Retirement Plan Blog

09 | 5 | 2008 Posted By Jerry Kalish

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"Same, same, but different" is a familiar saying in Thailand, and as shown on the left, the subject of a book of objects photographed in Thailand by Thomas Kalak, the photographer from Munich. It means, I understand, similar but not exactly the same. Kinda like, 403(b) plans and 401(k) plans.  

And that's a good jumping off point for me to answer a question posed to me  the other day in an email from one of this blog’s readers. Asks the reader, "Are the 403(b) regulations the same as the 401(k), as far as the 7-day rule for a small sponsor to deposit 401(k) contributions". It’s an important question as the distinction between 403(b) plans and 401(k) plans is starting to blur with the 403(b) regulations effective January 1, 2009.

What the reader is referring to, of course, is the recent Department of Labor Proposed Regulation that employee contributions to a "small"retirement plan (one with less that 100 participants) will be deemed to be made in compliance with the law if those amounts are deposited with the plan within 7 business days of receipt or withholding. (See my post, Department of Labor Proposes Safe Harbor Rule for Deposit of Employee 401(k) Contributions,,,Finally).

So the answer is yes, a 403(b) plan would be subject to the 7-day requirement if it's an ERISA plan. Now that's an important "IF". A 403(b) sponsor could find that their newly required plan document if not carefully drafted could cause them to wake up New Year's Day with an ERISA plan. And, thus, subject to all the ERISA rules (old and new) including reporting, disclosure, prohibited transactions, and fiduciary obligations. And, of course, the afore-mentioned 7-day deposit rule as part of the mix.

But 403(b) plan sponsors do have an obligation to make timely deposits of employee contributions. The 403(b) regulations require an employer to transfer contributions to the plan “within a period that is not longer than is reasonable for the proper administration of the plan”. For example, within 15 business days of the month the amount would have otherwise been paid to the participant.

So thanks, kind reader, for your question. I hope I've answered it to your satisfaction.

Here's a link to fellow blogger, Bob Toth's, post on 403(b) plans inadvertently becoming ERISA plans, The New 403(b) Documents and ERISA. He and his partner, Nick Curabba, provide excellent - and understandible - coverage of 403(b) plans and the new ERISA "stuff" on Baker & Daniels' Benefits Biz Blog.

09 | 3 | 2008 Posted By Jerry Kalish

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Venn diagram template via GraphJam. 

09 | 2 | 2008 Posted By Jerry Kalish

Our fellow bloggers at Slate magazine’s BizBox blog have been following what the general business media have saying about 401(k) plans for small businesses. Their most recent post on the topic, The 401(k) Question Continued ...  picked up on an article in U.S. News and World Report, What Small Business Owners Need to Know About 401(k)'s, that focused solely on 401(k) plans as the best retirement vehicle for business owners.

But as I indicated in an earlier post, Which way to the best retirement plan?, what’s best is  based on the specific set of facts and circumstances. One size doesn’t fit all.

While you don’t read a lot about them, SIMPLEs and SEPs do have their advantages for the business owner. SIMPLEs permit salary reduction contributions and matching contributions, and SEPs allow employer contributions of up to 25% of compensation. Both have substantially less documentation and compliance requirements (and expense) compared to a qualified retirement plan, i.e., 401(k)/profit sharing plan, but the trade-off is less design flexibility and plan features. 

So 401(k) as a slam dunk? Maybe more like a jump ball.

08 | 29 | 2008 Posted By Jerry Kalish

ERISA, of course, requires adherence to a host of deadlines, and the failure to meet some of them can have serious consequences for a retirement plan sponsor. Here’s a new batch of such deadlines added by the Pension Protection Act of 2006 (PPA) that could affect defined benefit pension plans for 2008 calendar year plans.

The PPA provides benefit accrual and payment restrictions for underfunded pension plans. I’ll neatly bypass the technical stuff because the point is that timing is everything with respect to when the actuarial valuation is performed. If it’s not done "timely", even a well funded pension plan can be swept under these restrictions.

For example, if the actuarial valuation of a pension plan is not performed before October 1 for a calendar year plan, then the plan is presumed to be less than 60% funded -regardless of actual funded status - and the most severe benefit restrictions would apply.

There are a number of administrative practices that a plan sponsor can do to avoid such adverse consequences. But everyone involved - the plan sponsor and advisors - have to stay in the moment.

Hat tip to Ron Willour, Enrolled Actuary, owner of Indianapolis-based Omega Retirement Plans, Inc. 

Picture by Chris Garrett on his DSLR Blog, Adventures in Digital Photography.

08 | 24 | 2008 Posted By Jerry Kalish

The funded status (or lack thereof) of public employee pension plans doesn't get a whole lot of coverage by the mainstream media.

That's unfortunate because it's an important public policy issue with extremely significant long-term financial implications for all of us taxpayers. But leave it to cartoonist Scott Adams to weigh in on the topic via his Dilbert strip for August 8, 2008:

But via the internet, it is an area that is covered by several knowledgeable bloggers.Two who I follow regularly via my RSS reader are John Bury and Jack Dean.

John Bury's blog is NJ Voices. John's one of us. That is, he's in the retirement plan business. He's an Enrolled Actuary with his own firm in Montclair, New Jersey. He's also a community activist who writes regularly about state, county and local government including the New Jersey state pension plan. And if you read his posts, he is - with all due respect - an actuary with attitude. And, in my opinion, that's a good thing.

Jack Dean is on the other side of the country in California. He edits Pension Watch. He also edits PensionTsunami.com, a project of FACT -- the Fullerton Association of Concerned Taxpayers. FACT's primary focus is on California's public employee pensions and the state's funding issues.

Hat tip to Mr. Dean for his post about Dilbert, Unfunny Pension Issue Hits the Funnies. 

08 | 21 | 2008 Posted By Jerry Kalish

The Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. The GAO investigates how the federal government spends our taxpayer dollars and has often been called the "congressional watchdog,"

I blogged about the GAO just the other day in my post, Getting ready for the first wave of Baby Boomers reaching retirement age: the Social Security Administration's big challenge. That post discussed the GAO’s report assessing how the Social Security Administration’s reduced workforce will manage the increased number of Social Security recipients as the Baby Boomers retire.

401(k) plans have also been on the GAO’s project list with particular emphasis on the fiduciary aspects of ERISA. Back in December, 2006, I blogged that GAO's 401(k) fee report, Congressional comments picking up buzz in local papers. The political result of that report was the introduction of legislation in Congress requiring more fee disclosure. That legislature was s put on hold when Congress adjourned while the Department of Labor has made significant regulatory initiatives in this area.

All this is background for the most recent GAO report issued last month, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors Highlights of GAO-08-774, a report to the Chairman, Committee on Education and Labor, House of Representatives. While it doesn’t break any new ground, it does provide an excellent overview of where the retirement plan industry is now with respect to: 

1. Common 401(k) plan features, which typically have important fiduciary implications, and factors affecting these decisions.
2. Challenges sponsors face in fulfilling their fiduciary obligations when overseeing plan operations.
3. Actions the Department of Labor takes to ensure that sponsors fulfill their fiduciary obligations, and the progress Labor has made on its regulatory initiatives.

The GAO also renews its recommendations to Congress to pass legislation that would help the Department of Labor’s fiduciary oversight. From the report’s conclusion (and note the section I have highlighted in italics):

Since our 2006 report, Labor has made progress on its disclosure initiatives but some important fiduciary issues have yet to be fully addressed. In our previous reports, we asked Congress to consider amending ERISA to (1) explicitly require 401(k) service providers to disclose to plan sponsors the compensation they receive from other service providers and (2) give Labor authority to recover plan losses against certain types of service providers, even if they are not currently considered fiduciaries to that plan under ERISA. While Labor has proposed a regulatory change that could eliminate some of the confusion surrounding certain fiduciary obligations, it is unclear how closely the final regulation will follow the proposed rule. We continue to believe that changes to ERISA would help Labor in its efforts to promote sponsors' fiduciary oversight and be in the best interest of participants.

Here's the link to the complete report, Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors.  

08 | 18 | 2008 Posted By Jerry Kalish

Just recently, I thought that it might be the dog days of summer as far as setting up a retirement plan is concerned.

But it may be the “retirement plan season” is here after all - at least in the minds of our fellow bloggers at Slate magazine’s BizBox blog. Their post today is What Retirement Plan Should You Offer? 

So let me take a stab at answering. One way to answer it is to start with the types of retirement plans that are available:

• Payroll Deduction IRA
• Simplified Employee Pension (SEP)
• SIMPLE IRA Plan
• 401(k) Plan
• SIMPLE 401(k) Plan
• 403(b) Plan 
• Profit-Sharing Plan
• Money Purchase Plan
• Defined Benefit Plan

The Internal Revenue Service provides excellent thumbnail sketches on their website, Choosing A Retirement Plan: Retirement Plan Options. But that’s really taking the horse before the cart. The starting point, we believe, should be the business owner answering two questions:

1. What is my objective? Is it to maximize my own contributions, or is it to attract, motivate, and retain the high performing employees I need to grow my business? Or, is it a combination of both?
2. Where am I in the life cycle of my business? Is my business in a start-up, fast growth, stable growth, or transition/exit stage?

Then, he or she will be able to decide upon the “best plan” or combination of plans that fits their circumstances at this time. A decision that should be periodically reviewed on a regular basis once a retirement plan is put in place. 

Which Way? quilt pictured above via Doodle's Quilts.
 

08 | 17 | 2008 Posted By Jerry Kalish

 Line-graph template via GraphJam.

08 | 14 | 2008 Posted By Jerry Kalish

Over the last several years, the Social Security Administration (SSA) has been faced with staffing reductions and an increased demand for services challenging its field offices to manage work while continuing to deliver quality customer service.  Now consider that the first wave of approximately 80 million baby boomers is reaching the age of retirement eligibility, and the SSA has a massive challenge ahead of it.

So how is the SSA going to manage this challenge? That's what Congress wants to know and the Senate Finance Committee asked the U.S. Government  Accountability Office (GAO) to find out. The GAO is an  independent, nonpartisan agency that works for Congress. The GAO investigates how the federal government spends our taxpayer dollars and has often been called the "congressional watchdog,".

The GAO’s recent report, Social Security Administration Field Offices: Reduced Workforce Faces Challenges as Baby Boomers Retire, assesses how the SSA is managing these challenges to determine:

1. The effect that reduced staffing levels may be having on field office operations
2. The challenges that SSA faces in meeting future service delivery needs

This statement is drawn from GAO’s ongoing study on field offices for the Committee which is expected to be issued later this year. But for now, here is what the the GAO found:

Growth in claims from the nation’s baby boomers and a retirement wave of its most experienced staff may pose serious challenges for SSA if the agency does not have a clear plan. The first wave of approximately 80 million baby boomers is reaching the age of retirement eligibility, and SSA estimates that retirement and disability filings will increase the agency’s work by approximately 1 million annual claims by 2017. To further compound this challenge, SSA projects that 44 percent of its workforce will retire by 2016. Because retirements will occur among the agency’s most experienced staff, this will have a serious impact on field offices’ institutional knowledge. SSA is planning on hiring an additional 2,350 new employees this fiscal year for regional and field office operations, almost all of whom will go to the field offices. Agency officials stated, however, that it typically takes 2 to 3 years for staff to gain the experience they need to function independently. SSA is using various strategies to recruit new employees to fill knowledge gaps. SSA is finalizing its Annual Strategic Plan which will describe the agency’s strategies for addressing these issues.

Here is a link to the full report (PDF, 26 page).

Photo above by Maya Hasson via flickr.
 

08 | 12 | 2008 Posted By Jerry Kalish

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 403(b) plans are going to look a lot like 401(k) plans starting January 1, 2009 when the new final regulations become effective. (See my posts last year, If it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b) Part 1 and Part 2). 

Non-profits can generally also sponsor a 401(k) plan, and some are considering making a switch. But while the plan document requirement is now common to both, there are some important differences that non-profits should consider about making a change. Here are just a few:

• Discrimination Testing. 401(k) plans are subject to testing. 403(b) plans are not, but must make deferrals "universally available".
• Investment Options. 401(k) plans have a wide-range of investment options. 403(b) plans are restricted to custodial accounts invested in mutual funds or annuity contracts issued by insurance companies.
• Catch-up Contributions. Qualifying 403(b) plans can permit up to an additional $3,000 in catch-up contributions by eligible employees in addition to the $15,500 and $5,000 catch-up limits applicable to both types of plans.

It's a little more involved than this, of course., and here's a link to Ft. William's more comprehensive discussion of the choices, Should Nonprofits Switch From 403(b) to 401(k).

Picture credit:  Artist Robert L. Barnum's Jump Ball, a sculpture on Ferris State University's Michigan Art Walk in Big Rapids, Michigan.