Monthly Archives: May 2011

IRS issues guidance on terminating 403(b) plans

The IRS has issued a new ruling, providing guidance to eligible tax-exempt organizations, public schools, and churches on terminating and distributing assets from certain 403(b) tax-sheltered annuity plans. The ruling, which was issued in February, provides four examples illustrating how a 403(b) retirement plan funded in different ways may be terminated and explains when the terminating plan’s distributions are taxable to participants. For more on this, read the Client Action Bulletin.

Retirement Town Hall rewind

Spring has sprung in much of the country so we’ll forgive you if you haven’t checked in to Retirement Town Hall recently. Don’t worry, we’ve got you covered with this rewind of the last few weeks.

DB vs. DC dissected

We’ve covered the differences between defined benefit (DB) pension plans and defined contribution (DC) plans from time to time on this blog. Last week we asked you which one you would prefer in our You make the call poll. The response? As the pie chart below shows, a majority of voters would opt for some form of DB plan.

Given the poll results, we thought we’d highlight just how DC plans became the norm in many companies. Bart Pushaw highlighted the root causes for the shift in “How DB plans became DC plans.”

The 411 on 401(k)
This week we asked you about Inspiring employees to contribute to the company’s 401(k) plan in our weekly poll question. And Jeff Marzinsky showed us how the GAO looks at conflicts of interest in retirement plan advising and what this means for you if your company offers a 401(k).

While we’re on the topic of things the GAO has reported recently, how about a $119 billion footnote? Charles Clark’s post offered us some interesting yet underreported data about Retirement savings incentives and your taxes.

As always, the polls are still open and anyone can comment, so if any of the above spurs you to speak your mind, we welcome your thoughts and votes.

Retirement savings incentives and your taxes

Charles ClarkIf you ever wondered how much income tax our federal government doesn’t collect by allowing employers to sponsor retirement programs and Americans to defer payment of taxes by contributing to IRAs, the numbers may shock you. In this current fiscal year, it’s $119 billion and that fact is buried in a footnote in a March 2011 report (Report GAO-11-333, page 1 footnote).

U.S. Federal Government FY 2011
Retirement Program Revenue Loss
401(k) plans $62,900,000,000
DB plans $42,200,000,000
IRAs $13,900,000,000
Total $119,000,000,000

It’s no wonder current members of Congress have been considering curtailing these tax-favored plans. In the same report, the GAO presents data that allegedly supports the claim that these tax-favored plans favor Americans with private sector jobs. They’ve titled it “Some Key Features Lead to an Uneven Distribution of Benefits.” What do you think?

Inspiring employees

With a title like “Inspiring employees” you might have guessed that this post would be the incredible story of how one man climbed the corporate ladder and went from the mail room to the board room. Sorry to disappoint you, but we’re actually using “inspiring” as a verb, not an adjective. We want to know how you inspire your employees to use the retirement planning tools you offer.

Unlike previous poll questions, this time we’re leaving an open-ended “other” section where you can write in what methods you’ve used to get employees to enroll in a 401(k) plan. And if that’s not enough space to tell your story, leave a comment on this post.

GAO looks at conflicts of interest in retirement plan advising

Jeff_MarzinskyThe Government Accounting Office (GAO) recently released a study, “401(k) plans: Improved regulation could better protect participants from conflicts of interest.”  As you can guess from the title, the study examines the independence of advice provided to plan participants and plan sponsors and considers how conflicts of interest might affect the advice provided to sponsors and participants.

The study references a white paper I wrote several years ago that is worth revisiting. The paper looks at 401(k) fees and poses key questions for plan sponsors: What is being paid for record-keeping? Are you getting the best price for mutual funds? And who is paying for what?

You make the call

If you’re not old enough to remember the old “You make the call” segment during NFL games, the gist of it was that an odd play was replayed and fans at home had to try to make a ruling. After a commercial break, viewers would get to see the correct call (Here is a YouTube video, complete with the commercial break, from an ’80s Monday Night Football Game). We decided to do our own “You make the call” feature on a topic that’s much more relevant than whether some wide receiver got both feet into the end zone for a touchdown—your retirement plan.

We’ve been writing a lot recently about the differences between defined benefit (DB) and defined contribution (DC) retirement plans. We know that changing your retirement benefit is not something you do on a whim, but we wondered, if you could snap your fingers and choose the perfect plan for your company, what would it be?

How DB plans became DC plans: An introduction

Bart Pushaw

At some point the popularity of defined benefit (DB) pension plans gave way to defined contribution (DC) plans. This is perhaps best exemplified by the numbers of 401(k) plans, which so many employees are now (or should be) contributing to on a regular basis. We looked into some of the factors behind this shift.

Q: What were the main reasons the landscape of retirement plans changed during the 1980s and 1990s?

A: For very small plans, those set up mainly as temporary tax shelters by small business owners such as doctors and dentists, the Tax Reform Act of 1986 changed rules sufficiently to cause them to get out of the game. For larger plans, there was a mantra emanating from performance-oriented compensation strategies about portability and paternalism: both uprooting pension plans in favor of DCplans such as the 401(k).

Q: What is it about portability or paternalism that made DB plans so ill fitting?

A: Many consultants were decrying how the workforce had become more mobile over the years. Mobile workers, it was said, couldn’t take their DB plan benefits with them when they left; they were not easily portable to the next employer. The mantra was so quick to pick up steam and repeated so often that I’m afraid there were reactions to it that clearly indicated misunderstanding or confusion.

Q: What kind of confusion could that have caused?

A: Once you look at it, portability was all about being able to cash out a prior employer benefit and roll it over to the next employer. The notion that DB plans could not accommodate this is nonsense. There is no reason why a DB plan could not allow it—and there can even be DC plans that do not. As a matter of sponsor choice, you deal with it that way. It was not and is not a matter of plan type, DB better than DC. And because people really didn’t stop and think about it, the main problem with portability (i.e., job-hopping employees) was not that the money could or could not follow you around (so what if it couldn’t?) it was because of how career benefits can be radically affected by job-hopping. If five companies have the same retirement plan, DB or DC, and I take my turn at employment at each over my career, then my benefit can be significantly less than if I stay with the first employer my entire career.

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Introducing the new multiemployer calendar

Milliman is pleased to announce the availability of our 2011 “Key Administrative Dates and Deadlines for Calendar-Year Multiemployer Defined Benefit Plans.” We are confident that you will find the calendar a useful planning tool throughout the year.

This calendar is a comprehensive but easy-to-use tool that plan administrators now have to stay ahead of the seemingly never-ending array of deadlines that confront sponsors of multiemployer plans. It covers the essential elements of the various tasks that need to be performed during the year and takes the guesswork out of knowing the exact requirements. If I were a plan administrator I would print it out, place it in a conspicuous location, and look at it at regular intervals.

You’ll find the calendar here.

Retirement Town Hall rewind

Have you noticed anything new about Retirement Town Hall in the last two weeks? (No, we’re not fishing for compliments on our new hairstyles.) We’ve added poll questions to the blog. The topic of auto-enrollment had been getting so much attention (including our own thought-provoking post by Jeff Marzinsky on the positives and the pitfalls of auto-enrolling), so we thought we should hear from you on the topic by asking What percentage of your salary would you be comfortable having your company auto-enroll in a 401(k)?

In this week’s poll we invite you to weigh in on another hot topic: liability-driven investing strategies. We want to know What’s driving your liability-driven investing decision? In the true spirit of a town hall, we will continue to delve into the key issues in the employee benefits arena with new poll questions every week.

Of course, we still featured good old-fashioned blog posts on retirement issues from some of the smartest minds in employee benefits.

As always, we welcome your comments, and if you just can’t wait for the next rewind to come your way, follow us on Twitter and you’ll be in the loop as soon as we add new posts.

Are 401(k)s plus annuities all that new?

Jeff_MarzinskyThe retirement industry is abuzz with the hot topic of adding an annuity option to a 401(k) plan with the goal of creating lifetime income for your employees. To many this is a very new concept, right?

Well, no, it isn’t. In the past many employers sponsored traditional defined benefit (DB) pension plans, which provided much the same type of benefit: a stream of lifetime income at retirement, with the flexibility of a variety of payment options. The 401(k) plan was created in the 1980s to supplement the pension plan, enabling employees to make additional pretax deferrals to these plans. So, as you can see, we’ve had this type of benefit in the past.

Fast forward to today when, by combining a traditional defined benefit pension plan with your 401(k) plan, you’ve just created a “balanced” investment program for your employees.

You might consider the pension as the fixed-income portion of a portfolio generating stable returns and the 401(k) plan as the equity portion offering the potential for growth with some volatility. Wouldn’t that make a nice balanced investment portfolio?

So, the Combined Pension/401(k) Program provides lifetime income and a balanced type of portfolio for your employees, in addition to the other enhanced features of the traditional pension plan.

Wouldn’t it make sense to pair your 401(k) plan with a defined benefit pension plan?