A tale of two neighbors: the U.S., Canada and mutual fund fees

By Jerry Kalish on Posted in 401(k) Plans

The U.S. and Canada are alike in many ways, but according to a recent study, Mutual Fund Fees Around the World, mutual fund fees in the two countries vary widely. The study indicates that the U.S. is among the lowest cost countries and Canada is the highest fee country by far: 79 basis points versus 200 basis points.

The authors, Ajay Khorana from the Georgia Institute of Technology, Henri Servacs from the London School of Economics, and Peter Tufano from the Harvard Business School, studied fees charged by 46,799 mutual funds offered for sale in 18 countries, which together account for about 86% of the world fund industry. Fees vary substantially from country to country. They found that larger funds and fund complexes charge lower fees, as do funds selling cross-nationally, while fees are higher for funds distributed in more countries and funds domiciled in so-called offshore locations. In addition, fund fees are lower in countries with stronger investor protection.

This should make 401(k) participants feel better.

Click here to download a copy of the study (PDF 52 pages). 

Gambling on retirement, part deux

By Jerry Kalish on Posted in Defined Benefit Pension Plans

In an earlier post, Gambling On Retirement, I cited a survey done for The Tax Foundation that indicated that 21% of the respondents believe the lottery is a practical way to save for retirement.

The Tax Foundation went on to assert that contrary to many people’s beliefs—and to state governments’ claims—the money that states raise from lotteries is tax revenue; and that lotteries exemplify poor tax policy as a regressive tax. That is, it takes a greater percentage of income from the poor than from the wealthy. Here’s more evidence says The Tax Foundation on the regressive nature of the lottery.

The State of Taxes, New York that is

By Jerry Kalish on Posted in Defined Benefit Pension Plans

In what could be called a New York state of mind, Congress passed into law H.R. 4019, signed by the President on August 3,  which amends a 1996 federal law that bars the states from taxing certain retirement income received by non-residents. Retirement income was defined to include income from both qualified retirement plans and non-qualified deferred compensation plans.

Not exactly, said New York which took the position that the law did not prevent the state from taxing non-qualified retirement benefits paid by a partnership to its retired non-resident partners. The law, New York said, only applied to employees and not partners.

Not now. The new law is retroactive for amounts received after December 31, 1995. Amended tax returns may be in order.

$1.8 Trillion

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

That’s the amount of new money that  Bloomberg estimates will go into 401(k) plans as a result of the Pension Protection Act of 2006 because the new law:

  • Permits automatic enrollment of employees in 401(k) plans
  • Allows small employers to establish combined defined benefit and automatic enrollment 401(k) plans
  • Makes permanent higher contribution limits for 401(k) plans and IRAs

And this estimate doesn’t include the additional fees that the 401(k) service providers will earn as a result of the law change that permits them to also provide investment advice to employees. This provision is effective for retirement plan years beginning after December 31, 2006. Translated, this means that since most plans are on a calendar year basis, the starting date is January 1, 2007.

We’re talking big money. For example, Fidelity alone is expected to see fees for advice increase from $200 million annually to as much as $1 billion.  Bloomberg cites Jim Lowell, editor of the independent trade newsletter Fidelity Investor, as making this estimate.

Potential for conflict of interest? You bet! Let’s hope that the regulatory agencies are able to meet the challenge and that plan sponsors learn how to buy – and not be sold – 401(k) services.

“Money attitudes”: the new 401(k) demographic

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

The new Pension Protection Act of 2006 opens the door for ERISA fiduciaries – a registered investment advisor, bank, insurance company or broker/dealer – to be compensated for giving investment advice to retirement plan participants. The Act creates a prohibited transaction exemption to these fiduciaries subject to certain safeguards to protect participants from abuse. More on the details at a later date.

With January 1, 2007, the effective date of the prohibited transaction exemption, the marketing process has already started. The investment advice provider will hopefully take the plan’s demographics into account. And those demographics, suggests a 2006 study conducted by The Pension Research Council at the Wharton School, are not socio-economic factors but rather “money attitudes” which include:

  • Successful Planners  who have a strong, goal-oriented vision of a successful retirement
  • Up and Coming Planners who are similar to Successful Planners but don’t have as much confidence about their plans
  • Secure Doers who have a strong interest in savings, particularly out of a sense of responsibility or duty towards themselves or others
  • Stressed Avoiders who find financial matters to be a source of stress, anxiety and confusion
  • Live-for-Today Avoiders who are uninterested in the future

The study, “Money Attitudes” and Retirement Plan Design: One Size Does Not Fit All, conducted by Donna M. MacFarland, Carolyn D. Marconi, and Stephen P. Utkus can be downloaded here (PDF).

Congress passes pension reform legislation

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

On Thursday, August 3, the Senate passed significant pension reform legislation by a wide margin (93 to 5). The bill enacted by the Senate is identical to the one passed by the House of Representatives last week. The President is expected to sign the bill into law.

The legislation, called the “Pension Protection Act of 2006", 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 Act includes the following provisions:

Defined Contribution Plans

  • Encourages automatic enrollment in 401(k) plans
  • Permits employees to diversify their company stock accounts among other investments
  • Removes the scheduled expiration of increased contribution limits, Roth contributions, and the saver’s credit
  • Requires faster vesting of employer profit sharing contributions
  • Allows non-spouse beneficiaries to rollover their distributions to IRAs
  • Adds new requirements for notice to participants
  • Changes the rules for 401(k) providers to provide investment advice to participants
  • Resolves major controversies surrounding cash balance plans on a prospective basis

Defined Benefit Pension Plans

  • Requires faster funding of pension obligations
  • Allows larger tax deductions based on funded status of the plan
  • Changes the method of calculating the lump sum equivalent of annuity benefits
  • Requires additional survivor option
  • Changes the basis of calculating PBGC premiums
  • Allows participants age 62 and older to take in-service distributions
  • Permits certain small employers to have defined benefit pension plans with 401(k) provisions

I will be providing more detailed analysis and comments on the Act’s provisions in the future.

I’m from the government and I’m here to help

By Jerry Kalish on Posted in 401(k) Plans

That old joke is actually not a joke these days when it comes to government resources for small business retirement plans.

The two agencies with oversight responsibility for qualified plans, the Internal Revenue Service (IRS)  for tax aspects and the Department of Labor (DOL) for reporting, disclosure, and fiduciary matters both provide excellent resources for small businesses. In an earlier post, I provided a link to an IRS video workshop for small business. Now it’s the DOL’s turn.

Yesterday the DOL held a Small Business Employee Benefits Seminar in Chicago on both Retirement Plan Options in the morning and Health Plan Compliance in the afternoon. The morning session which was the only part I attended provided an excellent overview of:

  • IRA based plans: Payroll Deduction IRAs, SEPs, and SIMPLE IRAs
  • Defined contribution plans: safe harbor 401(k), 401(k), and profit sharing
  • Defined benefit plans

One of the best handouts was the DOL’s brochure, Choosing A Retirement Solution for Your Small Business, which contains a chart comparing the above-mentioned plans. Click here (PDF) for a copy.

Will this be a green Christmas for some 401(k) plans?

By Jerry Kalish on Posted in 401(k) Plans

Maybe so.

Morningstar columnist Russel Kinnel reports that payouts from settlements from the mutual fund scandal of 2003 could be coming in December or in the first quarter of 2007. Remember the mutual fund scandal of 2003? This may refresh your memory:

Several name brand mutual fund families were implicated in facilitating late trading and market timing activities for favored clients. Many of the investors were 401(k) fund participants which resulted in a renewed emphasis on procedural prudence by plan sponsors, a removal of the offending funds from the fund lineup, and trading restrictions placed on plan participants.

By mid-2005 practically all of the fund families had settled with New York Attorney General Eliot Spitzer who initiated the investigations and the Security and Exchange Commission. However, settlement payments have yet to be made to fund holders.

What should 401(k) plans be doing? Checking with their 401(k) providers and mutual funds after the SEC approves the settlements.

Click here to read the Wikipedia article on the mutual fund scandal, and click here to read Mr. Kinnel’s story on the settlement.

401(k) loans easy money?

By Jerry Kalish on Posted in 401(k) Plans

Sure, a 401(k) loan is a quick and easy way to borrow money, and likely to increase among 401(k) participants.

Dan Lamaute of Lamaute Capital, Inc. tells us that the slumping housing market has reduced the use of home equity as a source of personal loans. The Fed reports that home equity loans fell by $900 million the week ending June 28, and Dan says that individuals looking for money are increasingly pursuing other options such as 401(k) loans.  

If you are a 401(k) participant considering this, is this a smart financial move for you to make? It’s not a simple decision. Here are some factors for you to consider:

  • Interest on a home equity loan is deductible while interest on a 401(k) loan is not.
  • If the funds are retained in the 401(k) plan, the account may earn more as a tax deferred investment than the after-tax cost of the home equity loan.
  • If you change jobs, you must repay the loan or could suffer a taxable distribution with a 10% penalty.

It’s complicated, and it’s one of those "kids, don’t try this at home" things. Work it through with a financial planner.

One retirement program that isn’t getting sacked

By Jerry Kalish on Posted in Defined Benefit Pension Plans

While Congress grapples with legislation to prolong defined benefit pension plans including those in ailing industries, there is at least one industry whose retirement program is quite healthy.

That industry, or game depending on your point of view, is professional football. Yesterday the National Football League (NFL) and the NFL Players Association announced that they had reached agreement on increases in benefits for retired and current players. These  increases will cost approximately $120 million per year, bringing the annual cost of NFL player benefits to $700 million per year. Retired players now receive nearly $60 million per year in retirement benefits.

So I got to thinking which group of professional athletes has the best retirement plan. Is it the NFL, the National Hockey League (NHL), the National Basketball Association (NFL) or Major League Baseball (MLB). The answer is none of the above. 

According to Business Week Online, PGA Tour Members have the most lucrative retirement plan of all professional athletes. Nick Price is quoted in the article saying that golfers now in their mid-20s who have a career like his could have $30-$40 million in their pensions. Someone like Shaquille O’Neal, on the other hand, could have $55,000 a year in pension benefits if he plays 15 years.

The difference is in how the respective retirement plans are funded. The retirement plans for players in the NFL, NHL, NBA, and MLB are all funded through television revenues. The PGA retirement program works like a deferred compensation plan.

For more on the NFL retirement program click here , and for more on the PGA Tour Members retirement program click here which will require you to navigate through advertising.

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