Retirement Plan Blog

March 15 401(k) compliance deadline can be focal point to re-examine plan design

Thu, 04 Mar 2010 07:47:42 -0600

2009 was a challenging year for employers and employees.

From our vintage point, we are seeing more employers than in recent years finding it necessary to return excess 401(k) contributions to Highly Compensated Employees by the March 15 deadline or provide a supplemental 100% vested contribution called a Qualified Non-Elective Contribution, a/k/a “QNEC”.

Unfortunately, passing 401(k) discrimination tests is not as easy as it was for Bill and Ted passing their history test in the 1989 classic comedy, Bill & Ted’s Excellent Adventure. If you missed it (it comes around from time to time on cable), Bill S. Preston, Esq. played by Alex Winter and and Ted Logan played by Keanu Reeves are two high school slackers that use a time machine to go back in time to bring back a group of famous historical figures to use in their presentation.

Those illustrious individuals, shown above, that were thrust into 1989 California (and what a trip that was) included Napoleon Bonaparte, Billy the Kid, Socrates, Sigmund Freud, Ludwig van Beethoven, Genghis Khan, Joan of Arc, and Abraham Lincoln.

Unfortunately, we don’t have a time machine or the late George Carlin who played Rufus from the future who supplied the lads with that time machine.

But going forward, the March 15 deadline can be an excellent focal point for employers to rethink those plan design elements that might help improve 401(k) discrimination results.

Returns of excess 401(k) contributions by HIghly Compensated Employees can sometimes be avoided changing the plan to:

Add an employer safe harbor contribution
Add an employer safe harbor match
Change the waiting period
Change the definition of compensation
Add automatic enrollment

But any of these changes means, of course, starting the planning process now - or maybe have history repeat itself a year from now.

IRA says hey, "don't you (forget about me)"

Mon, 01 Mar 2010 07:19:00 -0600

Pictured on the right is the cover of the soundtrack album for the 1985 movie by the late John Hughes, The Breakfast Club, which included Don't You (Forget About Me) written by the Scottish New Wave band Simple Minds. No, this is not a lead-in to a "Where Are They Now Segment" (they're still touring by the way).

Rather, this is about not being so involved with the more complicated retirement savings vehicles that we forget about good ole' Individual Retirement Plans, a/k/a IRAs.

IRAs are back in the financial news as part of President Obama’s budget for fiscal year 2011 which includes a provision for automatic IRAs. But that's what may be.

What's now with IRAs is that they continue to be an increasingly important tax planning vehicle for today's investor particularly for distribution planning made more attractive with new Roth IRA conversion rules. Beginning this year, the $100,000 modified adjusted gross income (MAGI) and tax filing status limits on Roth conversions has been removed.

The rollover rules are, of course, complicated but here is McKay Hochman's excellent 2010 portability chart updated for the Pension Protection Act of 2006. After all, this is the Age of Decumulation.

The ERISA plan document shouldn't be maybe yes, maybe no

Sat, 20 Feb 2010 07:13:50 -0600

No disrespect intended to the attorneys for beginning this post with a cartoon from the creative mind of Terry Hart, a/k/a, Hartboy. Rather, it’s intended as an excellent visual metaphor for my takeaway from the recent article written by our friend (and attorney) Andy Williams on his Benefits Law Group of Chicago website.

Andy writes What a Difference a "P" Makes: Hairsplitting Decision Denies Disability Claim. You can delve the details about the outcome of an ERISA case hinged on the difference (not a distinction) between whether a plan provision applied to a "Period of Disability" rather than just "periods of Disability."

But here’s the takeaway to which I referred above which is very relevant as the EGTRRA restatement deadline is just a few short months away for most retirement plans. (See our EGTRRA Restatement Series).

It’s simply that a retirement plan doesn’t just include Internal Revenue Code qualification requirements for favorable tax treatment. The plan document also defines the rights and obligations of the plan sponsor, participants, and beneficiaries. And that if the application of a particular plan provision “depends”, then maybe, just maybe plan sponsors should invest the time and expense of retaining an experienced attorney to review the matter.

Now about those Summary Plan Descriptions ….

Hard times shouldn't mean soft ERISA compliance

Fri, 05 Feb 2010 10:37:31 -0600

Our friends at Employee Benefit News Legal Alert published one of those "must read" articles. Attorney Cynthia Marcotte Stamer writes Tough Times Are No Excuse for ERISA Shortcuts. Ms. Stamer correctly points out that irrespective of the business hardships that plan sponsors are facing, the Department of Labor (DOL) will aggressively pursue enforcement if they perceive that a plan sponsor has failed take the necessary steps to protect plan participants.

Here are three key points she makes:

Many employers don't understand their fiduciary responsibilities and potential liabilities associated with sponsoring a retirement plan.
Plan sponsors frequently incorrectly assume that they can rely upon retirement plan service providers to ensure that their fiduciary responsibilities are being met.
Plan sponsors in other cases don't realize that they meet ERISA's functional definition of a fiduciary.

For comprehensive and understandable resources on what this "fiduciary stuff" is all about, check out The Fiduciary Education Campaign, a compliance assistance initiative of the Employee Benefits Security Administration (EBSA), the DOL agency responsible for fiduciary oversight.

Employee Benefit News Legal Alert is just one of the free resources provided by Employee Benefit News. Here's a link to check them out.

First Online 401(k) Rating System Launched By Brightscope, Inc. (One Year Later)

Fri, 29 Jan 2010 14:51:00 -0600

That was the title of a blog post I wrote exactly one year ago today when Brightscope, Inc., an independent data analytics company launched their 401k ratings disclosure website.

It featured the BrightScope Rating™, a quantitative 401(k) plan rating developed by BrightScope, Inc. in partnership with some of the country's top independent fiduciaries, finance professors, and 401(k) experts. BrightScope Ratings™ take into account over 200 unique data inputs per plan and calculate a single numerical score to define 401k plan quality at the company level.

In noting that it was the nation’s first online 401(k) rating system, I ended my post by saying, As for me, I’m still thinking about the implications of this innovation. Could be huge.

So I thought it would be interesting to see exactly the progress this start-up company has made over the past year.

Here’s a brief quantitative look-back. Then: 5 employees, now: 22. Then: 800 401(k) plans rated, now: 34,000 401(k) plans rated. Then: a few hundred page views a day, now: approximately 12,000 a day.

The buzz about BrightScope started from their initial press release and has been fueled by media coverage in both mainstream and trade media.

Since the beginning of 2009, the Company has launched the following products:

July 2009: Plan Management Dashboard for corporate plan sponsors
September 2009: Advisor Central for retirement-plan advisers
January 2010: Personal 401(k) Fee Report for 401(k) participants.

They have arrived in the middle of the “perfect storm”: increased Congressional scrutiny and involvement in 401(k) plans, stepped up regulatory focus by the Department of Labor, and everyone’s concern about the adequacy of retirement income – or lack thereof.

Only time will tell the extent to which Brightscope will impact the 401(k) plan industry. But impact it they will. Year 2 should be very, very interesting.

Fidelity Displaced as the Top Distributor and Mutual Fund Provider, According to 2010 Investor Study (and what it means for 401(k) plans)

Sat, 23 Jan 2010 10:21:41 -0600

That's the title of a press release I received this week from Cogent Research, a market research and strategic consulting firm based in Cambridge, Massachusetts about the results of their 2010 Investor Brandscape™ report.

According to Cogent, Fidelity Investments has forfeited its position as both the number one distributor and mutual fund provider to key rivals Charles Schwab and Vanguard. Cogent said it is because of significant shifts in brand perceptions, household penetration, as well as changes in investor loyalty.

The Cogent report which is based on a representative survey of 4,000 affluent and high net-worth investors in the United States reveals a decline in the number of investors using 401(k) plans. In fact, for the first time ever, affluent investors now report having more dollars allocated to IRAs than to employer-sponsored retirement plans.

In an interview Meredith Lloyd Rice, an author of the report, made the following key points.

The proportion of investors that hold a 401(k) has gone down significantly. As of Oct. 2009, she said, only 59% of investors’ surveyed hold an employee-sponsored retirement account, down from 70% in Oct. 2008.
The population is also aging and those closer to retirement are rolling over their employee-sponsored retirement plans into IRAs, another reason for the decrease in participation in 401(k) plans.
Younger investors are more likely to start their own businesses or freelance and aren’t necessarily working in traditional full-time jobs that offer employee-sponsored retirement plans.
High unemployment is also cutting into contributions.

In big picture terms, the results of this report aren't about market share or brand loyalty. Rather, It's how the intersection of our aging population, higher unemployment, and lower 401(k) participation is impacting retirement security - or lack thereof.

The shape of things to come for 401(k) plans in 2010

Sun, 10 Jan 2010 09:53:52 -0600

That's the poster from the not so good 1979 movie, The Shape of Things To Come. You kinda get the picture from the tagline Beyond the earth... Beyond the moon... Beyond your wildest imagination!

The movie was an adaptation of the 1933 science fiction novel, The Shape of Things To Come, by H.G. Wells which speculates on future events from 1933 until the year 2106.

My own prognostications for the future are not nearly as expansive. But rather limited to the world of 401(k) for 2010. Here's a link to my January 2010 column in Employee Benefit News, The Shape of Things To Come for 401(k) Plans.

The 2009 Retirement Plan in Review: The Good, The Bad, and The Ugly

Thu, 31 Dec 2009 10:17:52 -0600

It’s that season of the year. No, not the obvious holiday season, but the award show season. And I’ve got my own called, The Retirement Plan Year in Review: The Good, The Bad, and The Ugly.

The reference is, of course, to Sergio Leone's classic 1966 movie, considered the greatest of the Italian spaghetti westerns, starring Clint Eastwood (the Good), Eli Wallach (the Bad), and Lee Van Cleff (the Ugly).

And so with apologies to the afore-mentioned director and actors, here are my 2009 nominations in each of the three categories.

The Good: Increased Consumer Spending
The Bad: Job Losses
The Ugly: Early Retirements Hurt Social Security System and Many Recipients

You can see the entire "award show" in my December, 2009 column in Employee Benefit News.

So for 2009, that's a wrap.

Best wishes for a healthy, happy, and prosperous New Year.

Pozek On Pension added to our blogroll

Sat, 26 Dec 2009 09:28:37 -0600

Welcome to Adam Pozek and his new blog, Pozek On Pension to the cadre of retirement plan bloggers. He is Vice President, Consulting Services for Sentinel Benefits & Financial Group.

In the few posts Adam has published so far, he provides context for what’s happening with retirement plans with a point of view.

And here’s one that immediately caught my eye as a response to a plan sponsor or advisor “shopping” for a retirement plan administrator. I’ll simply link them to Adam’s post, Is Cheapest Always Best?

Right on!

Pozek On Pension (Adam Pozek)

Fri, 25 Dec 2009 19:55:21 -0600

Defined Benefit Pension Plans: What's Old Is New Again and Better Than Ever

Wed, 16 Dec 2009 14:21:43 -0600

Our blogging buddy, attorney Bob Toth, blogging from a ski slope in Quebec province, discussed the demise of defined benefit pension plans, Continuing the DB Demise Discussion. He notes that there are only 19,000 defined benefit plans now being covered by the PBGC.

The context in which Bob writes is what is generally perceived to be “Corporate America”. He quotes Nassim Nicholas Taleb from his book, The Black Swan: The Impact of the Highly Improbable:

Consider the following sobering statistic. Of the five hundred largest U.S, Companies in 1957, only 74 were still part of that select group, the Standard and Poor’s 500, forty years later. Only a few had disappeared in merger; the rest either shrank or went bust.

But that’s Corporate America as it used to be. From my vantage point, Corporate America is small business owners, and defined benefit plans are very much alive and well with new plans being adopted.

Just like Fleetwood Mac who after many years apart are back together, defined benefit pension plans are back and better than ever. Here is a presentation I did last year on that theme.

Defined Benefit Plans

See more presentations by JerryKalish | Upload your own PowerPoint presentations

Charles A. Krugel (Labor & Employment Law on Behalf of Management)

Wed, 16 Dec 2009 12:28:57 -0600

Save Your Retirement: What to Do If You Haven't Saved Enough or If Your Investments Were Devastated by the Market Meltdown (Book Review)

Sun, 29 Nov 2009 11:07:27 -0600

The Employee Benefit Research Institute (EBRI), an independent non-partisan research organization, in their annual Retirement Confidence Survey (RCS) has been asking workers how confident they are in having enough money for a comfortable retirement since 1993.

And in today’s economy, it should be no surprise that EBRI reported The 2009 Retirement Confidence Survey: Economy Drives Confidence to Record Lows; Many Looking to Work Longer. The Executive Summary stated

Workers who say they are very confident about having enough money for a comfortable retirement this year hit the lowest level in 2009 (13 percent) since the Retirement Confidence Survey started asking the question in 1993, continuing a two-year decline. Retirees also posted a new low in confidence about having a financially secure retirement, with only 20 percent now saying they are very confident (down from 41 percent in 2007).

The 2009 RCS reports that workers who have lost confidence in their ability to secure a comfortable are responding as follows:

81% have reduced their expenses
43% are changing the way they invest
38% are working more hours or a second job
25% are saving more money , and
25% are seeking advice from a financial professional

Sounds reasonable, yes? But here’s the rub. The RCS concludes that faulty assumptions and a lack of planning still hinder the ability of many Americans to realistically assess the preparations they need to take to ensure a financially secure retirement.

And that’s the problem that Frank Armstrong, III and Paul B. Brown address in their new book, Save Your Retirement: What To Do If You Haven’t Saved Enough or If Your Investments Were Devastated by the Market Meltdown.

So what’s so special about this book amidst the glut of books about retirement planning? Simply this. It reflects the real life experience of the authors in contrast to the media-created “investment experts” for many of whom the current recession is their first.

Frank Armstrong has more than 35 years of experience in the securities and financial services industry and is the founder and principal of Investor Solutions, Inc., a fee-only registered investment advisor, based in Miami. Paul Brown is a longtime contributor to the New York Times and co-author of the best selling retirement plan guide Grow Rich Slowly. He is a financial expert for ThirdAge.com, the popular website devoted to the concerns of people over age 40.

There’s nothing magic in their book. It’s just basic, old-school financial management in which Armstrong and Brown respond directly to what I call the “new financial realities” by showing battered investors

Where to move their savings
How to recalculate what they’ll really need to retire
How to assess when they can now afford to retire
How they should change their approaches to investing
How to use the federal tax system to save more
What to expect from Social Security now

So if you’re one of those people worried about how and when you can afford to retire, then this book can be an excellent guide. Here's a link to Amazon if you want to purchase the book, and you can also subscribe to Frank's companion blog, Sink or Swim.

You can also check out other book reviews I’ve done: Josh Itzoe's timely Fixing The 401(k); Fran Hawthorne's controversial Pension Dumping: The Reasons, The Wreckage, The Stakes for Wall Street; and Christian Jarrett’s and Joannah Ginsburg’s This Book Has Issues - Adventures in Popular Psychology.

2010 retirement plan limits unchanged but have future implications

Fri, 27 Nov 2009 12:11:43 -0600

Most annual retirement plan limits are indexed to inflation; and because of the decline in the Cost of Living Index in 2009, many of the limits remained unchanged for 2010.

Following are the key retirement plan limits for 2010 as announced by the Internal Revenue Service.

401(k) and 403(b) Deferrals: $16,500.
Catch-Up Limit (Age 50 and Older: $5,500.
Defined Benefit: $195,000.
Maximum Compensation: $245,000.
Highly Compensated Employee: $110,000.
Social Security Taxable Wage Base: $106,800.

Click here to download our chart for a list of all the retirement plan limits for 2010 compared to 2009 and 2008.

It may be good news for employees, many of whom expected reductions, but not good news for 50 million Social Security recipients. The negative inflation rate meant that they will not get a cost of living increase next year – the first time since 1975.

But while by law, Social Security benefits can't decline, premiums for the Medicare drug program are expected to increase next year by 11%. Social Security recipients who have these premiums deducted from their benefits will receive reduced checks.

And what are the implications of this deflation beyond 2010? Here is a link to J.P. Morgan’s article, Deflation and the Effect on Benefit Plan Limits, that discusses its impact on both private and public retirement plans.

Dude, where's my 401(k)?

Sun, 15 Nov 2009 18:30:42 -0600

If you missed that 2000 stoner comedy Dude, Where’s My Car?, you had several chances recently to catch it on cable. But if you’re still not aware of this movie that was a modest box-office success but has managed to develop a cult following, let me raise your pop culture awareness.

Two potheads played by Ashton Kutcher and Seann William Scott wake up from a night of partying and can't remember where they parked their car. And it occurred to me what if they woke up 40 years later and couldn’t find their 401(k) accounts from all the different employers for whom they worked. (Yea, yea, I know I should get a life outside ERISA!).

That’s a likely scenario for many employees who were never part of a defined benefit pension plan and participated only in defined contribution plans such as profit sharing and 401(k). In an economy in which workers change jobs frequently, employers go out of business, move or are acquired, it’s not unusual for them to lose track of former account balances.

The resources to find these lost defined contribution accounts are even more limited than for defined benefit plans. For these plans at least, the Pension Benefit Guaranty Corporation (PBBC) does have its Pension Search database, but it’s only useful to assist employees whose defined benefit pension plan the PBGC has taken over. The PBGC does, however, provide information on how to track down a lost pension from other sources in their publication, Finding a Lost Pension.

There are, however, at least two resources, however limited, that may help:

The Social Security Administration which receives Schedule SSA information from the Department of Labor each year for terminated employees with vested benefits. However, the information is only as current as the date that the employer left his former employer.
The National Registry of Unclaimed Retirement Benefits (NRURB), a database operated by the benefit distribution processing firm PenChecks. However, employers must take the initiative to register names of former employees who have left account balances in their retirement plan. There is currently approximately 50,000 such individuals in their database.

So what’s the solution? One to consider is the approach taken by the U.K. and Australia. Each country has a central registry for the purpose of helping people find lost pensions. You can read about this approach in the March/April 2002 issue of Contingencies magazine article, Retirees ISO Their Lost Pensions, written by David Blake of the Pensions Institute in London and John Turner of the American Association of Retired Persons (AARP).

The bottom line is that employees are on their own, and it’s time to address the matter.

And by the way, if you did miss the movie that inspired this post, be patient. The sequel, Seriously Dude, Where's My Car, is supposed to premiere next year.