Boomers, brokers, and the $300 billion in 401(k) rollovers this year

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

Business Week reports on a new study by consulting firm

Cerulli Associates

that large Wall Street firms are likely to capture a sizeable share of the $300 billion expected to roll out of 401(k) plans this year. Much of this money will come from the Baby Boomers, the first of whom reached age 60 last year. And this will be just be the start as they begin to retire over the next 10 to 20 years.

Cerulli predicts that it’s the ability of these brokerge firms to provide advice through their large network of financial advisors combined with their brand recognition, products, and marketing expertise that will cause many Boomers to move their retirement funds from their employers to IRAs with these firms.

But on the other hand, an independent survey commissioned by Retirement Corporation of America in May, 2006 indicated that more Americans rely on themselves and their friends for making critical investment decisions than financial advisors. According to the survey, the majority of investors:

  • Believe "you’ve got to have money to make money" because top quality advice is reserved for the wealthy,
  • Prefer to trust themselves, friends or family for good advice ahead of the experts, and
  • Have a low opinion of commission-driven financial advisors

That’s the perception – not softened by stories in the mass media with headlines such as Unscrupulous brokers prey on 401(k) holders.

The industry has some PR work to do.

Department of Labor enforcement criteria and 401(k) deposits

By Jerry Kalish on Posted in 401(k) Plans, Fiduciary Matters

While my main focus is qualified retirement plans, I try and stay up to date on what is happening in the world of welfare benefits, i.e., health plans, etc. After all, both types of benefit plans are subject to ERISA’s reporting, disclosure, and fiduciary rules. And both types, of course, are regulated in these areas by the Department of Labor (DoL). And so I found Roy Harmon’s post today on his Health Plan Law blog, EBSA "Targeting Criteria" Enhancements Lead to Large Enforcement Gains, of great relevance to my world of qualified retirement plans. EBSA is the Employee Benefit Security Administration which is that part of the DoL that is responsible for ERISA regulation and enforcement.

One of the targeting criteria that Mr. Harmon mentions is information received as a result of complaints from participants, fiduciaries, informants, or other sources in the community. The most common source of complaints is, I have observed, participants. The reason?  Their 401(k) contributions have not been timely deposited. Easily discovered in a 401(k) environment of daily recordkeeping with internet access.
 
The DoL takes the same view of late 401(k) deposits as the IRS does of late payroll tax deposits. Dim. "Timely" according to DoL regs requires 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. This has come to be known as the "15-day rule".

But there is no such rule. The DoL has 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 has turned out to no more than one to two weeks following withholding and, in many cases, 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.

And there is nothing that causes employee morale to fall through the floor quicker than late 401(k) deposits.

They’re back! Retirement plan bad boy clauses

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

Back in the day, pre-ERISA day, many retirement plans had “bad boy” clauses. That is, a provision in the plan under which a participant could forfeit all benefits for being a “bad boy.” That usually meant among other misdeeds criminal conduct. Well, they’re back – at least as far as Congress is concerned. Last November, a diverse coalition of 23 citizen groups led by the 350,000-member National Taxpayers Union (NTU) sent a letter to House Speaker-Elect Nancy Pelosi and Senate Majority Leader-Elect Harry Reid urging them to support a bill that would eliminate the practice of allowing convicted lawmakers to draw taxpayer-subsidized retirement benefits.

At that time, no member of Congress was required to forfeit a pension unless convicted of crimes related to treason and espionage. The NTU noted that as a result, over the past 25 years at least 20 lawmakers guilty of other serious offenses have enjoyed Congressional retirement payments. The NTU also noted that congressional pension benefits are two to three times more generous than those normally offered to similarly paid private-sector workers, and even exceed the standard for most federal executives. There is also a lucrative, supplemental 401(k)-style plan.

The bill never passed. Now new Congress, new politics. Today by a vote of 431-0 the House of Representatives passed a bill that lawmakers convicted of crimes such as bribery, fraud and perjury will be stripped of their congressional pensions. The bill must be reconciled with the Senate bill approved last week as part of larger ethics and lobbying reform before the measure can be signed into law. Only minor differences exist between the House and Senate versions.

And what about those 20 lawmakers referred to above who were convicted of crimes and may be collecting benefits? They’re exempt because both versions of the bill are not retroactive. Surprised?

Supreme Court to hear important fiduciary case

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

As the retirement plan industry matures (along with the participants), it seems to me as a non-attorney that the scope of ERISA-related litigation has expanded. Yesterday, I wrote about a U.S. Court of Appeals that vacated a lower court decision that certified a case as a class action. Timely, in the context of other law suits being filed as class action and those in the hopper.

Now today, both Rich Bales at Workplace Prof Blog and Steve Rosenberg in his Boston ERISA and Insurance Litigation Blog report that the U.S. Supreme Court has agreed to hear a case that will decide the extent to which, if at all, fiduciary responsibilities attach to the decision to terminate a retirement plan and the implementation of that decision. Again timely-and very important-in a business environment in which employers are terminating and freezing defined benefit pension plans. I expect that we will see more ERISA-related litigation involving significant issues such as these that will impact a large number of both plan sponsors and participants.

Court rules on ERISA class action law suit

By Jerry Kalish on Posted in 401(k) Plans

With the spotlight on ERISA class action law suits, I found this interesting and timely post on Barry Barnett’s Blawgletter. He points us to last Thursday’s decision by the U.S. Court of Appeals for the Fifth Circuit (U.S. District Courts in Louisiana and Texas) on a recent ERISA class action suit. In this case involving employer  stock, plan participants claimed that the fiduciaries of the EDS 401(k) plan improperly required them to purchase Company stock. Even after the stock became an "imprudent investment". The Court vacated a lower court’s decision certifiying the case as a class action. Mr. Barnett’s post includes a link to the Court’s decision. I’ll leave it to the attorneys out there to comment on what implications this case could have on the current class action law suit line-up.

Focus on the NFL: tomorrow’s games and pension increases

By Jerry Kalish on Posted in Defined Benefit Pension Plans

While sports fans are looking forward to tomorrow’s NFL games (for me the Beloved Bears vs. the Saints) that wil decide the two Super Bowl contestants, the retired NFL players are looking forward to receiving their pension increases under the new Collective Bargaining Agreement which I wrote about last year. (While agreement on the new CBA was reached last year, it was just radified at the end of the season by a vote of the NFL Players Association).

As to what this means in dollar terms for the retired player, here is a link to a letter on the Retirement Players Discussion Forum blog from Jeff Nixon, Vice President of the Buffalo Bills Alumni Chapter, to his guys that includes examples of the increases.

  • For a player currently receiving a pension: If he had 6 credited seasons from 1965 to 1970 , his previous monthly pension benefit was $1,200 . His new monthly pension will be $1,500.
  • For a player not yet receiving a pension. If he has 6 credited seasons from 1998 to 2003 his monthly pension benefit would have been $2,550. His new monthly benefit, if he starts receiving pension benefits at age 55 will be $2,805.

There’s a lot that could be written about on the subject – perhaps at a later time.

Future looks bright for cash balance pension plans

By Jerry Kalish on Posted in Defined Benefit Pension Plans

The U.S. Supreme Court on Tuesday upheld the 7th U.S. Circuit Court of Appeals’ decision regarding IBM’s cash balance pension plan. In addition, the IRS has begun to review moratorium cash balance plans, i.e, those cash balance plans that were converted from defined benefit plans before June 29, 2005. And with the Pension Protection Act of 2006 clarifying the legality of new cash balance plans, it looks like they are here to stay. Indeed, cash balance pension plans will become a more significant tax planning technique in designing retirement plans for closely-held business and professional firms. Much more on this topic to follow here in the future.

Looking under the brim of Top Hat plans

By Jerry Kalish on Posted in Defined Benefit Pension Plans

Steve Rosenberg in his article today on his Boston ERISA and Insurance Litigation Blog, Top Hat Plans and ERISA, brings into focus one of the inherent problems with Top Hat plans. At least from the standpoint of the employee. That is, Top Hat plans are exempt from the participation, funding, vesting and fiduciary responsibility rules of ERISA.

What’s a Top Hat plan for those of you not familiar with “pension speak?” It’s the descriptive label that is used for retirement plans for a select group of management or highly compensated employees. Top Hat plans are designed to make up for benefits that would otherwise be limited by law. For 2007 that would be a retirement benefit of $180,000 per year in a defined benefit plan and up to $49,000 in a defined contribution plan.

Cases like Steve writes about arise because the Department of Labor has never issued regulations on exactly what is a "select group" that defines these plans. When a participant does not receive what he or she expected from the plan, the participant sues the employer claiming that the plan is not a Top Hat plan because participation was not limited to a “select” group. Thus, says the participant, the plan was required to comply with all the requirements of ERISA.

This "select group" issue is not the only inherent problem with Top Hat plans. Again, from the standpoint of the employee. These plans are usually unfunded which means it’s simply a promise to pay. An employer may refuse to pay benefits owed under the plan because of a merger, acquisition, insolvency, or other reason.

Now here’s the irony in all this. An employee who is part of this select group gets there because of performance. Now it will be the company’s performance that will determine what the employee gets.

Independent contractor or employee: a teleconference on the practical side

By Jerry Kalish on Posted in Events, Seminars and Speaking Engagements

Last month, I wrote about the importance of correcting classifying your workers: independent contractors or employees. The IRS publication to which I included a link told you the rules. Now here is an opportunity to learn in a very practical way how to win audits on independent contractor status from Nancy Joerg, a shareholder and senior attorney, in the law firm of Wessels & Pautsch, P.C., a Midwest-based law firm that represents employers in labor and employment matters. Ms. Joerg is conducting a teleconference on Thursday, February 15, 2006, called "How to Win IDES Audits on Independent Contractor Status".

The IDES, the Illinois Department of Employment Security, is the Illinois state agency that audits companies to see whether their workers should be reclassified from independent contractor status to employee status. While the focus is obviously Illinois companies, non-Illinois employers may also find this teleconference helpful.

 

Do ESOP companies perform better?

By Jerry Kalish on Posted in Employee Stock Ownership Plans

The National Center for Employee Ownership (NCEO), the leading source for research on employee ownership, has over the years compiled a substantial body of research on the relationship between employee ownership and corporate performance. Their conclusion: employee ownership combined with participatory management is a most powerful competitive tool.

A 2006 study they reported on is further compelling evidence to that conclusion. The study by Sam Houston State University professors Robert Stretcher, Steve Henry, and Joseph Kavanaugh looked at 196 publicly traded U.S. ESOP companies during the years 1998 through 2004. Each ESOP company was matched to a comparable non-ESOP company.

The ESOP companies had returns on assets that were higher than the matched non-ESOP companies in all seven years, net profit margins that were higher in all the five years where comparable data were available, and better operating cash flows in three of the five years where data were available. All of these findings were statistically significant (not likely to have occurred at random).

Here is a link to the NCEO’s summary of 21 years of research on employee ownership and corporate performance.

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