology with the same objective as the polygraph: to determine whether the subject being tested is lying. It’s currently being used in the U.S. by law enforcement, and you may even have seen it on CSI (take your pick, Las Vegas, New York, or Miami).

But VSA is being used in the U.K., for a different purpose: to root out benefit cheats. There’s a big media buzz about it in the U.K. The Deception Blog’s post, Using Voice Analysis to Detect Benefit Cheats, discusses the media coverage of a pilot project there to use VSA on benefit applicants. The buzz is not about whether benefit claimants should be forced to take lie detector tests, but about the claim that the pilot project is a success.

The technology is being tested on people claiming local housing or council tax benefits. An early review exposed 126 benefit cheats in just three months, saving one local authority £110,000 or approximately $221,000. The government claims the technology also improves services.

And, of course, there are two obvious questions:

First, does it work? It depends on who you ask, but like polygraph examinations, VSI is not admissable in court as evidence.

Second, is it coming to a call center here soon?

Tax deduction for ESOP was twice as nice in IRS Private Letter Ruling

By Jerry Kalish on Posted in Employee Stock Ownership Plans

Conventional wisdom says that a plan sponsor cannot generally deduct more that 25% of eligible compensation to a qualified retirement plan. But “generally” means in ERISA terms that there are exceptions. And here’s a very interesting one. A C corporation – let’s call it “C” for short – that sponsored an ESOP wanted to deduct more than 25% of compensation. In fact, it wanted to make three types of contribution.

  • The first to pay the principal on the ESOP loan.
  • The second to pay the interest on the ESOP loan.
  • The third would be been unrelated to the ESOP loan (that is, the ESOP would not have used the third contribution to pay either the principal or interest on the ESOP loan).

So taxpayers do what taxpayers do when they want assurance that they will not suffer adverse tax consequences from a specific transaction. They apply for a Private Letter Ruling – a written decision by the Internal Revenue Service in response to taxpayer requests for guidance. In C’s case, the IRS ruled in Private Letter Ruling 2007320028 (PDF) that: 

  • Tthe first contribution to pay the ESOP loan principal is deductible provided it does not exceed the aforementioned 25% of eligible compensation limit.
  • The second contribution is deductible to pay the interest on the ESOP loan.

So far “conventional wisdom”. Now here’s that real interesting part. The IRS also ruled that C may deduct the third contribution that is unrelated to the ESOP loan as long as the contribution does not exceed the 25% of compensation limit. Useful, for example, if an employer wanted or needed to pay off terminating participants who elect cash while the ESOP is paying off an ESOP loan.

Thus, contributions of up to 50% of eligible compensation could be deductible in addition to the unlimited deduction for interest. Another example of why we should “never assume”.

Note: Private Letter Rulings are not considered as precedent for use by taxpayers other than for the taxpayer who requested the ruling, but they do give an indication of the IRS’s current attitude as to a particular type of transaction.

Not my generation that nobody seems to want

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

I’m not talking about my generation, but rather Gen X; and the nobody who doesn’t want them are financial advisers. According to a study commissioned by Edward D. Jones & Co., as reported by Investment News, advisers prefer older and wealthier clients. This despite the fact that younger workers are ahead of other generations when it comes to saving for retirement. Aside from the fact that the Gen X investor has fewer assets than the older, affluent investor that is the target client for most advisers, the advisers themselves have painted this generation with a broad brush. Some of the advisers:

  • Feel that the younger investors have "attitude problems",
  • Are more comfortable working with clients their own ages,
  • Are are uncomfortable with the technology they feel that younger clients would demand, and
  • Feel that younger investor don’t appreciate the value of good advice.

Hmm, the more things change, the more they stay the same.

And my generation? Represented by My Generation, the title song on the The Who’s first album pictured above which was released in the U.S. in 1965.  The song was inducted into the Grammy Hall of Fame in 1999 and remains one of The Who’s best known songs and, indeed, one of the most acclaimed songs in rock and roll history. They don’t make ’em like that anymore. (Sorry, I just had to say it).

 

TANSTAAFL, seniors, and the SEC

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

TANSTAAFL is an acronym for the adage "There Ain’t No Such Thing As A Free Lunch. It was popularized by the Nobel economist Milton Friedman, but the phrase, "free lunch", has its antecedents in American literature from about 1870 through 1920. The phrase refers to a tradition once common in saloons in many places in the United States. These establishments offered "free" lunches, varying from the basic to the quite extensive, but required the patron to buy at least one drink who usually went on to order more. In other words, free things often have hidden costs.

The SEC and other security regulators also think TANSTAAFL. They held a Seniors Summit yesterday at the Securities and Exchange Commission during which they released a joint report summarizing the results of their examinations of "free lunch" investment seminars.

A year-long examination was conducted by the SEC, the Financial Industry Regulatory Authority (FINRA) and state securities regulators (members of NASAA, the North American Securities Administrators Association). The regulators scrutinized 110 securities firms and branch offices that sponsor sales seminars and offer a free lunch to entice attendees. The report’s key findings include:

  • 100% of the "seminars" were instead sales presentations.
  • 59% reflected weak supervisory practices by firms.
  • 50% featured exaggerated or misleading advertising claims.
  • 23% involved possibly unsuitable recommendations.
  • 13% appeared to be fraudulent and have been referred to the most appropriate regulator for possible enforcement or disciplinary action.

The report recommends that financial services firms review their supervisory practices and take steps to supervise sales seminars more closely, and redouble their efforts to ensure that the investment recommendations they make to seniors are suitable in light of the particular customer’s investment objectives. The report also includes a list of supervisory practices that appeared to be effective.

The report also recommends that ongoing investor education efforts for seniors should provide education with respect to "free lunch" sales seminars. Specifically, senior investors should understand that these are sales seminars that result in the sales of financial products, and they may be sponsored by an undisclosed company with a financial interest in product sales.

Here’s a link to the full Free Lunch Report (PDF).

Dividing retirement benefits on divorce, and what ERISA has to say about it

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

Divorce, unfortunately, is a fact of life, and can affect an employee’s benefits in a retirement plan. Jimmy Verner, who practices family law, illustrates why there must be a Qualified Domestic Relations Order (QDRO) to divide those retirement benefits in his newly launched North Texas Divorce and Family Law Blog. But a QDRO only comes into existance when the Plan Administrator of the retirement plan approves a domestic relations issued by a court.

Mr. Verner’s perspective, of course, is that of the attorney representing one of the two parties in the divorce. So here’s a QDRO viewed from the perspective of the Plan Administrator – the individual or individuals responsible for the administration of the retirement plan and a fiduciary. The Plan Administrator would look to see that the domestic relations order contains certain information to qualify as a QDRO under ERISA:

  • The name and last known mailing address of the participant and each alternate payee.
  • The name of each plan to which the order applies.
  • The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee.
  • The number of payments or time period to which the order applies.

The Plan Administrator would also look to see that the QDRO not contain certain information:

  • The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan.
  • The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value).
  • The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO.
  • The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.

Pretty basic, but ERISA being ERISA, pretty complicated. Fortunately, the three federal agencies charged with ERISA oversight have published comprehensive guidance.

And from everyone’s standpoint, it’s best for the Plan Administrator to review a draft of the domestic relations before it gets filed with the court. Better to resolve issues before the order is filed than the Plan Adminstrator having to determine that the domestic relations order really isn’t a QDRO.

The real game of Jeopardy

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

 

"What was the number of mortgage foreclosures in July?"

As reported,by Investment News citing Realty Trac, a marketplace for foreclosure properties. Foreclosure filing in the country increased by 9% between June and July and rose precipitously by 93% compared to the same period last year.

The big data security question: Have we met the enemy and is it us?

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

I’ve written about retirement plan data security – or lack thereof – in the past, but always in the context of employee data on laptops that had been stolen. But as I read about a recent study cited by AccountingWeb.com, Pogo’s famous words came to mind, “We have met the enemy, and he is us.”

Are we our own worst enemy when it comes to protecting employee and benefit plan data? Consider the results of the study which was carried out at last spring’s Infosecurity Exhibition Europe as part of an annual survey into "Trust, Security and Passwords”. It revealed the extent to which Information Technology (IT) employees snoop at the confidential information of other employees. By using the special administrative passwords that give IT workers privileged and anonymous access to virtually any system:

  • One-third admitted to snooping through company systems and peeking at confidential information such as private files, wage data, personal e-mails, and HR background.
  • More than 1/3 admitted they could still access their company’s network once they’d left their current job, with no one to stop them.

The big security risk is not just hackers, but companies mismanaging the storage and access to administrative passwords.

And IT folks are just like everyone else. Post-It Notes are the favorate way of storing passwords.

Franchises and IRAs

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

Rush Nigot on his Rush on Business Blog provides valuable information for franchisees. But how do you finance it? There are a small number of trust companies that can help facilitate that process if you use self-directed IRA assets to invest in private equity, e.g., a franchise. It’s not just publicly traded securities that IRAs can invest in. There’s also real estate, secured loans, unsecured loans, and private placements. But caveat emptor twice. Failure to follow the tax rules can result in adverse tax consequences, and the investment may not pan out. Remember, these are retirement funds so consult with your advisors first. This is another one of those "kids don’t try this at home" situations.

Solving the “annuity puzzle”

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

I recently wrote about retirees moving to Tibet, a metaphor for retirees moving from the “land of accumulation” to the “land of accumulation” and the new financial culture with which they will have to master. The “tour guides”, the financial industry, will have to solve the “annuity puzzle”, the investment industry term for the disconnect between the economic arguments of annuitizing and the investor’s aversion to annuitizing. It’s a difficult puzzle to solve according to a July 2007 Fidelity Research Institute study which indicated  that retirees and pre-retirees are signicantly underestimating how long they need to make their retirement savings last.

Retirees believe they will need to make their retirement savings last until an average of age 85; for pre-retirees, the average estimate is even younger at age 83. These estimates highlight how many pre-retirees underestimate their life spans, and therefore risk outliving their assets, given the likelihood of living to at least 90 for men (24%) and women (35%) who have reached age 65.

While there are a myriad of barriers to adoption of annuities – some based on emotion and some on logic – the study found that each is potentially solvable by improved investor education. Here is the link to the the Fidelity study, Structuring Income for Retirement: Addressing America’s Guaranteed Income “Gap” (24 pages, PDF).
 

The traders’ story: a modern morality tale

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

It seems that there were these 2,500 traders surveyed by Traders Monthly who were asked whether they would parlay some insider information into a guaranteed $10 million trade. If they had a 50% chance of getting arrested, 93% said no; if they had only a 10% chance of getting arrested, 72% said no; and if they had no chance of getting arrested, 58% said yes. An anonymous trader was quoted as saying: "It can’t be that wrong if I can’t get caught."

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