Department of Labor issues default fund proposed regulation

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

The Department of Labor (DoL) issued the first regulation under the Pension Protection Act of 2006 (PPA) which deals with what is a permissible default fund.

The PPA provides a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. The regulation provides fiduciary relief if the fund is a qualified default investment account (QDIA) as defined in the proposed regulation. As expected, the default fund could have equity exposure as in a:

Plan fiduciaries still have responsibility for the selection and monitoring of the QDIA.

Here is the link to the DoL’s Fact Sheet that summarizes the proposed regulation.

Overcoming 401(k) communication barriers

By Jerry Kalish on Posted in 401(k) Plans

Automatic enrollment with a balanced default fund isn’t by itself going to solve the retirement savings issues that many employee will be facing. It will help, but the real answer is for plan sponsors is improve the communication effort.

In an earlier post, I discussed in a general way that employee benefit communication should have
functionally oriented communication objectives: 

  • How to communicate flexible benefit plans
  • How to communicate savings and investment concepts for 401(k) plans
  • How to relate profit sharing plans to productivity and profitability
  • How to make employees better health care consumers and how to integrate wellness into health care plans to impact upon costs

Difficult enough by itself. But even more difficult if we are communicating with the many cultures that are represented in today’s workforce. One expert who knows about this is Melissa Burkhart, whose firm Futuro Solido USA addresses these issues for employers whose employees speak Spanish and other languages.

Melissa points out that many of these employees have strong and negative erroneous benefits about the U.S. financial system. In order to change their thinking and persuade them that retirement plans are, in fact, in their best interests, these beliefs must be addressed and clarified. In addition, Melissa says, there are strategies that can be used for conducting successful enrollment meetings.

Here is the link to the website for Melissa’s company, Futuro Solido USA which has videos you can view that help bring down the cultural and language barriers to successful communication.

SIMPLE vs. 401(k): decision deadline approaching

By Jerry Kalish on Posted in 401(k) Plans

If you’re thinking about establishing a SIMPLE in 2006 for your small business, then you don’t have much time. It must be place by October 1.

No doubt you’ve been told that it’s easy to establish – and relatively inexpensive – and also easy to maintain – and also relatively inexpensive. That’s true, or course. It’s called SIMPLE for those reasons. But don’t let being able to maintain a "hand-off" retirement plan at a relatively low cost drive your decision. Consider a 401(k) plan if you want to

  • Not cover practically all employees
  • Make larger contributions
  • Not have 100% vesting of employer contributions
  • Have the Roth option
  • Allow for plan loans
  • Etc.

And yes, it is more complicated to maintain and accordingly more expensive. Retirement planning is a lot like life. It’s a series of trade offs.

One more deadline. If you currently have a SIMPLE in 2006 but would like a 401(k) in 2007, you must make that decision and provide notice to employees at least 60 days prior to the start of the calendar year, November 1, 2006.

A SIMPLE can be rolled over to a 401(k) plan after a "2-year period" which begins on the date which the individual first participated in the SIMPLE.

Click here for a chart (PDF) that compares a SIMPLE with a 401(k) plan.

Promoters fishing for retirement plan dollars

By Jerry Kalish on Posted in 401(k) Plans

Sizeable participant retirement accounts, the call of early retirement for the Baby Boomers, and retirement plan provisions that permit in-service distributions – all factors that are apparently attracting promoters to get at that cash.

The NASD concerned about this danger to retirement plan participants issued an Investor Alert yesterday, Look Before You Leave: Don’t Be Mislead By Early Retirement Pitches That Promise Too Much. The Alert warned plan participants that

When faced with a pitch that promises that you can cash in your company retirement savings in your 50s, reinvest the money, and live comfortably off the proceeds for the rest of your life, many simply can’t say no. But usually they should. NASD is issuing this Investor Alert because we are aware of instances in which employees who had built up sizeable retirement savings have been misled, and financially harmed, by flawed, even fraudulent, early-retirement investment schemes.

The Alert uses as an example a recent enforcement action. The NASD fined the broker/dealer $2.5 million for failing to adequately supervise a broker who the NASD alleged lured long-term employees of a company through free seminars into retiring prematurely with unreasonable and exaggerated promises of high returns from reinvested funds from their company retirement plans.

The B/D also had to pay $13.8 million in restitution to 32 former employees. The B/D also agreed to hire a consultant who will conduct a comprehensive review of the firm’s seminar presentations, advertising, and systems and procedures relating to retirement planning and investment recommendations for retirees. In settling these matters, the B/D neither admitted or denied the charges, but consented to the entry of NASD’s finding. And what about the broker? He has been charged with securities fraud.

So here is today’s lesson –  beyond the obvious that there is no such thing as a free lunch. Plan sponsors should be careful, very very careful, about selecting an individual or firm to provide investment advice to 401(k) plan participants after the January 1, 2007 Pension Protection Act effective date. Plan sponsors will still have a fiduciary obligation to select and monitor these service providers.

Here is the link to the NASD’s Investor Alert.

Investment Returns: Defined Benefit vs. 401(k) Plans

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

That ‘s the title of a just published study by The Center for Retirement Research (CRR) at Boston College. The study compared defined benefit pension plan investment returns with 401(k) plan investment returns. Using data from 1988-2004, the study reports that:

  • Defined benefit plans outperformed 401(k) plans by one percentage point.
  • Part of the explanation may be because of higher fees in 401(k) plans.
  • Another part of explanation may be that more than half of the participants do not follow the prudent investment strategy of diversifying their holdings.
  • The available data suggests that IRAs produce even lower returns than 401(k) plans.

As someone who has been involved with both types of plans during this time period and before, I am not at all surprised at all by the results. That 401(k) plans have underperformed defined benefit plans raises serious concerns for the adequacy of retirement income. The IRA data, by the way, increases these concerns.

That’s history. The study I would like to see? One done 3-5 years from now reporting whether the advent of investment advice to 401(k) participants really made a difference. Let’s all hope so.

Here is the link to the study authored by Alice H. Munnell, Maurico Soto, Jerilyn Libby, and John Prinzivalli of the CRR.

Hat tip to Barry Barnitz’s Financial page.

Department of Labor seeks comments on guidelines for ERISA auditor independence

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

The picture above certainly does not represent today’s accountant. And in a similar vein the Department of Labor (DoL) wants to know whether its Interpretative Bulletin 75-9 published over 30 years ago relating to the independence of accountants who audit ERISA plans is still relevant. The DoL published a notice yesterday in the Federal Register asking for comments on this matter.

Background

Generally, Federal law requires that Plan Administrators of certain employee benefit plans, e.g., retirement plans that file Form 5500 (100 or more participants) are required to attach an independent qualified public accountant’s opinion.

The independent qualified public accountant must examine the plan’s financial statements and other records to determine whether the financial statements and schedules required to be included with Form 5500 are presented fairly and in conformity with generally accepted accounted principles. Retirement plan service providers like our firm often refer to the accountant’s report and financial statements collectively as the "audit report".

The auditor auditor engaged for the employee benefit plan audit must be licensed or certified as a public accountant by a State regulatory agency and should not have any should not have any financial interests in the plan or the plan sponsor.

DoL Guidelines

It is this last requirement that the DoL wants to reevaluate in light of the significant changes that have taken place in the business environment in general and the accounting profession in particular.

The 1975 DoL Interpretative Bulletin describes three types of relationships in which the Agency would not consider the accountant to be independent: That is, during the audit engagement and during the period covered by the audit, the accountant, his or her firm, or any member of the firm cannot:

(1) Have or be committed to acquire any direct financial interest or any material indirect financial interest in the plan or the plan sponsor;

(2) Have a connection to the plan or plan sponsor as a promoter, underwriter, investment advisor, voting trustee, director, officer or employee of the plan or plan sponsor; and

(3 Maintain financial records for the employee benefit plan.

At a later date, I’ll discuss some practical matters that a plan sponsor should consider in retaining the auditor and preparing for the audit. In the meantime, here are the relevant links:

DoL Interpretative Bulletin 75-9 (PDF)

DoL Announcement in Federal Register (PDF)

And a hat tip to Steven Taub at CFO.com.
 

 

 


Knowing when to hold ’em, knowing when to fold ’em and knowing when to roll ’em: 401(k) distribution choices

By Jerry Kalish on Posted in 401(k) Plans

 

In a recent post about the challenges in communicating employee benefits to employees, I included a Department of Labor stat: the average 34-year old has already worked for nine different companies in his or her brief career.

So I got to thinking: what are these employees doing with their 401(k) account balances when they leave? Based on what I see with our clients, most take the money and run. Two studies done last year support my anecdotal evidence.

The first study by the Congressional Research Service (CRS), Pension Issues: Lump Sum Distributions and Retirement Income Security, pointed out that most recipients of lump sum distributions were more than 20 years away from retirement.

The second done by Hewitt provided additional insight. Not surprisingly, Hewitt found a direct correlation between age and tenure and employees’ decisions to cash out of their 401(k)plans as well as the size of the account balance. The younger the employee the more frequent lump sum distributions were taken. But even a high percentage of older employees took lump sum distributions, i.e., more than 42% of employees age 40-49 took lump sums when leaving their jobs.

This decion despite favorable tax laws that promote portability of benefits by tax free rollovers or transfers to other tax favored retirement plans. The favorable distribution rules, by the way, were expanded by the new Pension Protection Act of 2006 (to be discussed at a later date):

  • Direct rollover to Roth IRA
  • Rollover by non-spouse beneficiary

Obviously there could be serious consequences to these employees not being able to accumulate  sufficient retirement savings.

One more example of why financial education needs to be available.

Here are the links (PDF) to both the Congressional Research Service report and the Hewit release on their study.

How do I change my 401(k) beneficiary?

By Jerry Kalish on Posted in 401(k) Plans

The answer to this question like answers to every question in Pensionland starts with, tell me more first.

Here is how a financial columnist recently responded to this question. Paraphrasing the Q & A:

Asked the reader: I’m going to remarry and how can I have my children inherit the money in my 401(k) account and not my soon to be new spouse?

Answered the columnist: It’s very simple, Just go to whoever is managing your 401(k) money and complete a new beneficiary form.

Maybe the columnist is right. Maybe it is that simple. But one thing I’ve learned over the years is that nothing is simple in Pensionland. Some retirement plans require by law that the spouse is the automatic beneficiary unless he or she consents otherwise in writing. Let jump ahead and assume that this is the case here but that there was no spousal consent obtained. You can take it from here.

This is why disclaimers are good things.

What do employees really want?

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

Max Goldman in his blog, The Performance & Talent Management Blog, writes about a recent survey by McKinsey that indicates HR executives overwhelmingly see employee benefits as being important in order to compete effectively. Particularly to be able to attract and retain top talent. However, says the study, most companies don’t understand what benefits employees prefer.

Then these companies better figure it out quickly because there is a whole different workforce than ever before with a war for talent going on. A new workforce that is characterized by:

  • Mobility. The average 34-year old has already worked for nine different companies in his or her brief career.
  • Distance. Approximately 10 million people work away from their corporate office at least 3 days a month.
  • Aging. There will be a growing group of retirees as the workforce shrinks.
  • Diversity. Most of the net increase in the workplace are women, minorities and immigrants.

The recent MetLife Study of Employee Benefit Trends provides some insight into what employees really care about. The MetLife Study has two interesting findings:

First, in this competitive market for talent, employees’ top consideration when trying to decide whether to join with/or remain with an employer is the "quality of coworker and/or customer relationships. The other two main criteria are the opportunity for work/life balance, and working for an organization whose purpose they agree with.

Second, life-stages matter. While workers experience many trigger events through out their careers, most of them admit they have trouble understanding which employee benefits are most appropriate. for them.

So maybe "what we got here is a failure to communicate." Communication that now has functionally oriented communication objectives:

  • How to communicate flexible benefit plans
  • How to communicate investment concepts for 401(k) plans
  • How to relate profit sharing plans to productivity and profitability
  • How to make employees better health care consumers and how to integrate wellness into  health care plans to impact upon costs

The challenge then is not just  find out what benefits employees want but to also make them relevant for this 21st Century workforce.

Click here for the link to Mr. Goldman’s article and click here for the MetLife Survey (52 pages PDF).

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