No goody bag now goes untaxed

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

That’s a picture of the Golden Globe award given each year by the Hollywood Foreign Press Association (HFPA). The "no goody bag now going untaxed" is the announcement today by the Internal Revenue Service that it reached an agreement with the HFPA  resolving outstanding tax responsibilities with respect to Golden Globe Awards presenter gift baskets. And these aren’t just baskets. They include luxury trips, jewelry, and consumer electronic products that were estimated to be worth up to $100,000 at last year’s Oscar awards.

The agreement is part of a continuing outreach by the IRS to the entertainment industry regarding their income tax liabilities. An outreach that began last year with the Academy of Motion Picture Arts & Sciences resolving outstanding tax responsibilities with respect to Academy Awards gift baskets.

Now this story doesn’t have a whole lot to do with retirement plans – actually nothing at all to do with retirement plans. But I like it because it is a good example of the Two Part Theory of Political Economics ascribed to Nobel winning economist Milton Friedman.

  • Part One: “Them what has gets”.
  • Part Two: “Ain’t no free lunch”.

 

Employee ownership not just for U.S. workers

By Jerry Kalish on Posted in Employee Stock Ownership Plans

Employee ownership, either in the form of employee stock ownership plans (ESOPs) or stock options, is now recognized world wide. The leading voice of employee ownership in Europe is the European Federation of Employee Share Ownership which held its Sixth European Meeting of Employee Ownership in Brussels last month.

For those of you interested in what Europe is doing with employee ownership – we are after all in a world economy, here is a link to the Conference presentations. One of our neighbors, John Hoffmire at the University of Wisconsin – Madison, presented a paper on Employee Ownership Indices and Investment Funds in the USA, 1992 to present.

The Economics of Providing 401(k) Plans: Services, Fees, and Expenses

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

The Economics of Providing 401(k) Plans: Services, Fees, and Expenses

The Investment Company Institute, November 2006

Executive Summary

  • 401(k) plans are a complex employee benefit to maintain and administer and are subject to an array of rules and regulations. Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services.
  • Employers and employees generally share the costs of operating 401(k) plans. As with any employee benefit, the employer generally determines how the costs will be shared.
  • About half of the $2.4 trillion in 401(k) assets at year-end 2005 was invested in mutual funds, primarily in stock funds. Mutual funds are required by law to disclose a large amount of information, including information about fees and expenses and portfolio turnover.
  • 401(k) investors in mutual funds tend to hold low-cost funds with below-average portfolio turnover. Both characteristics help to keep down the costs of investing in mutual funds through 401(k) plans.

New guide to 401(k) distributions available from IRS

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

401(k) Resource Guide – Plan Sponsors – General Distribution Rules

Executive Summary

Distributions from 401(k) plans can be complicated and confusing. The IRS has just made available a this resource guide that covers the basics of 401(k) distributions. Each topic has a link to the applicable Internal Revenue Service publication.

Examining 401(k) returns: what works and what doesn’t

By Jerry Kalish on Posted in 401(k) Plans

Rick Bales over at Workplace Prof Blog points us to a joint Vanguard/Wharton study of over a million 401(k) participants that indicates what works and what doesn’t in maximizing long-term investment returns. Not surprising:

  • High-turnover trading hurts long-term returns.
  • Periodic re-balancing helps long-term returns.
  • Holding balanced or lifecycle funds is the best "trading" strategy of all.

But here is another question to ask. Does the adequacy or lack thereof of the actual funds themselves matter? Here is a link to my last summer’s post that points to a study which in non-academic terms says: yes, and a lot.

But the real question is, the answer to which we will have to wait: will the new investment advice provision effective this year make a difference?

Retirement planning for 2007 begins now

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

Last minute tax planning is like cramming for a final exam. You don’t always get the best results. Starting now to do 2007 retirement planning can make a big difference. Here are some of the situations we saw in late December, 2006:

  • Not enough compensation for a shareholder-employee of an S corporation. Many owners will minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.
  • Not enough time to maximize 401(k) contributions. Adopting a 401(k) in the latter part of the year may not give an employee enough time to maximize his or her own contributions. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral.
  • Timely notice not give to employees. Tax planning is a time-sensitive activity, and sometimes notices to employees must be made in order to achieve desired results. For example, an employer sponsoring a SIMPLE must give its employees notice of the plan provisions and employer contribution levels, including any plan changes, at least 60 days prior to the start of the next calendar year. An employer who did not give the requisite termination notice by November 1, 2006 meant no profit sharing/401(k) plan for 2007. An employer with a SIMPLE should keep November 1, 2007 in mind if a different plan type is intended in 2008.
  • Employer contributions made early in the year. While it can be advantageous from an investment standpoint to get the money working as soon as possible, this can sometimes cause problems. For example, if an employer has already made its profit sharing contributions for the current plan year, those contributions may practically preclude a defined benefit plan from being adopted for the year. It may also eliminate the adoption of a profit sharing plan whose allocation method might better favor a Highly Compensated Employee if contributions to a SEP have already been made.

These are just a few of the situations that could have been avoided by not waiting until the last minute to adopt a retirement plan. Studying for that final 2007 retirement planning final exam should begin now.

New Year, New 401(k) Rules

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

The Pension Protection Act of 2006 makes significant changes affecting 401(k) plans – for the most part favorable to plan sponsors and participants.

Here is a summary of those changes effective in 2007:

  • Increased 401(k) Limits. For 2007, the annual limit for 401(k) contribution increases to $15,500. The catch-up for age 50 and older remains at $5,000.
  • Default Investments. Beginning after January 1, 2007, the Act permits the use of default investment choices beyond money market and stable value funds that plan sponsors can use for employees who do not make investment elections. The Department of Labor issued proposed regulations late last year which will be finalized soon.
  • Investment Advice. Beginning after January 1, 2007 the Act encourages plan sponsors to make investment advice available to 401(k participants. There will be much to comment upon later this year.
  • Faster Vesting of Employer Non-Elective Contributions. Effective in 2007, employer non-elective contributions, i.e., profit sharing, must vest according to rules applicable to matching contributions: no less favorable than either 3-year cliff vesting (100% vested after 3 years of service), or 6-year graded vesting (20% after two years, 20% a year thereafter, 100% after six or more years).
  • More Frequent Benefit Statements. Effective in 2007, the new law requires that Plan Administrators must provide a benefit statement: 1) at least once a quarter to participants in plans in which they can self-direct their accounts, 2) at least once a year to participants in plans in which they cannot self-direct the investment of their accounts, and 3)upon request to any beneficiary.
  • Diversification of Investments in Employer Stock.  Effective in 2007, participants must be given the right to diversify their investments in employer stock. Exceptions to the new law are provided for certain privately-held companies and Employee Stock Ownership Plans.

Finally, if you didn’t add a Roth 401(k) provision to your 401(k) plan in 2006, consider doing so in 2007 to allow participants to diversify their future tax burden.

The 2006 retirement plan year in review: the Good, the Bad, and the Ugly

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

Just like Sergio Leone’s classic 1966 movie, 2006 will indeed be memorable.

And so with apologies to Mr. Leone and Clint Eastwood, here are my 2006 choices for the Good, the Bad, and the Ugly in Pensionland:

  • The Good: The passage of the Pension Protection Act of 2006 (PPA). The new law makes significant changes to practically every retirement plan in which approximately 44 million people are participants. The 900 page bill affects all types of retirement plans including defined benefit plans, profit sharing and 401(k) plans, cash balance plans, and employee stock ownership plans (ESOPs). Most of the changes are effective in 2007 and 2008 but some are retroactive or delayed. The PPA significantly enhances 401(k) plans – now the retirement plan of choice by corporate America.
  • The Ugly: the increasing number of scams and outright thefts from retirement plans. Sizeable account balances and the Boomers starting to retire have become targets. While the numbers are relatively small, they can have a profound impact on plan participants and retirees. The regulatory agencies – the National Association of Security Dealers, the New York Stock Exchange, and the Department of Labor – are ramping up their enforcement activities to deal with this growing problem. 

That’s it. For 2006, it’s a wrap.

The British equivalent of chutzpah

By Jerry Kalish on Posted in 401(k) Plans

Chutzpah, derived from the Yiddish, is the quality of audacity for good or for bad.  For the bad in the case at hand. And "case" it is. Someone stole 3 laptops from the London Metropolitan Police with payroll and pension data on 15,000 Met police officers. And if it could happen to Scotland Yard, one of the world’s preeminent law enforcement agencies, it could also happen to your retirement plan’s data.

I covered this problem several months ago, and it bears repeating, It’s 10:00 in the evening. Do you know where your 401(k) plan is? I included a link to Tom Fragala’s article on his Truston Identity Theft Blog on Top 10 Ways To Protect Yourself From Laptop Theft. Here they are in brief:

  1. Lock it.
  2. Be careful at home.
  3. Hide it.
  4. Don’t leave it unattended.
  5. Password protect it.
  6. Make it easy to return.
  7. Personalize it.
  8. Write down your computer info.
  9. Back up your data.
  10. Protect your backups.
  11. Bonus tip 1. Install laptop trace software.
  12. Bonus tip 2. Install remote locking software.

Here is the link again to Tom’ s article which has the details.

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