Below is a great article written by Jerry Kalish:
Hardship distribution provisions in 401(k) plans used to be one of those matters on which plan sponsors didn't spend a whole lot of time. But because of the economy, that's not the case anymore. As a result, two points of view about hardship distributions have evolved.
One one hand, there is the view that hardship distributions act as "leakage" from 401(k) accounts, the result of which is lost retirement savings. It's a view that recently gained traction from the release of a report by the Government Accountability Office, "401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers' Retirement Savings."
The GAO report suggests that:
* Congress should consider changing the requirement for the six-month contribution suspension following a hardship withdrawal to help participants recover more fully from a hardship situation.
* The Secretary of Labor should consider promoting greater participant education on the importance of preserving retirement savings.
* The Secretary of the Treasury should consider clarifying and enhancing loan exhaustion provisions to ensure that participants do not initiate unnecessary leakage through hardship withdrawals.
Both the Labor Department and the Treasury Department agreed to take actions to follow the GAO's suggestions.
The other view is that hardship distributions act as a "safety valve." While hardship provisions, like loans, are allowed by law, employers are not required to provide for them in a 401(k) plan. Many do offer hardship distributions, however, because they provide a sense of security to participants as they balance their retirement savings and current financial needs. The hardship distribution acts as a safety valve in case they ever need the money.
Both views have currency (pardon the pun.) And until the economy improves, hardship distributions will continue to be a fact of life for many 401(k) plan sponsors. With that in mind, here's a brief rundown on the rules and how to avoid compliance problems:
* The hardship withdrawal must be for an "immediate and heavy financial need."
* The participant has no other way to meet the need.
* The withdrawal cannot exceed the amount needed.
* The participant must have first obtained all distribution or nontaxable loans available under the 401(k) plan.
* The participant cannot contribute to the 401(k) plan for six months following the withdrawal.
Under the provisions of the Pension Protection Act of 2006, an employee's needs may include the need of the employee's nonspouse, nondependent beneficiary. Hardship withdrawals are subject to income tax and the 10% withdrawal penalty if the participant is younger than 59-and-a-half years old.
The IRS, which regulates the tax aspects of retirement plans, was concerned enough about hardship distributions not being done properly that it discussed the matter in its summer 2009 edition of "Retirement News for Employers."
To properly handle hardship distributions, consider these basic, yet very practical, seven steps:
1. Review the terms of your plan.
2. Ensure that the employee complies with the plan's procedural requirements.
3. Verify that the employee's specific reason for hardship qualifies for a distribution using the plan's definition of what constitutes a hardship.
4. If the plan, or any of your other plans in which the employee is a participant, offers loans, document that the employee has exhausted them prior to receiving a hardship distribution.
5. Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee's financial need.
6. Make sure that the amount of the hardship distribution does not exceed any limits under the plan and is made only from the amounts eligible for a hardship distribution.
7. If the plan has a provision that the employee taking a hardship distribution is suspended from contributing to the plan for at least six months, make sure to enforce that provision.
Until the economy improves, don't expect the leakage to slow down.
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source: 401khelpcenter.com & ebn.benefitnews.com
Tuesday, February 16, 2010
Thursday, February 11, 2010
What Does W-2 Compensation Really Mean?
The most popular base definition of compensation for retirement plans is the “W-2" definition. However, we have been receiving a number of phone calls recently asking exactly what that definition covers, and which box of Form W-2 it reflects.
The short answer is that the W-2 definition reflects Box 1 of Form W-2, “Wages, tips, and other comp." This is the number a taxpayer uses to complete Form 1040. However, for 415 purposes (and for purposes of the various Code sections which are based on the 415 definition of compensation, such as the top-heavy rules), the plan must add back in elective deferrals.
Source:401khelpcenter.com & relius.net
The short answer is that the W-2 definition reflects Box 1 of Form W-2, “Wages, tips, and other comp." This is the number a taxpayer uses to complete Form 1040. However, for 415 purposes (and for purposes of the various Code sections which are based on the 415 definition of compensation, such as the top-heavy rules), the plan must add back in elective deferrals.
For this purpose, elective deferrals include deferrals to:
Qualified plans 403(b) plans 457(b) plans Salary reduction SEPs SIMPLE IRAs Cafeteria plans Qualified transportation fringe benefit arrangements
Complicating this calculation is the fact that Roth deferrals are already included in income under Box 1. So, when adding back qualified plan deferrals, one is actually adding back only traditional, pre-tax deferrals.
Rather than use Box 1 and add back the deferrals, some practitioners have used Box 5, “Medicare wages and tips." This is unfortunate because there are a number of differences between Box 1 and Box 5. A difference which is currently receiving attention relates to health insurance premiums for S Corporation 2% or more shareholder-employees. Those premiums are always included in Box 1, but may be subject to an exclusion under Box 5. But there are other possible differences as well. As a result, Box 5 is not an appropriate source of compensation for retirement plans and never has been.
There are two exceptions, besides elective deferrals, to the rule that Box 1 compensation equals W-2 compensation for plan purposes:
A plan must disregard any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed. So, even if a foreign subsidiary pays an individual for work outside the United States and is not required to give the individual Form W-2, a plan must count the compensation which would have been reportable on a W-2.
A plan has the option to exclude amounts the employer pays or reimburses for an employee’s moving expenses if, at the time of the payment, it is reasonable to believe that the employee can deduct these amounts under Code §217. Such an exclusion would need to appear in the plan document itself.
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Complicating this calculation is the fact that Roth deferrals are already included in income under Box 1. So, when adding back qualified plan deferrals, one is actually adding back only traditional, pre-tax deferrals.
Rather than use Box 1 and add back the deferrals, some practitioners have used Box 5, “Medicare wages and tips." This is unfortunate because there are a number of differences between Box 1 and Box 5. A difference which is currently receiving attention relates to health insurance premiums for S Corporation 2% or more shareholder-employees. Those premiums are always included in Box 1, but may be subject to an exclusion under Box 5. But there are other possible differences as well. As a result, Box 5 is not an appropriate source of compensation for retirement plans and never has been.
There are two exceptions, besides elective deferrals, to the rule that Box 1 compensation equals W-2 compensation for plan purposes:
A plan must disregard any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed. So, even if a foreign subsidiary pays an individual for work outside the United States and is not required to give the individual Form W-2, a plan must count the compensation which would have been reportable on a W-2.
A plan has the option to exclude amounts the employer pays or reimburses for an employee’s moving expenses if, at the time of the payment, it is reasonable to believe that the employee can deduct these amounts under Code §217. Such an exclusion would need to appear in the plan document itself.
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source:401khelpcenter.com & relius.net
Wednesday, February 10, 2010
The Impact of Automatic Enrollment on 401(k) Match Rates: A Methodological Note
Here is a great article written by Barbara A. Butrica and Mauricio Soto:
Automatic enrollment in employer retirement savings plans has received considerable attention recently since behavioral studies show that workers are more likely to participate in their employer’s plan if automatically enrolled. And increased participation means more workers likely will retire with some pension savings. However, our recent study “Will Automatic Enrollment Reduce Employer Contributions to 401(k) Plans?” raised the question of how employers will pay for these additional compensation costs.
Source: Barbara A. Butrica and Mauricio Soto, 401khelpcenter.com, and (EBRI) urban.org
Automatic enrollment in employer retirement savings plans has received considerable attention recently since behavioral studies show that workers are more likely to participate in their employer’s plan if automatically enrolled. And increased participation means more workers likely will retire with some pension savings. However, our recent study “Will Automatic Enrollment Reduce Employer Contributions to 401(k) Plans?” raised the question of how employers will pay for these additional compensation costs.
Our paper offers three hypotheses: (1) firms leave pension and other compensation arrangements unchanged, thereby increasing total compensation paid to workers; (2) firms reduce nonpension compensation to keep total compensation at the same level before autoenrollment was introduced (for example, by reducing wages or other benefits); or (3) firms reduce the match offered to workers to offset the increase in costs. Using data from 2007 Form 5500 filings, we find some evidence to support the third hypothesis. Controlling for size, industry, and other characteristics, we find that employers with autoenrollment seem to have lower match rates than those without autoenrollment. While this result is intuitive to us and describes a seemingly rational response by profit-maximizing firms, we also explore other explanations. We do not, however, have information on how nonpension compensation might be changing, so for us to comment on the generosity of plan sponsors is impossible.
More recently, an advance summary of a forthcoming brief from the Employee Benefit Research Institute (EBRI) reports that 225 large plans implementing automatic enrollment between 2005 and 2009 had higher match rates in 2009 than in 2005, suggesting that employers may have increased pension contributions over the period. While EBRI’s results seem to conflict with ours, it is not clear that they do. The two studies measure different concepts—ours measures the ratio of employer to employee contributions for a sample of 826 large 401(k) plans and the EBRI study measures the change in the potential match rate for a sample that includes switches from defined benefit to 401(k) plans. The studies also use different time frames.
Further research is needed to better understand the decisionmaking of plan sponsors. Ideally, researchers would have a large sample of 401(k) plans reporting match rates before and after automatic enrollment to understand employer responses. The question of how employers respond to automatic pension enrollment is an important element of the debate over how to increase retirement income savings for all Americans.
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Tuesday, February 9, 2010
Some Considerations When Reinstating Your 401k Match
Here is an article written by Rick Meigs - President of 401khelpcenter.com
Charles Schwab notes that as our economy begins to show signs of improvement, one of the most difficult decisions many companies will struggle with is whether or not the time is right to reinstate the 401k match. While there is no question that matching contributions were a serious casualty of the recession, Schwab has found that anywhere from one-third to one-half of firms that stopped or reduced their contributions are thinking about reinstating them during 2010.
As companies begin to evaluate their programs to reinstate the match, below are several key areas that employers should pay particular attention to:
Benchmarking Around Peers and Goals
Employers should compare its plan match formula and overall structure to others in their industry, including similar sized companies and those in their geographical region to see if their retirement plan is still competitive and properly designed to attract the candidates it considers desirable.
Breaking Down Demographics
By breaking down plan participants by their salary level, years of service, position and age, employers can observe participation and savings rates for each category. This will allow firms to better identify any weak spots that need shoring up.
The Plan's Match Ceiling
Schwab's research shows that employees will most often set their deferral rate at the plan's "match ceiling"- the amount of salary they must defer to receive the maximum employer matching contribution. Employers should reset to a higher match ceiling to encourage employees to save more.
Investment Education
The reinstatement of the match is also a great time to rethink other key aspects of a 401k plan. Employers should take the opportunity to remind employees about other strong features of its plan including free advice sessions and workshops, target date fund options that make diversifying and rebalancing easier, or a Roth 401k plan option. Schwab has found that on average, employees who receive consultations more than double their savings rates because they feel more confident about investing and are happier with their plan.
Automatic Savings Rate Increases
While auto-enrollment is increasing in popularity, far fewer companies take an important next step: automatically raising participants' deferral levels each year. For employers this can be a particularly smart move as auto-enrollment plans usually start participants off at a relatively low deferral level and an annual bump-up can help put employees on a stronger path to a more secure retirement.
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source: 401khelpcenter.com/Rick Meigs
As companies begin to evaluate their programs to reinstate the match, below are several key areas that employers should pay particular attention to:
Benchmarking Around Peers and Goals
Employers should compare its plan match formula and overall structure to others in their industry, including similar sized companies and those in their geographical region to see if their retirement plan is still competitive and properly designed to attract the candidates it considers desirable.
Breaking Down Demographics
By breaking down plan participants by their salary level, years of service, position and age, employers can observe participation and savings rates for each category. This will allow firms to better identify any weak spots that need shoring up.
The Plan's Match Ceiling
Schwab's research shows that employees will most often set their deferral rate at the plan's "match ceiling"- the amount of salary they must defer to receive the maximum employer matching contribution. Employers should reset to a higher match ceiling to encourage employees to save more.
Investment Education
The reinstatement of the match is also a great time to rethink other key aspects of a 401k plan. Employers should take the opportunity to remind employees about other strong features of its plan including free advice sessions and workshops, target date fund options that make diversifying and rebalancing easier, or a Roth 401k plan option. Schwab has found that on average, employees who receive consultations more than double their savings rates because they feel more confident about investing and are happier with their plan.
Automatic Savings Rate Increases
While auto-enrollment is increasing in popularity, far fewer companies take an important next step: automatically raising participants' deferral levels each year. For employers this can be a particularly smart move as auto-enrollment plans usually start participants off at a relatively low deferral level and an annual bump-up can help put employees on a stronger path to a more secure retirement.
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source: 401khelpcenter.com/Rick Meigs
Monday, February 8, 2010
Brand Name Consultant vs. Independent Advisor
Check out this insightful article written by Thomas B. Bastin:
There is a legitimate question in the minds of many as to whom they should be working with to assist in the management of their retirement program. The easy way out is to go with a large brand name consultant or financial institution. After all if they are large and branded they must be competent, right? That is an assumption rather than a careful consideration of what service is actually being offered. In order to answer the real question titled above you must first understand your responsibility/options, and then understand the industry.
ERISA dictates that any person responsible for making decisions impacting ERISA plans are labeled plan fiduciaries.
There are four duties imposed on qualified retirement plan fiduciaries under ERISA Section 404(a)(1):
- First is the duty of loyalty identified as operating in the sole interest and for the exclusive purpose of the plan and participants (ERISA Section 404(a)(1)(A)).
- Second, the duty of prudence (ERISA Section 404(a)(1)(B)).
- Third, the duty of diversification (ERISA Section 404(a)(1)(C) and (4).
- Fourth, the duty to adhere to plan documents (ERISA Section 404(a)(1)(D)).
Let us begin by focusing on the second duty of prudence. You often hear people state that in managing a retirement plan one should act as a "prudent man" would. Prudence is code for process. A proper process involves parties that possess the required expertise and accept liability for their actions. The Department of Labor on their website has stated that LACKING investment expertise, a fiduciary WILL WANT TO HIRE someone with the professional knowledge necessary to carry out the investment & other functions. ERISA has even included a safe harbor definition of a "prudent expert" to be either:
(1) A Registered Investment Advisor
(2) A Bank
(3) An Insurance Company
These three "entities" qualify as prudent experts provided the "entity" accepts liability in writing for the advice of their staff. Thus, consulting firms and individual brokers fall outside of the prudent expert safe harbor and as a result the plan sponsor must document their expertise to justify the service provided. The key fact to recognize here is the government expects a prudent expert to accept fiduciary liability in writing for their advice (a safe harbor requirement). Hiring a consultant who refuses to accept liability runs contrary to the government definition of a prudent expert. The first question to ask a consultant is if they do not qualify as a prudent expert how can you possibly have implemented a prudent process that relies upon their service (remember they provide no advice)?
In the hiring of a prudent expert plan sponsors can reduce their liability for the management of plan assets in two ways:
(1) Appoint a co-fiduciary who accepts liability in writing to assist the plan investment committee in creating an investment policy statement, establishing proper criteria for fund selection, retention and removal, and making written recommendations for the committee to consider when making investment decisions. This will aid the committee in reducing liability by establishing and documenting that a prudent process was followed with the assistance of a prudent expert. The plan sponsor retains ultimate authority over the investment options offered to participants.
Potential Result: In a litigious situation, members of the investment committee retain personal liability for their actions with respect to the investment decisions made.
Potential Result: In a litigious situation, members of the investment committee will be called to testify regarding their investment expertise and decisions made along with the Advisor.
(2) Appoint a Registered Investment Advisor will to accept status as an ERISA Section 3(38) Investment Manager via a written agreement to take over the selection, monitoring and replacement of investment options offered to participants. This option provides the most protection to plan sponsors as their duty shifts from participating in investment decisions to monitoring that the Advisor has followed their stated process for making investment decisions. Ultimate authority for investment decisions lies with the Advisor.
Potential Result: In a litigious situation, members of the investment committee will be called to testify regarding their actions in monitoring that the Advisor followed their stated process. No investment expertise is required to monitor that someone else follows their own stated process. One simply has to review the work product.
Potential Result: In a litigious situation, the Advisor will be called to testify regarding their investment expertise and decisions made. Who do you want on the stand answering these difficult questions an investment expert or a committee member? Who would you want on the stand dealing with prudent process questions an ERISA expert or a committee member?
There is a third option which is to hire a brand name consultant that fails to accept liability for the services provided. Not only would your committee members have to defend their investment decisions for which they lack expertise, but they would also have to defend the decision of using the services of a person who is not considered prudent under the Government's Safe Harbor Definition. The question that really needs to be asked, which surely the plaintiff's lawyer will ask the jury, is why didn't you hire a prudent expert? What will your answer be? I find it unlikely the jury will be as impressed with the brand name credential as you are. Especially when that brand name consultant takes the stand and disavows any and all responsibility for the service they have provided. In fact, a former partner for a large brand name consultant recently disclosed that they were forbidden from ever entering into a services contract of any kind with clients for fear they would actually have to identify the service being provided. I have to think that wouldn't look good to a jury when you testify the brand name assisted with your prudent process yet you failed to even enter into a services agreement with them. Add this to your good friend the consultant looking like an Olympic gymnast jumping from your side of the table to the other safe side where non-fiduciaries congregate and you have some real issues to overcome.
Why not just serve as a fiduciary and prevent guys like me from making this an issue? Brand Name Consulting Firms with big dollar budgets can just as easily buy E&O insurance to cover the liability as I have done. For that answer we need to go back to the first duty which is loyalty. As a plan fiduciary every decision made has to be for the sole purpose and in the exclusive interest of the plan and participants. No conflicts of interest can exist. As you might suspect the reason for refusing to become a plan fiduciary has nothing to do with the liability and everything to do with their refusal to avoid conflicts of interest. Think about the players in this industry and the conflicts they might deal with.
• Brand Name Consultants - In the past we have seen consultants recommending vendors which they had direct financial interest in, or indirect via other consulting, soft dollar or pay to play arrangements. Some Consultants are so large, and the conflicts so numerous, they could never operate solely and for the exclusive purpose of the plan and participants.
• Banks & Mutual Fund Companies - It would be a little tough to have any other banking business with a client and also serve as a plan fiduciary. In addition, it would be impossible to stuff the retirement plan with proprietary funds and still serve as a plan fiduciary. Finally, it would be forbidden to retain revenue sharing without disclosing to the client and still serve as a fiduciary.
• Brokerage Houses - Quite impossible to negotiate undisclosed kickbacks from retirement plan vendors in return for offering their products to the brokers and also serve as a fiduciary. Also forbidden to offer high payouts to brokers who place proprietary funds inside retirement products and still serve as a fiduciary.
Discovery can be a powerful weapon in the hands of the plaintiff's bar. They can find conflicts you would never be privy to. The prudent process you thought was implemented can just as easily be turned around to demonstrate your lack of prudence in hiring vendors. Once you lose the jury via a vendor's conflict you have probably lost the case.
As I tell all potential clients you must implement a prudent process that will stand up in court. However, the decision on whether to hire a consultant or independent advisor is really quite easy. You should identify those services desired then seek the appropriate vendor. For instance will they provide the following?
• Serve as a Section 3(38) investment manager accepting liability in writing,
• Provide an investment policy statement with stated criteria for selecting, monitoring and replacing investment options,
• Identify appropriate asset classes to offer participants,
• Provide Quarterly Investment Reviews, document issues for investments on the watch list and replace funds that fail to meet stated criteria,
• Document annually you adherence to stated fiduciary practices,
• Support stated fiduciary practices with case and regulatory law,
• Provide full fee disclosure and transparency with annual reporting,
• Serve as your Section 404(c) fiduciary and provide an annual 404(c) checklist documenting your adherence to this code section thereby shifting liability for participant investment decisions away from the plan sponsor and to participants,
• Provide an annual vendor stability report so you can be comfortable you assets are safe (have you ever looked into the stability of your vendors),
• Provide ERISA consulting and M&A services as desired,
• Serve as the quarterback to your plan answering all plan related questions.
You can have all of this OR you can hire a consultant with the brand name and do it yourself. Just as it would be easy for the large brand name firm to buy E&O insurance and provide these services it would be just as easy for myself to join the brand name. Unfortunately for those reasons listed above neither will happen. They are unwilling to forgo the conflicts and I am unwilling to provide substandard service with no advice.
I can understand why someone would find comfort in a brand name. My problem has always been the focus is on the wrong brand. Rather than the name of entity your Advisor works for you should be investigating the brand behind the E&O policy which backs up their advice. That is the "only" brand name offering you protection!!! Honestly, what value does a brand offer if they refuse to stand behind their service? To answer the titled question what is the difference between a brand name consultant vs. an independent registered investment advisor: "The Advisor works as your Head Coach calling plays and accepting responsibility while the consultant sits in the stands chirping and second guessing without ever becoming a member of your team".
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
ERISA dictates that any person responsible for making decisions impacting ERISA plans are labeled plan fiduciaries.
There are four duties imposed on qualified retirement plan fiduciaries under ERISA Section 404(a)(1):
- First is the duty of loyalty identified as operating in the sole interest and for the exclusive purpose of the plan and participants (ERISA Section 404(a)(1)(A)).
- Second, the duty of prudence (ERISA Section 404(a)(1)(B)).
- Third, the duty of diversification (ERISA Section 404(a)(1)(C) and (4).
- Fourth, the duty to adhere to plan documents (ERISA Section 404(a)(1)(D)).
Let us begin by focusing on the second duty of prudence. You often hear people state that in managing a retirement plan one should act as a "prudent man" would. Prudence is code for process. A proper process involves parties that possess the required expertise and accept liability for their actions. The Department of Labor on their website has stated that LACKING investment expertise, a fiduciary WILL WANT TO HIRE someone with the professional knowledge necessary to carry out the investment & other functions. ERISA has even included a safe harbor definition of a "prudent expert" to be either:
(1) A Registered Investment Advisor
(2) A Bank
(3) An Insurance Company
These three "entities" qualify as prudent experts provided the "entity" accepts liability in writing for the advice of their staff. Thus, consulting firms and individual brokers fall outside of the prudent expert safe harbor and as a result the plan sponsor must document their expertise to justify the service provided. The key fact to recognize here is the government expects a prudent expert to accept fiduciary liability in writing for their advice (a safe harbor requirement). Hiring a consultant who refuses to accept liability runs contrary to the government definition of a prudent expert. The first question to ask a consultant is if they do not qualify as a prudent expert how can you possibly have implemented a prudent process that relies upon their service (remember they provide no advice)?
In the hiring of a prudent expert plan sponsors can reduce their liability for the management of plan assets in two ways:
(1) Appoint a co-fiduciary who accepts liability in writing to assist the plan investment committee in creating an investment policy statement, establishing proper criteria for fund selection, retention and removal, and making written recommendations for the committee to consider when making investment decisions. This will aid the committee in reducing liability by establishing and documenting that a prudent process was followed with the assistance of a prudent expert. The plan sponsor retains ultimate authority over the investment options offered to participants.
Potential Result: In a litigious situation, members of the investment committee retain personal liability for their actions with respect to the investment decisions made.
Potential Result: In a litigious situation, members of the investment committee will be called to testify regarding their investment expertise and decisions made along with the Advisor.
(2) Appoint a Registered Investment Advisor will to accept status as an ERISA Section 3(38) Investment Manager via a written agreement to take over the selection, monitoring and replacement of investment options offered to participants. This option provides the most protection to plan sponsors as their duty shifts from participating in investment decisions to monitoring that the Advisor has followed their stated process for making investment decisions. Ultimate authority for investment decisions lies with the Advisor.
Potential Result: In a litigious situation, members of the investment committee will be called to testify regarding their actions in monitoring that the Advisor followed their stated process. No investment expertise is required to monitor that someone else follows their own stated process. One simply has to review the work product.
Potential Result: In a litigious situation, the Advisor will be called to testify regarding their investment expertise and decisions made. Who do you want on the stand answering these difficult questions an investment expert or a committee member? Who would you want on the stand dealing with prudent process questions an ERISA expert or a committee member?
There is a third option which is to hire a brand name consultant that fails to accept liability for the services provided. Not only would your committee members have to defend their investment decisions for which they lack expertise, but they would also have to defend the decision of using the services of a person who is not considered prudent under the Government's Safe Harbor Definition. The question that really needs to be asked, which surely the plaintiff's lawyer will ask the jury, is why didn't you hire a prudent expert? What will your answer be? I find it unlikely the jury will be as impressed with the brand name credential as you are. Especially when that brand name consultant takes the stand and disavows any and all responsibility for the service they have provided. In fact, a former partner for a large brand name consultant recently disclosed that they were forbidden from ever entering into a services contract of any kind with clients for fear they would actually have to identify the service being provided. I have to think that wouldn't look good to a jury when you testify the brand name assisted with your prudent process yet you failed to even enter into a services agreement with them. Add this to your good friend the consultant looking like an Olympic gymnast jumping from your side of the table to the other safe side where non-fiduciaries congregate and you have some real issues to overcome.
Why not just serve as a fiduciary and prevent guys like me from making this an issue? Brand Name Consulting Firms with big dollar budgets can just as easily buy E&O insurance to cover the liability as I have done. For that answer we need to go back to the first duty which is loyalty. As a plan fiduciary every decision made has to be for the sole purpose and in the exclusive interest of the plan and participants. No conflicts of interest can exist. As you might suspect the reason for refusing to become a plan fiduciary has nothing to do with the liability and everything to do with their refusal to avoid conflicts of interest. Think about the players in this industry and the conflicts they might deal with.
• Brand Name Consultants - In the past we have seen consultants recommending vendors which they had direct financial interest in, or indirect via other consulting, soft dollar or pay to play arrangements. Some Consultants are so large, and the conflicts so numerous, they could never operate solely and for the exclusive purpose of the plan and participants.
• Banks & Mutual Fund Companies - It would be a little tough to have any other banking business with a client and also serve as a plan fiduciary. In addition, it would be impossible to stuff the retirement plan with proprietary funds and still serve as a plan fiduciary. Finally, it would be forbidden to retain revenue sharing without disclosing to the client and still serve as a fiduciary.
• Brokerage Houses - Quite impossible to negotiate undisclosed kickbacks from retirement plan vendors in return for offering their products to the brokers and also serve as a fiduciary. Also forbidden to offer high payouts to brokers who place proprietary funds inside retirement products and still serve as a fiduciary.
Discovery can be a powerful weapon in the hands of the plaintiff's bar. They can find conflicts you would never be privy to. The prudent process you thought was implemented can just as easily be turned around to demonstrate your lack of prudence in hiring vendors. Once you lose the jury via a vendor's conflict you have probably lost the case.
As I tell all potential clients you must implement a prudent process that will stand up in court. However, the decision on whether to hire a consultant or independent advisor is really quite easy. You should identify those services desired then seek the appropriate vendor. For instance will they provide the following?
• Serve as a Section 3(38) investment manager accepting liability in writing,
• Provide an investment policy statement with stated criteria for selecting, monitoring and replacing investment options,
• Identify appropriate asset classes to offer participants,
• Provide Quarterly Investment Reviews, document issues for investments on the watch list and replace funds that fail to meet stated criteria,
• Document annually you adherence to stated fiduciary practices,
• Support stated fiduciary practices with case and regulatory law,
• Provide full fee disclosure and transparency with annual reporting,
• Serve as your Section 404(c) fiduciary and provide an annual 404(c) checklist documenting your adherence to this code section thereby shifting liability for participant investment decisions away from the plan sponsor and to participants,
• Provide an annual vendor stability report so you can be comfortable you assets are safe (have you ever looked into the stability of your vendors),
• Provide ERISA consulting and M&A services as desired,
• Serve as the quarterback to your plan answering all plan related questions.
You can have all of this OR you can hire a consultant with the brand name and do it yourself. Just as it would be easy for the large brand name firm to buy E&O insurance and provide these services it would be just as easy for myself to join the brand name. Unfortunately for those reasons listed above neither will happen. They are unwilling to forgo the conflicts and I am unwilling to provide substandard service with no advice.
I can understand why someone would find comfort in a brand name. My problem has always been the focus is on the wrong brand. Rather than the name of entity your Advisor works for you should be investigating the brand behind the E&O policy which backs up their advice. That is the "only" brand name offering you protection!!! Honestly, what value does a brand offer if they refuse to stand behind their service? To answer the titled question what is the difference between a brand name consultant vs. an independent registered investment advisor: "The Advisor works as your Head Coach calling plays and accepting responsibility while the consultant sits in the stands chirping and second guessing without ever becoming a member of your team".
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source: 401khelpcenter.com
Thursday, February 4, 2010
Participating in a Retirement Plan: Gender Differences
How does gender affect the likelihood of participating in a retirement plan?
The November 2009 EBRI Issue Brief, published by the nonpartisan Employee Benefit Research Institute (EBRI), provides answers to these and other questions. Here are some of the key findings concerning race/ethnicity differences in employment-based retirement plan participation in 2008:
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Below is a great article written by John MacDonald:
The November 2009 EBRI Issue Brief, published by the nonpartisan Employee Benefit Research Institute (EBRI), provides answers to these and other questions. Here are some of the key findings concerning race/ethnicity differences in employment-based retirement plan participation in 2008:
- Overall, female wage and salary workers ages 21-64 participate in a retirement plan at a lower level than males did.
- However, among full-time, full-year workers of these same ages, females had a higher level of participating in a plan than men: 56.2 percent for women, compared with 53.7 percent for men.
- Across all of the worker status categories, females were more likely to participate in a retirement plan than males. This result had persisted since 2001, when the full-time, full-year females' participating level was slightly higher than the males' level, at 58.5 percent to 58.1 percent. This difference subsequently grew to 3 percentage points in 2007 before declining slightly to 2.5 percentage points in 2008.
- Concerning earnings level, the proportion of females participating in retirement plan was higher than it was for males at each earnings level. Consequently, it appears the female workers' lower probability of participating in the aggregate was a result of their overall lower earnings and lower rates of full-time work in comparison with males.
Percentage of Wage and Salary Workers Ages 21-64 Who Participated in an Employment-Based Retirement by, Work States and Gender, 2008
Source: Employee Benefit Research Estimates from the 2009 Current Population Survey.
The complete November 2009 EBRI Issue Brief is available at www.ebri.org
Source: Employee Benefit Research Estimates from the 2009 Current Population Survey.The complete November 2009 EBRI Issue Brief is available at www.ebri.org
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source: John MacDonald & ebri.org
Monday, February 1, 2010
Obama Administration Unveils Retirement Security Initiatives
A year ago, President Obama appointed a Task Force on the Middle Class. On January 25, 2010, after a year of meetings held all over the country, the Task Force gave a preview of elements of their recommendations (the full report will be released in February).
In the section on retirement security, they laid out several proposals:
Establishing Automatic IRAs
Currently, 78 million working Americans—roughly half the work force—lack employer-based retirement plans. Fewer than 60 percent of working heads of families were eligible to participate in any type of job-related pension or retirement plan in 2007. The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families. The Administration is also streamlining the process for employers to automatically enroll workers in 401k plans, which has been shown to boost participation, especially for low- and middle-income workers. New tax credits would help pay employer administrative costs and the smallest firms would be exempt.
Simplifying and Expanding the Saver’s Credit
The struggle to save enough to ensure a secure retirement became particularly pronounced in the wake of the recent financial crisis, which delivered a major hit to the savings on which workers rely for their retirement security. The Administration proposes to help working families save for retirement by expanding and simplifying the Saver’s Credit to match 50 percent of the first $1,000 of contributions by families earning up to $65,000 and providing a partial credit to families earning up to $85,000. The Administration will also make this tax credit refundable to ensure that millions of additional middle-income families can take advantage of it even though they have no income tax liability.
Updating 401k Regulations to Improve Transparency and Reliability
A majority of American workers rely on 401k-style plans to finance their retirements, making it critical that the 401k system be safe, transparent, and well-regulated. Even workers who save significant amounts may see their returns eaten away by fees and expenses. We need to do more to give families better choices to reach a secure retirement. The Administration is:
Integrity Financial Corporation’s flagship 401k client is the Association of Washington Business (AWB) in Olympia. AWB is Washington state’s premier advocate for the business community and is recognized as The State’s Chamber of Commerce. This plan has a BrightScope Rating of 76, placing it in the top 15% of all plans in its peer group. www.brightscope.com
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source: 401khelpcenter.com
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