The four dimensions of 401(k) plans

By Jerry Kalish on Posted in 401(k) Plans

If I remember my college physics course correctly, we used three space dimensions and one-time dimension to describe the “real world”. Today’s science uses the hypercube pictured here as the three dimensional cube extended in the direction of the fourth dimension. And so what does this have to do with retirement plans you ask.

It has everything to do with the retirement plans, particularly 401(k) being designed and managed for today’s workforce. A workforce which also has four dimensions. But these are generational dimensions, the four generations of employees in the work force for the first time in our history. In purely demographic terms, they are:

  • Veterans: 1922-1945
  • Baby Boomers: 1946-1964
  • Generation X: 1965-1980
  • Generation Y: 1981-2000

And based on their generational backgrounds, each employee has different attitudes, behaviors, and expectations. If we’re interested in using the right motivational buttons in making our 401(k) plans more effective, then we have to communicate accordingly. Let’s not take the easy way out by simply using automatic enrollment and qualified default investments.

Cash may be king, but some kings are more protected than others

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

In volatile markets, investment managers go to cash. That’s happening right now because of the prime mortgage meltdown. But not all money market funds are the same. Just as there are enhanced index funds, there are also enhanced money market funds.  "Enhanced" meaning the fund manager seeks higher returns by taking slightly more risk. And in the case of enhanced money market funds trying to get extra basis points, this may mean investing in asset-based securities like mortgage-linked bonds. According to HedgeWorld.com, some supposedly safe money market funds have shut down, while others are having problems meeting redemptions.

Do you know where your cash is?

Is a vulture fund coming to your retirement plan soon?

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

They’re called "vulture funds". They’re financial organizations that specialize in buying securities in distressed environments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy.

Take for example, Argentina whose external public debt was  bought up in substantial measure by vulture funds at   very low prices. Or in this country, K-Mart,  where the real estate held by the company was the anticipated payout for investors who bought stock during their bankruptcy proceedings.

And now, reports Investment News, money managers are finding lots of opportunities in the subprime mortgage fallout. Investment managers are starting new funds to buy distressed securities tied to the subprime mortgage market or buy asset-based securities that been devalued by the ratings agencies.

The "blame game" has included predatory lending practices of subprime lenders and the lack of effective government oversight, mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the portfolios.

But regardless of fault, there have been a record number of foreclosures, and now I’m curious to see whether any of the retirement plans espousing socially responsible investments will be investing with the so-called vulture funds.

Hey! Just whose IRA is this anyway?

By Jerry Kalish on Posted in Individual Retirement Accounts

I had to read this article twice. It says that Vanguard is requiring customers to have the same beneficiary for all their IRAs. Retirement Think pointed me to it on Financial Planning.com. It seems that Vanguard has sent out letters to 170,000 of their IRA clients who had different beneficiaries on their multiple IRA accounts that they had to have the same beneficiary. It’s possible that someone could have an IRAs holding money rolled over from employer retirement plans, traditional IRAs (both pretax and aftertax), and Roth IRAs.

No matter. According to Forbes, if the client doesn’t change the beneficiary, then Vanguard will do it for them. Forbes also made two customer service calls to Vanguard. One rep was quoted as saying that “There’s no way to override the computer,” and added that Vanguard is “a low-cost provider” and permitting different beneficiaries would increase its cost.

So much for personal financial planning.

Pardon me for showing my generation gap: Give the People What They Want is an album by the English rock group The Kinks released in August of 1981 in the US, but it was delayed until January of 1982 in Europe.

It’s not just defined benefit plans that are being terminated

By Jerry Kalish on Posted in Employee Stock Ownership Plans

Most of the media attention has been on the decline of defined benefit pension plans. That is, for large companies. Defined benefit plans are alive and well for small business owners. And in the same vein – but at a much faster pace – large publicly traded companies are terminating their ESOPs.

According to Corey Rosen, Executive Director of the National Center for Employee Ownership in his recent Employee Ownership Update, one third of the largest 900 companies that had ESOPs in 2004 (the Fortune 500 and the Russell 400) had reduced the stock held in the plan to zero or close to it by the end of 2005. Corey thinks that this a direct result of concerns about legal fallout from the Enron, WorldCom, RiteAid, and other "stock drop" lawsuits that began earlier in the decade.

But as with defined benefit pension plans, ESOPs are alive and well in privately held companies,  particularly as an exit strategy for Baby Boomer business owners.

Retiring to Tibet

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

Baby boomers apparently are thinking about retiring to exotic locations. I saw an article about this in one of our trade publications in which an investment advisor was quoted as saying that retiring to Cancun was no different than retiring to Arizona. Well, not exactly. Hurricane Dean aside, what about cultural, political, and legal differences as well as access to medical care to which retirees have been accustomed.

While not many retirees will make the leap to Cancun, many retirees will be moving to Tibet. Tibet? Yes, Tibet. That’s the analogy that David Macchia uses to convey the challenge that most retirees will face: converting their accumulation of retirement assets into distributed retirement income. David is CEO of Wealth2k, a firm that is using communication technology to deal with the transition from the accumulation phase to the distribution phase.

Going from such concepts as asset allocation, dollar cost averaging, and the cost of waiting to new concepts as such dealing with the cost of medical care and not outliving one’s assets is – says David – like moving from middle class America to Tibet. And for those of us that are in the retirement plan industry, we’ll need to become tour guides.

If you’re interested in the shape of things to come, here is a link to David’s movie that will give you a glimpse of retiring to Tibet.

The great debate: employee vs. independent contractor

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

Employee or independent contractor? Attorney Rush Nigot warns us about making the mistake of treating employees as independent contractors. It’s an issue about which the IRS has sacked the NFL and caused Microsoft to reboot. Penalties and interest can pile up if someone is incorrectly treated as an independent contractor. And in the case of a retirement plan, the employer would have to make up the benefits the individual would have received as an employee. And it can be expensive.

But what if you do make a mistake, and that independent contractor is really an employee. How do you fix it? Here’s how. There’s two aspects to the fix. From the payroll tax standpoint, Accounting Web provides valuable tips for reporting misclassified employees (registration required). And from a retirement plan standpoint, you can use one of the correction programs offered by the Internal Revenue Service as part of their Employee Plans Compliance Resolution System (EPCRS). Better to get to them before they get to you.
 

IRS issues list of priorities for issuing retirement plan guidance

By Jerry Kalish on Posted in Pension Protection Act of 2006

The other day I wrote that the ERISA agencies have a full regulatory plate with the Pension Protection Act of 2006. Now here is the 2007-2008 Priority Guidance Plan that the IRS has just issued for retirement plans courtesy of McKay Hochman with a hat tip to Steve Brooks of our firm for bringing it to our attention.

It’s going to be a busy couple of years for ERISA people.

Scamming the seniors

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

Back in the day, I used to see Three-card Monte played on the Chicago "L". For the benefit of the uninitiated, Three-card Monte, also called Three-card shuffle, Follow the lady, Find the lady, or Follow the Bee, is a confidence game in which the victim, or mark, is tricked into betting a sum of money that he can find the money card, for example the queen of spades, among three face-down playing cards The hand is quicker than the eye and these guys are pros. You don’t win.

In relative terms, what people lose playing Three-card Monte can be called "chump change" compared to the Securities and Exchange Commission’s estimate that approximately 5 million seniors are victimized by some sort of financial fraud each year.  And there is no more tempting target than the huge amount of money in seniors’ accounts in retirement plans and IRAs.

The enforcement agencies on both the state and federal level are ramping up to deal with the problem. The upcoming Senior Summit on September 10 sponsored by the SEC will bring together regulators, law enforcement officials, and community groups who have to deal with senior investment fraud to find some solutions – or better yet, help seniors avoid the Three-card Monte folks.

Steve Nash, maple syrup, and … ESOPs

By Jerry Kalish on Posted in Employee Stock Ownership Plans

We have much in common with our friends, neighbors, and allies up north. And not surprisingly, both Canada and the U.S. have the common problem of our respective Baby Boomer business owners looking for an exit strategy. Old friend Perry Phillips, President of ESOP Builders, Inc., a Canadian valuation and ESOP consulting firm, cites studies that show 70% of Canadian Baby Boomers currently running small and medium- sized businesses will want to exit by 2015. And as in the U.S., ESOPs are an effective exit strategy.

But our ESOPs are not like the ESOPs with which Perry works. U.S. ESOPs (Employee Stock Ownership Plans) are very structured programs governed by U.S. tax laws and ERISA which provide attractive tax benefits to the selling shareholders, the corporation, and the employees.

ESOPs in Canada, on the other hand, have a broader connotation. Canadian ESOPs can be a combination of three types of equity compensation arrangements: out-right share purchase, stock options, or phantom stock. And unlike U.S. ESOPs which are governed by federal law, Canadian ESOPs will vary in design and structure based on Provincial law.

But one thing Perry and I do have in common with our ESOP clients. ESOPs work best when combined with an "ownership culture".  Here is a link to the supporting research compiled by the National Center for Employee Ownership, the non-profit employee ownership research and education organization. 

LexBlog