Saturday, June 27, 2009

Do you have a 401(k) Investment Policy Statement?

One of the primary obligations of a 401(k) plan sponsor is to prudently identify, retain, and monitor the investment options in the plan. According to several industry surveys, there are as many as half of all plans which have no written guidelines for doing this. The written guidelines are known as an Investment Policy Statement (IPS), and there are lots of templates and resources which make it easy to do.

A good IPS will define the investment categories which are available to the trustees, and give specific guidlines for inclusion/elimination of a fund. We like the fi360 approach (http://www.fi360.com) which consolidates factors such as manager tenure, performance (of course!), style drift, composition, alpha, Sharpe ratio, and more into a Fiduciary Score of 0-100. But there are others, as well - the important thing is to choose an IPS that you are actually going to follow. I would have to consult with counsel to say which is worse: no IPS, or an IPS that you don’t pay attention to. Probably the latter.

So, if you don’t have an IPS, get one. Now.

And if you have one, make sure that you are following the guidelines.

The funny thing is that, if you follow the guidelines and make sure that you always have the best available funds, you’ll have better fund performance and a happier participant population. Why wouldn’t you?

Sunday, June 21, 2009

RIA versus Broker: What’s the Difference?

Although this has been a hot topic in the industry for quite a while, the general investing public does not understand the difference between a broker and an advisor. So, what’s the difference? and why should you care?

It’s actually pretty simple:

RIAs registered with the Securities and Exchange Commission are governed by the fiduciary standard that requires advisors to act in their clients’ best interests. This fiduciary standard of care is the highest know to law and, given a choice, most plan sponsors would prefer to have an advisor who is a “co-fiduciary”. Wouldn’t you prefer to work with someone who is required by law to put your interest first?

On the other hand, broker-dealers registered with the Financial Industry Regulatory Authority (FINRA) are held to the suitability standard that requires them to make recommendations that fit a client’s risk tolerance, objectives and financial status. In other words, brokers are trained and monitored to make sure that they are providing suitable investments, but normally stop short of accepting co-fiduciary status.

At the end of the day, it will depend on the individual broker or advisor, of course…there are great people on both sides of industry. But you might want to think about what happens when the chips are down and you want someone to share, in writing, the fiduciary responsibility

Do You Know Your 401(k) Expenses?

I had a meeting this week with a company who had no idea that his insurance company vendor was paying a subsidy to the Third Party Administator. How do you know if you are getting good value if you can’t account for all the expenses?

I also noticed that the State of Alabama cancelled their deferred Compensation arrangement with Nationwide, and wanted to pass along the following comments:

1) The State Personnel Board cited a lack of financial transparency Wednesday when it canceled a contract with Nationwide Retirement Solutions to provide a deferred compensation plan for active and retired state workers in Alabama.

2) “We’ve leaned over backward to ask these people to come square,” board Chairman Joe Dickson of Birmingham said.

3) Board members say they were unaware the 1994 agreement provided for Nationwide, based in Columbus, Ohio, to make large payments to ASEA. The association’s tax returns show those payments have reached almost $6 million since 2002, board attorney Alice Ann Byrne said Wednesday.

If you are in charge of a 401(k) plan, be sure to ask - in writing - for a total list of fees associated with your plan. Not only is it in the best interest of participants, but it’s good business, as well.

Tuesday, June 16, 2009

New Legislation for 401(k) Fee Disclosure

I sat “news flash” with tongue firmly in cheek. According to the AmericanShareholders.org website,

“House Ways and Means Select Revenue Measures Subcommittee Chairman Richard Neal, D-Mass., has introduced legislation that would require greater disclosure of fees in 401(k) and other employer-sponsored retirement accounts by companies and plan administrators, coupled with tax penalties for failure to comply…Failure to provide such notices would result in a tax of $100 per day, capped at the lesser of $500,000 or 10 percent of a plan’s assets.”

There is an old story about General MacArthur, who was camped beside a large river and needed to get his troops across. He called in his engineer and asked how long it would take to put up a bridge. “Three days” was the reply. “Good, then have your draftsman draw up plans immediately”

Three days later, MacArthur called back his engineer to see how it was progressing.

“Sir, the bridge is finished, and you can take your troops across now provided you don’t have to wait for the plans. They’re not done yet”

The point is, that full fee disclosure is available now if you know where to look. A competent advisor can provide a transparent program, much like the old “visible engine” toys that were around when I was a kid. Yes, it costs money to run a 401(k) plan, but there’s no reason you shouldn’t know what money you are spending and where it goes to.

So…why wait for legislation and the Government to try shining a bright light on the vendors?

Saturday, June 13, 2009

Hardship Withdrawals and Your Responsibilities

As much as you want to help an employee who is having financial difficulty, it’s important to remember that it’s the IRS defintion of Hardship that counts, not yours. If you allow a hardship withdrawal which does not conform to the IRS definition, you run the risk of plan disqualification (monies returned and taxed).

The IRS says that there must be a heavy and immediate financial need and has provided the following non-discriminatory standards:

(1) unreimbursed medical expenses incurred by the employee, the employee’s spouse, or the employee’s dependents;

(2) purchase of principal residence (but not mortgage payments);

(3) payment of tuition and other fees for the next semester or quarter of post secondary education for the employee and dependents.

(4) payments necessary to prevent the eviction of the employee from his or her principal residence or the foreclosure of the mortgage on the
  principal residence.

(5) payment for burial or funeral expenses of the employee’s deceased parent, spouse, children, or dependents;

(6) expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction.

All outside financial resources must be exhausted including plan loans and loans from financial institutions.

There’s more, of course, but this is where plan sponsors sometimes grant a hardship withdrawal even though the IRS does not see things the same way.

If you’re not sure about a hardship request, you should consult your TPA, vendor, or ERISA counsel

Tuesday, June 09, 2009

Safe Harbor Relief for Cash Strapped Companies

The IRS issued proposed regulations which would allow 401(k) plan sponsors to reduce or eliminate the safe harbor match, which you were previously required to maintain for 12 months. Sponsors can rely on the proposed regulations until final regs are issued.

Last fall, many plan sponsors who provide safe harbor plans elected to continue the safe harbor match through calendar year 2009. But as the economy has soured, more and more companies have been scrambling to conserve cash, and sought to eliminate the employer contribution (often, but not always, 3% of pay). Normally, the match must be provided for the entire year once it has been announced at the end of the previous year.

Previously, there were two exceptions to the rule: the plan could be amended to reduce or eliminate the match, and the plan could be terminated.

Now, there are three additional methods:
1) the employer is operating at an economic loss;

2) there is substantial unemployment or underemployment in the trade or business and in the industry concerned; and

3) the sales and profits of the industry concerned are depressed or declining.

As always, the Sponsor should consult counsel for further details and interpretations.