Is there such a thing as too much information for 401(k) participants?

By Jerry Kalish on Posted in 401(k) Plans, Pension Protection Act of 2006

I started to think about that question after reading Jonah Leher’s post, Don’t Read the Business Page, on The Frontal Lobe Blog. Mr. Leher tells us to ignore the mass media coverage about the stock market and the growing liquidity coverage because it’s too much information.
He writes about the experiment that Harvard psychologist Paul Andreassen conducted on MIT business students in the late 1980s. After having the students select a stock portfolio, he divided them into two groups. The first group could only see the changes in the prices of their stocks. The second group had access to a continual flow of information from various sources.

You know what’s coming. The first group – the “less information” group did significantly better than the second group – the “high information” group. Exposure to too much information was distracting. Andreassen was surprised with the result when he did the experiment in the later ’80s, but most of us shouldn’t be now. Back then, there was wasn’t the constant flow of information – good and bad – bombarding us 24/7/365 from a multitude of sources. 

So what does that have to do with 401(k) plans? The Pension Protection Act of 2006 mandates additional disclosures to 401(k) participants for such new provisions as automatic enrollments and qualified default investment funds. More is on the way in the form of required disclosures regarding plan fees either in the form of Department of Labor regulations or by legislation.

No one disputes that participants should be provided with sufficient information in order to make informed decisions about their retirement funds. The question is how much information is enough information? Let’s not turn 401(k) participants into a "high information group".

 

W-2 Compensation for S Corporation Owners: Retirement Plan “Tax Traps for the Unwary”

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

One of the most commonly used expressions in articles about taxes is this one: “tax trap for the unwary”. While I would like to be more creative than that, that expression effectively sums up a common situation we’ve seen involving the compensation of shareholder-employees of S corporations. The objective of an S corporation is, of course, to avoid double taxation (once to the shareholder and again to the corporation). So where is the “tax trap for the unwary?’ There are actually two.

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Using IM and SMS to communicate 401(k)

By Jerry Kalish on Posted in 401(k) Plans

Maybe 401(k) plan sponsors are on the wrong side of the generation gap – at least when it comes to communicating with their under 30 year-old employees – when I asked the question, Face it. Maybe we’re not using the right medium to communicate 401(k)?. I suggested text messaging, and here’s some supporting anecdotal evidence. Mark Liberman writing in his Language Log Blog tells a story about the conversation he overheard among several of the younger academics at the Google Faculty Summit — 30- to 40-year-olds. They were complaining that their students think that email is for old people (a category that this group is not yet used to being part of).

So if we communicate 401(k) plans to employees for whom English is a second language, e.g., Spanish, maybe we should think about having our 401(k) plans being communicated by people who speak IM and SMS.

Benefits among those issues that need to be addressed up front in sale of a business

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

We are in the midst of a robust merger and acquisiton environment. Much of it is being fueled by private equity firms flush with cash. The other part of the equation has to do with demographics – those Boomer business owners looking to cash out. Two sets of issues can slow down or even derail a deal: environmental issues and employee benefit and compensation issues.

Rush Nigut nicely covers the former when he tells business owners contemplating a sale that they shouldn’t forget to address the environmental issues up front  on his blog Rush on Business. Employee benefit and compensation programs are also issues that should be addressed pre-deal. In both cases, the focus is on the liabilities – current and potential. Benefit and compensation programs can include, of course, retirement plans, welfare benefit plans, and non-qualiified deferred compensation plans. Some of the questions buyers will ask include:

  • Is the retirement plan “qualified” for purposes of receiving tax favored treatment under the Internal Revenue Code?
  • If the seller maintains a defined benefit plan, what is its funded status?
  • If the seller contributes to a multi-employer, collectively bargained retirement plan, is there a withdrawal liability?
  • Are there any welfare benefit liabilities, e..g, post-retirement medical benefits.

The due diligence process for both environmental and benefit and compensation issues can be quite involved, the results of which often dictate how the deal is structured: stock sale or asset sale. So as Rush Nigut suggests: address the issues upfront.

ERISA agencies have full regulatory plate with Pension Protection Act

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

That’s the metaphorical objective of any regulatory agency whose responsibility is to interpret and administer laws passed by Congress- to translate those laws into regulations, rules, and produres. Mitchell Port on his California Tax Attorney Blog gives us an initiation to understanding IRS guidance, excellent background for anyone who is involved with retirement plans, and especially  the Pension Protection Act (PPA) passed on August 17, 2006. It’s not just the IRS that will be involved with the “translation”. The burden will also be on the Department of Labor (DOL). And both of the agencies will have a full plate with the different effective dates for the new law’s provisions. 

Take a look at what’s in store for the IRS and DOL – and us – for just the defined contribution plan provisions:

  • Provisions effective retroactively: 2
  • Provisions effective on enactment date: 8
  • Provisions effective for plan year beginning on or after January 1, 2007: 12
  • Provisions effective for plan years beginning on or after January 1, 2008: 6
  • Provisions effective for plan years beginning on or after January 1, 2009: plan amendments
  • Provisions effective for plan years beginning on or after January 1, 2010: defined benefit/401(k) combined plan 

The above list is from McKay Hochman’s Status of Defined Contribution Provisions One Year After PPA which provides the details. 

 Hat tip to Joe Kristen for his Tax Update on the Roth & Company, P.C. Blog Roundup.

“Help yourself to one marshmallow, or maybe two”

By Jerry Kalish on Posted in 401(k) Plans

The marshmallow experiment is a famous test conducted by social psychologist Walter Mishchel at Stanford in the 1960s. Mishcel, now at Columbia, put marshmallows in front of a room full of 4-year olds, and told them that they could have one marsh mallow now, but if they could wait several minutes, they could have two. The children who waited longer went on to get higher SAT scores. They got into college and had, on average, better academic outcomes.

I wonder if they also had better 401(k) participation rates.

ERISA plan record retention: how long is long enough?

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

Attorney Rush Nigot blogging about Document Retention and Electronic Discovery on his new Blog, Rush on Business, tells us that in today’s business environment, organizations need to respond to an increasing number of document requests, from regulatory compliance issues to internal investigations to full-scale litigation.

And there’s certainly an ERISA component to that. So in a brief Q and A format, here is some basic information about document retention for ERISA plans.

What are the legal requirements?

In the addition to the reporting and disclosure obligations that fiduciaries have, ERISA also requires that plan sponsors retain the records that support the information included in the 5500 filing and other reports.

The short answer is that all plan-related materials should be kept for a period of at least six years after the date of filing of an ERISA-related return or report, and the materials should be preserved in a manner and format (electronic or otherwise) that permits ready retrieval. All records that support the plan’s annual reporting and disclosure should be retained.

Who is responsible for retaining plan records?

While it is fairly common for a plan sponsor to contract with outside service providers, such as our firm, who provide certain reports and prepare the 5500 filing, the plan administrator remains ultimately responsible for retaining adequate records that support these reports and filings. In addition, the Department of Labor (DOL) requires employers to maintain records sufficient to determine the amount of benefits accrued by each employee participant.

What are best practices?

As noted above, generally, these documents should be kept for a period of six years after the date of the filing to which they relate. However, best practices would be to keep certain records for the life of the plan. This would include all plan documents dating from the plan’s inception. The thicker the paper trail, the easier it will be for the plan to respond to an inquiry from a governmental agency or a request for information from a plan participant. Most recently, the Internal Revenue Service (IRS) requested specific employee records from a client going back 10 years during a plan termination process. Fortunately, the employer was able to provide it.

But don’t consider this a boring subject. The IRS or the DOL can require the plan administrator to recreate plan records.

You’re only as old as you think except the IRS has something to say about it for retirement plan purposes

By Jerry Kalish on Posted in Defined Benefit Pension Plans

Normal retirement age is not just a state of mind. For ERISA purposes, it’s the lowest age specified in a pension plan at which a participant may retire without the consent of the employer and still receive retirement benefits.  The IRS has something to say about it since a lower age than the traditional age 65 can accelerate funding.

The IRS issued final rules effective as of May 22, 2007 for employer sponsored plans that clarify that a safe harbor age is 62. However, earlier ages can be used. If a pension plan has a normal retirement age that is between 55 and 62 years, deference will generally be given to a good faith effort to determine the typical retirement age for the industry, as long as that effort is reasonable with respect to the facts and circumstances.

However, a normal retirement age of less than 55 years is presumed to be earlier than would be reasonably representative of the typical industry retirement age for the industry unless facts and circumstances that demonstrate otherwise are presented to the Commissioner. 

And here is one example about why the IRS is concerned about using a lower age to accelerate funding. Depending on funding methods, assumptions, compensation, etc., a 45-year old retiring at age 62 would cost approximately $75,000 but would be approximately $160,000 at age 55. And it’s because of numbers like this, defined benefit plans are alive and well for closely-held companies.

Face it. Maybe we’re not using the right medium to communicate 401(k)

By Jerry Kalish on Posted in 401(k) Plans

Pardon me if my generation gap is showing, but Marshall McLuhan was right, "The medium is the message."  Investment News reports that some of the major investment banks, Citigroup, Goldman Sachs, Lehman Brothers, Bear Stearns, and UBS, have put firewalls in place to bar staffers from using Facebook. Citigroup leads the list with almost 8,500 employees in its Facebook network followed by Goldman Sachs with approximately 5,600 and Lehman Brothers with approximately 3,000. So if these employees are representative of the rest of the younger workforce, how should we get them the 401(k) message? How about text messaging.

If you’re generationally challenged and don’t know about Facebook, click here.

Buckle up. 401(k) fee legislation introduced

By Jerry Kalish on Posted in 401(k) Plans

401(k) fees showed up on the political radar screen in March when U.S. Rep. George Miller (D-CA), the chairman of the House Education and Labor Committee, held hearing. The blips got louder last Thursday when Congressman Miller formally introduced legislation calling for better disclosure of 401(k) fees. The legislation, called the 401(k) Fair Disclosure for Retirement Security Act of 2007, would:

  • Require plan administrators to disclose, in clear and simple terms, all fees charged to plan participants each year;
  • Help workers better understand their investment options by providing more detailed information on investment strategies, risks, and returns when they sign up for their company’s 401(k);
  • Require 401(k)-style plans to include at least one lower-cost, balanced index fund in its investment line-up;
  • Ensure that all fees and conflicts of interest are disclosed annually to employers who sponsor 401(k) plans; and
  • Enhance the Department of Labor’s oversight of 401(k) plans.

The legislation’s introduction followed closely on the heels of the end of the Department of Labor’s comment period on how to better deliver information on administrative and investment fees to 401(k) participants. regulations the DOL will be adopting.  The 401(k) industry is asking for time to let the DOL come out with regulations. Whether that will happen or not is now part of the Washington political process.

So buckle up. We may be in for a bumpy ride.

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