Experts in Personalized Retirement Plan Design & Administration Newsletter 01.02.13

Untitled DocumentIs Your 401k Holding Too Much Company Stock? Following the holiday season, many will feel the effects of overindulging on festive sweets. It turns out that your 401k also suffers when indulging on too much of a good thing. When choosing 401k investments, many employees have the option to buy an ownership stake in the company by electing to purchase employer stock. Management encourages this type of investment because employees will think more like owners. But employees should carefully consider before loading up on company shares. Source:

Your 401k Resolutions for 2013 It’s late December, a time when most of us start making resolutions for the new year. While you might be vowing to eat less or get to the gym more, it’s also important to get your finances in tip-top shape and a great place to start is with your 401k. Here are some ideas to help get 2013 started on the right foot. Source:

“High Touch” Doesn’t Always Mean Higher Education in Retirement Plans Unlike plan service, participant education has traditionally always been “high touch.” But high touch doesn’t necessarily equal highly productive results. This article looks at the effectiveness of different models using an academic analogy. Source:

Nestlé Redesigns Their DC plans and Launch Custom Target-Date Strategies In this article, PIMCO talks with Shirley Zabiegala and Karin Brodbeck at Nestlé about the recent redesign of their DC plans and the launch of custom target-date strategies. Shirley shares the details of the launch, including extensive written, Web, and phone conference employee education programs. Karin talks about the investment structure, including details on the target-date default, the multi-manager core lineup, and the mutual-fund-only brokerage window. She provides the rationale for a more conservative target-date allocation, acknowledging the early retirement age and propensity for retirees to move assets out of the plan. Source: PIMCO

Four Reasons Not to Roll Over an Old 401k Conventional wisdom says that after leaving your job, it’s smart to roll your old 401k into an IRA. In many cases, that’s true. There are, however, certain situations — some of them fairly common — in which it makes sense to leave your old 401k alone or move it somewhere other than an IRA. Source:

Pensions vs. 401k’s: Which Have Best Prepared America for Retirement? There are two major types of retirement plans: defined contribution plans like 401k’s, and defined benefit plans like pensions. Both have flaws and advantages. Pensions are supposed to guarantee a level of income during retirement. Defined contribution plans are much more transparent; what you see is what you get. So, simple question: Which is better? Source: Motley Fool

From Defined Benefit to Defined Contribution Plans: Formulas for Retirement Success It’s a good idea to review the basic premises, including the fundamental formulas that underpin retirement planning for American workers. Only by knowing how these plans work—and where the risks are—can today’s employees understand their retirement benefits and plans effectively for the future. Source:

403(b) Plans

What’s the difference between 401k and 403(b)? A 401k is simply a retirement account sponsored by a for-profit entity. The name of this retirement plan comes from the tax code, Section 401, paragraph (k). The 403(b) is simply a retirement account sponsored by a non-profit. The name comes from — you guessed it — Section 403, paragraph (b). Source:

Fiduciary Information and Insight

IPS’s Need Specific Criteria When it Comes to TDFs Fred Reish notes that in reviewing investment policy statements of 401k and 403(b) plans, he has observed that many lack specific criteria for the selection and monitoring of target-date funds, or, if there are criteria, that they are overly broad and not particularly helpful to plan committees. While there are no clear legal guidelines to direct this process, Fred suggests some best practices. Source:

Caveat Emptor for 401k Plan Sponsors There has been much debate since the passage of Dodd-Frank on whether all financial service providers ought to be held to a fiduciary standard and necessarily put the interests of their clients ahead of their own. Here is one thing that isn’t debatable when it comes to plan sponsors choosing a 401k service provider: “Let the buyer beware!” Source:

The Value of as Good ERISA Auditing Firm In the world of retirement plans, larger retirement plans have to answer a higher authority through the independent audit requirement. The purpose of this article is let you know about the plan audit requirement and what to look for in hiring an independent auditor for your retirement plan. Source: Rosenbaum Law Firm

Rule 408(b)(2): The New Fiduciary Paradox Many believe that the 408(b)(2) & 404(a)(5) fee disclosure rules will provide a panacea for eliminating hidden or hard-to-find 401k fees. However, if plan sponsors do not actively engage in the fiduciary process, there will be an unintended consequence, one that may cost many plan sponsors dearly. Source:

The Wizard of Oz, Retirement Plans and You Just as Dorothy and friends believed that they could rely on the Wizard to get back home, many retirement plan sponsors believe they can rely on their 401k service providers to help them fulfill their fiduciary duties. Like the Wizard who used elaborate props to make himself appear great and powerful, some retirement plan providers would also like you to “Pay no attention to that man behind the curtain.” Source:

The Fiduciary Duty to Recover Securities Class Action Settlement Awards Under ERISA The courts have interpreted the broad fiduciary duties of a plan sponsor as imposing a “duty to take reasonable steps to realize on claims held in trust,” meaning that plan fiduciaries have a duty to take reasonable steps to recover amounts owed to the plan and its related trust. This article addresses the steps retirement plan fiduciaries should take to develop a prudent process for investigating and recovering amounts owed to plans in connection with class action settlement awards. Source: The Wagner Law Group

Some Items of Interest to Advisors

Prolonged Low Interest Rates Killing Retirement Savings Most consumers and their advisors are aware of the havoc market volatility can have on a retirement income portfolio. Many seniors also fear outliving their retirement assets. But are they conscious of the devastating impact the prolonged low interest rate environment may have on their retirement savings? Source:

Exchange-Traded Funds Resource Center This page provides the basics on the creation, operation, and regulation of ETFs. It also features policy views from ICI, updates on recent ETF developments, and links to other ETF resources. Source: Investment Company Institute

Alternative Investments by Retirement Plans In the current investment climate involving historically low interest rates and an uncertain stock market, plan sponsors, consultants and third party administrators often ask, “Can a plan invest in non-traditional investments, such as real estate?” The short answer is yes, as long as one follows the rules. Needless to say, there are numerous rules that must be followed. This article presents an overview of the pertinent considerations. Source: Fox Rothschild LLP

Proxy Advisors and Your Fiduciary Responsibility Discusses the simmering issue of using proxy advisors and the propriety of delegating proxy voting decisions by investment advisers. Why is the issue important? First, because a relatively few proxy advisors wield substantial power over corporate America; second, such power may not always be wielded in the best interests of investors, and, third, because the delegation of proxy voting responsibility is in many cases an inappropriate delegation of an investment advisor’s fiduciary responsibility. Source:

Insights: Studies, Research and White Papers

401k Plan Asset Allocation, Account Balances, and Loan Activity in 2011 401k savers continued to seek diversified portfolios in 2011, with 61 percent of 401k participants’ assets invested in equity securities and 34 percent in fixed-income securities, on average, according to the annual update of a joint study released today by the Employee Benefit Research Institute and the Investment Company Institute. Source: Employee Benefit Research Institute

Defining Excellence: A Report on Retirement Readiness in the Not-for-Profit Higher Education Industry Defining Excellence: A Report on Retirement Readiness in the Not-for-Profit Higher Education Industry is the second in a series of reports providing plan sponsors with insights into retirement plan design, administration trends, and best practices in higher education. This approach enables plan sponsors to benchmark against their peers and take steps to enhance their retirement programs. Source:

Employer Costs for Defined Benefit and Defined Contribution Retirement Plans Private industry employers now spend more per employee hour worked for defined contribution retirement plans (retirement plans that specify the level of employer contributions and place those contributions into individual employee accounts) than for defined benefit retirement plans (plans that provide employees with guaranteed retirement benefits that are based on a benefit formula). Source: U.S. Bureau of Labor Statistics

Automatic Enrollment, Employee Compensation, and Retirement Security This study uses restricted microdata from the National Compensation Survey to examine the impact of auto-enrollment on employee compensation. By boosting plan participation, automatic enrollment likely increases employer costs as previously unenrolled workers receive matching retirement plan contributions. Our data shows a significant negative correlation between employer match rates and auto-enrollment. We find no evidence that total costs differ between firms with and without auto-enrollment or that DC costs crowd out other forms of compensation-suggesting that firms might be lowering their match rates enough to completely offset the higher costs of auto-enrollment without needing to reduce other compensation costs. Source:

A Nudge Isn’t Always Enough Over the past decade, researchers have focused attention on a new approach for encouraging Americans to adopt beneficial behaviors. This approach relies on making the desired behavior occur automatically unless an individual chooses to opt out. This policy has proven to be a potent way to boost participation rates. While such default design strategies can improve some saving decisions, researchers have begun exploring their potential limitations. Source: Center for Retirement Research at Boston College

Court, Legislative and Washington DC

How the Fiscal Cliff May Impact 401k Contributions The Bipartisan Policy Center’s Debt Reduction Task Force has one way to help fix the deficit: reduce 401k contributions by 64% using a 20/20 Cap. Under the 20/20 Cap, contributions would be limited to the lesser of 20% of pay or $20,000 a year. All those pretax dollars designated for retirement will now be taxable income and Treasury will fill with additional tax revenues. Source:

Ameriprise Suit Alleging 401k Fund Selection Favoritism Allowed to Advance This recent U.S. district court decision is the latest ruling over plan fees and may give a legal foothold to participants seeking restitution for investment decisions they deem imprudent. Source:

Case About Ameriprise 401k Fund Selection Moves Forward In denying Ameriprise’s motion to dismiss, Judge Susan Richard Nelson of the U.S. District Court for the District of Minnesota found the plaintiffs plausibly alleged Ameriprise selected affiliated funds, such as RiverSource mutual funds and nonmutual funds managed by Ameriprise Trust Company, to benefit themselves at the expense of participants. Source:

Changes in Tax Rules Could Cut 401k Plan Sponsorship Almost half of employers, 46 percent, said they would consider dropping their plans under the 28 percent tax credit scenario, while one-third would do so in the event of a limited tax exclusion or under the 20-20 proposal. Source:

ERISA Litigation Newsletter — December 2012 This month’s edition explores the arguments asserted by the parties in US Airways v. McCutchen as to whether, and under what circumstances, plans may enforce provisions entitling them to reimbursement of previously paid medical benefits where the participant obtains a recovery from another source. The central issue presented by the parties is whether unambiguous written plan provisions may be altered based on the argument that enforcement of these provisions would not constitute ”appropriate equitable relief” under Seciton 502(a)(3) of ERISA. Source: Proskauer Rose LLP

Compliance and Regulatory Related

How to Spot Hidden Provider Costs Plan sponsors should beware when evaluating potential providers that hidden costs may exist. Sponsors can avoid paying hidden provider costs by asking detailed questions. Source:

Effective Record Retention May Save Plan Sponsors From Costly Penalties Document, document, document; you have heard and read it many times. The necessity to document applies not only to policies and procedures, but also to the information necessary to calculate a benefit. This article looks at some practical applications that highlight the importance of complete plan records. Source:

The Great Fee Disclosure Experiment In retrospect, while you worked hard to prepare for the disclosures – despite the DOL continuing to move the target, seemingly at whim, until the latest moment possible – the headaches, the wrangling and the rushing to meet the deadlines all seem to have been met with a collective shrug by the participant public. Source:

Participant Disclosure Receives Little Attention Since the 404(a)(5) disclosure regulation went into effect in August, sources say they have seen little response from participants. Source:

Fixing Late Deposit of Salary Deferrals Failing to timely deposit salary deferrals is a fiduciary violation and could subject a plan to the Department of Labor’s civil penalties, and could violate the plan’s terms and jeopardize its tax-exempt status. The Internal Revenue Service website explains what defined contribution plan sponsors can do if they fail to timely deposit withheld salary deferrals. Source:

Plan Correction: Improper Exclusion of an Eligible Employee from Deferring to a Traditional 401k Plan One of the more common errors that retirement plans experience is the improper exclusion of an eligible employee. Because the error occurs frequently, the IRS has provided a recommended correction method under EPCRS (Rev. Proc. 2008-50). This technical update addresses how the employer corrects the elective deferral for an improperly excluded employee. Source:

2013 Reporting & Disclosure Calendar for Benefit Plans Sibson Consulting’s 2013 Reporting & Disclosure Calendar for Benefit Plans summarizes compliance requirements for qualified, single employer benefit plans. To see a brief description of each requirement and information about such details as the plan(s) affected, filing requirements and due dates. Source: Sibson Consulting

A Compliance Guide for Plan Sponsors: Plan Audits With the U.S. Department of Labor stepping up its enforcement efforts, plan sponsors need to make sure they are in compliance with every rule and regulation when it comes to their retirement plans. It isn’t enough to just be prepared. When January rolls around, plan sponsors need to know whether they are eligible for an audit and if they are, they need to submit an independent plan audit with their IRS Form 5500. Source:

IRS Announcements for Plan Sponsors The IRS has posted important information for employer sponsored retirement plans regarding Form 5500 Proposed Penalty Notices and a list of plan qualification requirements for 2012. Page contains links to the IRS’s web pages for further details. Source: Baden Retirement Plan Services

Plan Correction: Correcting the Match for an Improperly Excluded Employee If an employer improperly excluded an eligible employee from a traditional 401k plan, how does the plan correct the matching contribution failure under EPCRS? This article addresses how the employer would correct the matching portion of the plan. Source:

Qualifying Plans Down on the Hacienda (Puerto Rico) Sponsors of tax-qualified retirement plans that have employees resident in Puerto Rico or employees that received Puerto Rico source contributions should be aware that Puerto Rico has its own system for qualifying retirement plans. While the provisions in Puerto Rico’s tax code relating to qualified plans are similar to those in the Internal Revenue Code, there are a number of important distinctions. Source: Fox Rothschild LLP

DOL Issues Amendments to Abandoned Plan Guidance In 2006, the Department of Labor created the abandoned plan program that allows certain financial organizations that hold qualified plan assets for plans that have been abandoned by an employer to terminate and distribute benefits from the plan. The current abandoned plan program is not available for plans of bankrupt employers. However, on December 11, 2012, the DOL proposed a new rule that would consider a plan abandoned on the date certain bankruptcy proceedings begin. Source:

2013 Compliance Calendar for Defined Contribution Plans Vanguard has compiled a 2013 calendar that shows recurring compliance and notice requirements for qualified defined contribution plans. Source: Vanguard Strategic Retirement Consulting

Handling Qualified Retirement Plans in Mergers and Acquisitions Qualified retirement plans are present in almost every corporate merger or acquisition. This is a discussion of the legal and practical issues raised by qualified retirement plans encountered in corporate mergers and acquisitions under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. Source: Practical Law Publishing

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