Tuesday, December 29, 2009

Analysis Suggests Participants Don’t Understand Value of Annuities

December 28, 2009 ( – An analysis of retiring participants from one public pension plan suggests they do not understand the value of life annuity payments.

John Chalmers from the Lundquist College of Business, University of Oregon, and Jonathan Reuter from the Carroll School of Management, Boston College, analyzed data on Oregon Public Employees Retirement System (PERS) retirees who must choose between receiving all of their retirement benefits as life annuity payments or receiving lower life annuity payments coupled with a partial lump sum payout… [Looking] at variation in the value of the incremental life annuity payments arising from how PERS calculates retirement benefits, the researchers found evidence that demand for lump sum payouts is higher when the forgone life annuity payments are more valuable. 
Chalmers and Reuter also found that demand for lump sum payouts is higher when the lump sum payout is "large," and when equity market returns over the prior 12 months are higher.
"Collectively, these findings suggest that retirees value incremental life annuity payments at less than their expected present value, either because they do not know how to accurately value life annuities or because they have strong demand for large lump sum payouts," the researchers wrote in a working paper for the National Bureau of Economic Research (NBER).
The researchers did find that those with poor health at retirement more consistently utilized "value-maximizing decision-making."
According to the NBER working paper, the Oregon PERS data showed that the higher the money’s worth of the incremental life annuity payments, the more likely the retiree is to choose the partial lump sum option over the full life annuity option. "This (robust) finding suggests that retirees facing more valuable incremental life annuity payments either attach greater value to the lump sum payout or … underestimate the value of the incremental life annuity payments," the researchers wrote. …
The research findings suggest that the fraction of retirees demanding a lump sum is associated with the returns on the prior 12-month returns to the S&P 500 index. …

The researchers also found that demand for the partial lump sum option is lower for retirees earning high salaries, and speculate that this is because these retirees are less financially constrained or more financially literate.
Rebecca Moore

Monday, December 28, 2009

Clock Ticks On Estate Tax

Financial Advisor Magazine
(Dow Jones) As Congress appears ready to let the federal estate tax lapse on January 1, a dramatic question is what a repeal will do to millions of less affluent taxpayers.
Many who now would owe neither estate nor capital gains tax on inherited assets will owe significant capital gains. And that's just one of the troubling aspects of a repeal.
There are also serious questions about how families with ailing relatives would be affected--a subject of gallows humor since a one-year repeal of the tax was first envisioned for 2010 years ago. …
Under current law, the estate tax disappears for a year in 2010 and then is reinstated in 2011…
For many advisors, the most striking aspect of a repeal is that, along with the estate tax itself, a step-up in cost basis for income tax purposes would go away. …
So, at a relative's death, "families that would not have had to pay the estate or capital gains tax now may have to pay a capital gains tax on assets that have appreciated in value during the deceased person's lifetime," said Warren Racusin, chair of the trusts and estates practice at law firm Lowenstein Sandler in Roseland, N.J.
Racusin mentioned a client whose parents gave him Microsoft Corp. stock when he was younger, purchased for relatively little, that is now worth $6 million. If the man were to die in 2009, his family would not owe capital gains tax on the appreciation. And, with good estate planning by the man and his wife, there might be no estate tax due either, because a couple can shelter up to $7 million from federal estate tax.
If the man were to die on January 1, 2010, however, his wife could owe capital gains of around $340,000 on the $6 million, figuring in a $3 million exemption for spouses, and another $1.3 million exemption for whoever inherits.
As for a retroactive tax, it would likely raise some complications if lawmakers wait too long to enact it. Relatives of some people who die in a prospective estate-tax-free period--after the end of the year but before a new tax is enacted--would surely not be pleased. Quite certainly, some would challenge the constitutionality of the tax, according to tax analysts.
Nonetheless, both the lower courts and the Supreme Court historically have defended retroactive taxes. …
Copyright (c) 2009, Dow Jones. For more information about Dow Jones' services for advisors, please click here.

Monday, December 21, 2009

Affluent households ignore 529 plans, study says

Investment News

Despite tax breaks, report says the market is under-penetrated

By Charles Paikert
June 14, 2009, 6:01 AM EST
Two-thirds of affluent parents with children under 18 aren't using Section 529 college savings plans, according to a report by The Phoenix Cos. Inc. …
“I was really surprised at the extent to which the high-net-worth segment is not using 529 plans,” said Walter Zultowski, senior vice president of research and concept development for Hartford, Conn.-based Phoenix and author of the report. “529s should be a no-brainer for them.” …
Jeff Coghan:
Jeff Coghan: "We are still early in the life cycle of this product."
“I would think that 529s would be part of financial planning for affluent parents, especially with the tax benefits,” said JoLynn Free, senior vice president and financial consultant in Austin, Texas, for RBC Wealth Management of Minneapolis. “We certainly recommend them, and as a vehicle, I've found them to be solid gold.” …
In addition to the tax benefits of 529 plans, Ms. Free said that affluent clients like the fact that parents, not children, remain owners of the account. What's more, 529 accounts appeal to high-net-worth parents and grandparents because they can easily transfer cash into a tax-protected account, she added. …
E-mail Charles Paikert at

Social Networking And Advisors

Financial Advisor Magazine
Advisors are barely scratching the surface in their use of social networking.
By Andrew Gluck
Of all the social networking Web sites, LinkedIn is the one financial advisors use most. …
Not a lot of reliable data are available yet on the business use of social networking applications. We don’t have much demographic data about who is on each social network or the business benefits of tweeting on Twitter versus connecting on LinkedIn or friending on Facebook. But here are some thoughts that might be valuable as you decide which sites to use for growing your advisory firm and exchanging ideas with other professionals.
They’re Not Just for Kids. According to a study released by Anderson Analytics, SPSS and LinkedIn, the number of C-level executives on LinkedIn numbered 2.2 million worldwide last summer, while there were 1.9 million executive vice presidents and senior vice presidents on the network. Some 4.5 million users said they were senior management, while 5.2 million said they were middle management. About half of the users worldwide are in the U.S., and the base was growing last year at a rate of 2 million a month.
By contrast, Twitter users are overwhelmingly young, according to a study by Pew Research Center released in February. However, … Twitter is not dominated by the youngest of young adults. Indeed, the median age of a Twitter user is 31. In comparison, the median age of a MySpace user is 27, while it’s 26 for a Facebook user and 40.5 for a LinkedIn user, according to the Pew study.
… In the U.S., users between the ages of 55 and 64 made up 10% of Twitter’s total, which is nearly the same figure for those users between ages 18 and 24, who accounted for 10.6%. So you are seeing older Americans adopt social networking at an astounding rate.
Say Something Nice. Unlike traditional marketing, social networking is totally based on being nice to other people and not just selling your services. The key to successful marketing is giving valuable information to your target market. For instance, an advisor trying to market to doctors might post a blog offering a case study of changes he made to a doctor’s financial plan after the market meltdown of last year, and then tweet about that. … Another nice thing to do is establish a group on LinkedIn for doctors in a particular geographic area in need of financial and business management advice. …
Target, Target, Target. Just as the old adage emphasizes “location” as crucial to real estate values, it’s also crucial to target your marketing when you’re social networking. The more focused you are, the more likely you are to find an underserved niche that needs you and the less likely you are to encounter competitors. …  I recently gave a Webinar in which I explained how to automatically tweet your Google alerts. It makes sense to tweet such information because Twitter is good for distributing news. LinkedIn, meanwhile, is better for networking and creating groups.
Find Prospects. Both LinkedIn and Twitter are good ways to find prospects, and though one fishing strategy is not very nice, you should know about it anyway—and that’s looking into your competitors’ networks. While LinkedIn lets you hide your own network from the public and Twitter lets you block people you don’t know from receiving your tweets, the public (and competitors) can still see who is in your network even when you make your updates to Twitter private. So you may want to avoid connecting with clients on Twitter and only use it for prospecting.
To find prospects on LinkedIn, you can search its vast database, clicking “search,” and then narrowing that search on the pull-down menu to “search companies.” …
To find prospects on Twitter, you can search site profiles using some of the new Twitter search engines popping up, including: Tweepsearch, Twellow, Twubble and Mr. Tweet. Also check out a promising new registry for business-to-business searches on Twitter called Twibs. …
Compliance. Regulators offer little guidance about how advisors can use the new tools of social networking, apart from referencing existing advertising rules. …
To be sure, existing regulations are clear on many aspects of social networking. Still, it could save broker-dealers and RIAs a lot of money if the SEC and FINRA would offer more guidance, because then technology systems could be built to accommodate the rules. …
In the meantime, registered reps are clearly at a disadvantage, since some B/Ds are simply banning the use of certain social networking sites. Many have forbidden the use of Twitter or blog-writing by their reps.

Look Before Rolling Over a Business Startup
(December 15, 2009)
By William Brighenti

Promoters have been marketing on the Internet the use of 401(k) funds to purchase franchises or startup businesses, which normally require up-front material sums of monies to launch.

The procedure typically involves the creation of a C Corporation by the business owner, then the setup of a retirement plan for its employees, followed by the rollover of the new business owner-employee's 401(k) funds into this new plan, and ultimately the exchange of corporate stock for the funds in the plan.

Logo of Internal Revenue Service, USA
Logo of Internal Revenue Service, USA (Photo credit: Wikipedia)
Hence, the acronym ROBS: roll-overs as business startups. … A recent memo issued by the Internal Revenue Service characterized the rollover for a business startup as a "scheme" in the marketplace to access retirement funds to evade income taxes and the withdrawal penalty of 10 percent on their premature distribution. …

If your clients are already sold on this procedure and nevertheless wish to pursue it, here are a few recommendations that may help them:

1.    Hire an appropriate attorney to prepare the new retirement plan document. Avoid using the M&P (master and prototype) plan provided by the franchise seller. A number of promoters of ROBS transactions are on the IRS's watch list.
2.    Have an objective valuation of the stock of the new corporation prepared with supporting detailed analysis. … The lack of a bona fide appraisal would raise a question as to whether the entire exchange is a prohibited transaction.
3.    Before purchasing a franchise through promoters charging fees out of the proceeds of the stock purchase, consider whether they can be construed by ERISA or the IRS as "fiduciaries" rendering "investment advice" or administering the plan. If a fiduciary receives a payment from the plan assets, it may constitute a violation of the Tax Code.
4.    Enable future employees to acquire employer stock. … In order for the plan to not discriminate in favor of highly compensated employees, an extension of the stock investment option must be afforded to non-highly compensated employees to be hired in the future.
5.    Establish the plan as permanent; do not discontinue it within a few years after its adoption.
6.    Never pay purely non-business expenses from the plan.
7.    Communicate in writing the existence and availability of the plan to all new employees; otherwise, your plan will be in violation of Treasury regulations and may result in its failure.

Pension (Photo credit: Frederik Seidelin)
The consequences of entering into any prohibited transactions and of carelessly setting up a ROBS are staggering penalties of 110 percent or more of the amounts involved in the transactions or the roll over itself. On Nov. 5, 2008, the IRS issued the following warning to all business owners contemplating the implementation of a ROBS arrangement:
“For these reasons, we intend to scrutinize ROBS arrangements. … We believe that ROBS arrangements may endanger the qualified status of otherwise tax-qualified employee plans and may be prohibited transactions, requiring complete undoing of the transaction, and imposition of excise taxes.”

So tread carefully, and your clients should obtain the necessary legal, accounting and other professional advice before adopting a ROBS arrangement. Or perhaps they should even consider other alternatives, such as borrowing from their 401(k) plan.

William Brighenti, CPA, is a Certified Valuation Analyst and Certified QuickBooks ProAdvisor, who operates Accountants CPA Hartford in Hartford, Conn. He writes the blog Accounting and Taxes Simplified.
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Monday, December 14, 2009

Stop Giving Your Customers Too Many Choices — They Don’t Want Them!

The Accidental Product Manager
December 9, 2009
Image Credit Too Many Choices Can Make Your Customers Decide Not To Buy
Too Many Choices Can Make Your Customers Decide Not To Buy
As product managers, we have somehow convinced ourselves that our customers both want and need more choices when it comes to our products. … However, it just may be the case that the one thing that our customers really don’t want is to have to make more decisions in order to buy our products.
Product managers at one company seem to have figured this out and they are using this knowledge to kick Netflix’s butt…

The Story Of The redbox

…There are more than 18,000 redbox kiosks out there right now. You’ve probably seen them because they seem to be everywhere: drugstores, grocery stores, and even in some McDonald’s restaurants. The company says that they are installing new kiosks at a rate of about one per hour….

The Secret Of redbox’s Success

If you’ve ever seen a redbox kiosk, you probably quickly realized that it has a pretty poor selection of DVDs that you can rent. … Each kiosk offers only 125-200 different titles — that’s a far cry from either a Blockbuster store or Netflix’s online catalog. And yet, it sure seems to be succeeding. What’s up with this?
What the redbox product managers have found is that consumers are being overwhelmed with so many choices that often we just simply choose to not buy anything at all. Limiting the number of choices that we have to make appears to be a big part of the appeal of the redbox product.
In the early days, the redbox product managers experimented with loading the kiosks up with a wide variety of different titles including classic and foreign films. What they found out from these experiments was that their customers really didn’t want more choices. What they wanted was some help and guidance on what they would enjoy watching.

Keeping It Simple

Due to where their kiosks are located, redbox doesn’t really want their customers to take too much time browsing: make a quick decision and then move on. …
What redbox has done is to realize that new releases is what is going to draw in most of their customers. … This means is that they may be losing some customers who are looking for some of the “long tail” movies that are not so popular. So what: redbox seems to be doing quite well even without them.

What All Of This Means For You

Taking a step back and looking at what redbox has accomplished, we need to realize that there is a message here for all product managers. …
Life today is complicated for everyone including our customers. We like to add options to our products so that we can appeal to even more potential customers. Maybe what we should be doing instead, is simplifying how our products appear to our core base of potential customers and making it easier for them to buy our product.
This would require you to go back and look at all of the different variations of your product that you are currently offering. … If you dropped the low performers, would you make your product more attractive to potential customers because it was less complex? This is a lesson that we all need to learn before our competition does…
Do you think that customers would buy more of your product if you offered them fewer options?

Plan Sponsors May Face New Fiduciary Responsibilities


Plan sponsors need to increase their educational efforts and may find it prudent to engage an outside investment advisory firm as well as competent legal counsel so as to assume and delegate fiduciary responsibility for the advice provided on behalf of the plan, as well as plan participants and beneficiaries, ensuring that suitable guidance is provided with respect to guidelines pursuant to ERISA law.

GLG News
December 7, 2009


Plan sponsors need to increase their educational efforts and may find it prudent to engage an outside investment advisory firm as well as competent legal counsel so as to assume and delegate fiduciary responsibility for the advice provided on behalf of the plan, as well as plan  participants and beneficiaries, ensuring that suitable guidance is provided with respect to guidelines pursuant to ERISA law. 


…As a result of the Pension Protection Act of 2006, conditions were developed in order to provide professionals the ability to provide specific investment advice rather than solely investment education. The PPA later requested that the DOL provide further clarification and more detail as to what would be considered permissible concerning advice rendered.  … Effective November 19, 2009 the U.S. Department of Labor announced the publication of notice withdrawing the final rule on the provision of investment advice  …
In general, the reason for withdrawing the final rule stems from issues concerning possible conflicts of interests with certain service providers and as to whether the associated exemptions proposed in the rule would adequately protect the interests of plan participants and their beneficiaries. …
From the standpoint of pension service offerings, most employers or Plan Sponsors to a pension plan are deemed to have fiduciary responsibility. … An employer or Plan Sponsor is considered a fiduciary with respect to an employee pension plan if the employer is named as a fiduciary in the plan, or if the employer exercises any discretionary authority over assets or with respect to the administration of the plan.
… Most importantly, Plan Sponsors have a duty to inform, providing participants with sufficient information to make investment decisions; furnish relevant data concerning benefits and plan provisions; and notify participants with respect to amendments to the plan.
…   ERISA also imposes fiduciary obligations on anyone who promulgates or renders investment advisory service for compensation, or those having the authority or responsibility to render such advice, with respect to any pension plan money or property. ERISA maintains enforcement procedures that may be initiated in some circumstances, by participants, beneficiaries, as well as the U.S. Department of Labor for negligence on the part of fiduciaries or any service providers to the plan.
Necessary steps should be taken by all Plan Sponsors to establish guidelines for investment policy, participant education, and legal compliance. Although ERISA expressly permits trustees and other fiduciaries to appoint investment managers, as part of their fiduciary responsibility, Plan Sponsors should ensure that pension plan operations are monitored. It is also critical to establish procedures that clearly indicate that fiduciary responsibilities are being satisfied. Plan fees should also be reviewed to ensure compliance with sponsor prudence.
While 404(c) regulations do not specifically require participant education, Plan Sponsors should make reasonable attempts to provide general investment education, particularly since the U.S. Department of Labor provides guidance on how to provide investment education without creating fiduciary liability for investment advice.  …  Additionally, the new regulations are likely to increase the responsibilities of retirement Plan Sponsors as a whole.
Employers and Plan Sponsors should avoid providing individualized advice or assistance to plan participants and beneficiaries with regard to the selection of investment vehicles. Furthermore, if an employer or Plan Sponsor has not retained a registered investment advisor, a disclaimer should be provided in all related materials stating that the information is not intended to be specific investment advice and those participants are urged to seek advice from their own investment professional.
By actively managing the risks associated with participant directed plans through activities that include, but are not limited to; conducting annual fiduciary reviews; adopting written procedures concerning investment policies; and providing information through investment education, Plan Sponsors may be able to reduce their liability exposure and facilitate the process of managing their fiduciary responsibility.
Given the current status of the regulations with respect to advisory guidance provided to participants of tax qualified retirement accounts, Plan Sponsors need to prepare for additional investment rules that could potentially arise regarding defined contribution plans. It may also be prudent for Plan sponsors to … wait to see what the new requirements will be before safely assuming who may provide such investment advice to plan participants.
End Notes
Department of Labor Field Assistance Bulletin,
Employee Benefits Security Administration News
None of the information or content contained herein is intended to create an investment advisory client relationship between the reader and the author. The information contained within this article is not be construed as personalized investment advice or a substitute for investment advice. Investments or strategies mentioned in this article may not be suitable for all individuals. All readers of this article should make their own individual decisions. The material contained within this article, does not take into account each reader’s particular investment objectives, financial circumstances, or needs. All readers should strongly consider seeking advice from their own investment advisor, tax practitioner, or legal counsel.

The four stages of an annual review

A top-down approach to assembling, analyzing and acting on portfolio data is advisable
Investment News
By Blaine F. Aikin
December 6, 2009
As the year draws to a close, fiduciaries should be turning their attention to one of their most important responsibilities: the annual portfolio review. This is a prime event conducted in the process of fulfilling the continuing fiduciary duty to monitor. It is the time when the fiduciary undertakes a comprehensive assessment of whether the investment objectives of the investors they serve are being met.
Monitoring involves four stages: gathering material information, analyzing the implications of the information, acting appropriately on the findings of the analysis and documenting the basis for actions considered and actions taken. Effective monitoring hinges on deciding at the outset what information is relevant to determining whether the current portfolio management process is meeting investor objectives and is likely to continue to do so. A top-down approach is generally recommended to assemble, analyze and act upon this information.
Start by addressing what has changed at a level above portfolio composition and holdings. Most importantly, consider whether the investor's objectives have changed, in which case there is a direct effect on what information is material, as well as on the decisions that will bring the portfolio management process into alignment with the new objectives.
Change in laws or regulations, the economy and the financial markets is also relevant to most portfolios. For example, 22 states this year introduced or enacted the Uniform Prudent Management of Institutional Funds Act. This should be a major discussion topic in the annual portfolio review process of most endowments and foundations in those states.
Similarly, the implications of historically high unemployment, unprecedented government stimulus spending and extraordinary market volatility have profound implications for domestic investments. While no one can say with certainty the precise nature and magnitude of these implications, the annual review process should demonstrate thoughtful deliberations of these matters and how they influenced investment decisions.
Next, examine portfolio composition and asset allocation issues. Performance of the broad asset classes over the past year and longer time periods is generally the focus of attention, but unusual volatility within certain asset classes and apparent changes in the correlation among asset classes are important factors for analysis. Even if certain asset classes are not represented in the investment portfolio being reviewed, it is advisable to consider a wide range of accessible asset classes for potential introduction to the portfolio.
Simply by improving the asset allocation of the portfolio, it may be possible to achieve higher-than-expected returns for the level of risk the investors are prepared to take. To make this determination, Monte Carlo simulation, mean-variance or re-sampled efficiency optimization, or a comparable analytical tool may be applied. Model portfolios supported by sound research and analysis may serve as the basis for decision making.
For participant-directed plans, changes in the available asset classes may be warranted, based upon findings from this stage of review.
If tactical asset allocation (a form of market timing) is employed in managing the portfolio, the value added by asset allocation moves should be carefully analyzed at this stage. The value of this approach can be assessed by comparing the results of tactical decisions against what would have been achieved by using a strategic benchmark allocation.
Finally, revisit the due-diligence criteria used to select the specific investments held in the portfolio and evaluate each position for shortfalls that may have developed. With respect to performance, each portfolio holding should be compared with an appropriate index and peer group benchmark. While manager performance is often the focus of attention during quarterly portfolio reviews, the annual review should be more comprehensive and balanced. In rough order of priority, an effective annual review process should result in sound decisions with respect to: current investor objectives and investment policy provisions, investment philosophy and strategy, asset allocation, re-balancing activities, and investment manager watch listing and replacement.
The annual review will be incomplete until the deliberations and decisions of the process have been recorded. These records help ensure that planned actions are taken and subsequent moves planned with the benefit of information previously considered, and demonstrate that a prudent process has been followed. That is especially important at a time such as the present, when an extraordinary investment environment lends itself to rampant second-guessing.
Blaine F. Aikin is chief executive of Fiduciary360 LLC.

Required Minimum Distribution Rules Change After This Year
NEW YORK, NY, December 7, 2009 -- "The 2008 tax legislation to give senior citizens a reprieve from the requirement to take 2009 required minimum distributions (RMDs) from employer-sponsored tax-qualified retirement plans and IRAs was a relief to many," says Lesli Laffie, tax analyst for the Tax & Accounting business of Thomson Reuters. "… However, there may be sound tax reasons to either take or stop taking RMDs before 2009 ends," she advises. "And, seniors who are well-off and charitably inclined may want to consider transferring up to $100,000 of IRA funds directly to charity before 2010."
The RMD Quandary
… In years other than 2009, the failure to take an RMD could trigger a 50 percent penalty on the undistributed RMD. The 2009 RMD 'holiday' is available to taxpayers who own or are beneficiaries of retirement plan accounts (generally, 401k, 403(b), or 457(b) plans), or who are traditional IRA owners or beneficiaries, or Roth IRA beneficiaries. The holiday means they can withdraw less than 100 percent of their RMDs for 2009, without incurring the penalty. The suspension without penalty applies only to RMDs otherwise required for 2009, not to RMDs for 2008 that had to be taken by April 1, 2009. Taxpayers who turned 70 1/2 in 2009 still must take an RMD by Dec. 31, 2010.
"There are a number of issues to bear in mind when deciding whether or not to withdraw in 2009," says Laffie. "For those who have inherited Roth IRAs, withdrawals are tax free, so the only decision for those beneficiaries is whether to leave or withdraw account assets."
Consider taking RMDs before 2009 ends if:
  • Your tax rate may be lower in 2009 than in 2010. … Rates are always subject to change, "but if a taxpayer believes he will be in a higher tax bracket in 2010 (due to higher income and/or fewer deductions), he may want to take RMDs in 2009 to incur tax at the lower rate," advises Laffie. In addition, a 2009 RMD would lessen the amount of future RMDs. "If a taxpayer anticipates that tax rates will go up in the future, acceleration of RMDs into 2009 may be an appropriate strategy."
  • You have offsetting deductions. Taxpayers with high 2009 deductions relative to income, such as medical expenses, may be able to offset an RMD, but will lose the part of the medical deduction that equals 7.5 percent of their adjusted gross income (AGI). A taxpayer with a charitable contribution deduction carryover that will expire soon, or with a net operating loss, may also be able to offset the increase in income from an RMD.
  • You receive social security. A taxpayer whose Modified AGI (MAGI) is below the level requiring taxability of social security payments should consider taking an RMD to the extent those payments will continue to escape taxation…
  • You decide to roll over the distribution into a Roth IRA. Because RMDs are not required for 2009, a 2009 withdrawal is not considered to be an RMD. Therefore, it can be rolled over into a Roth IRA (as long as MAGI does not exceed $100,000 or you are not married filing separately). …"In 2010, more lenient rules take effect in rolling over a traditional IRA to a Roth IRA, but they won't apply to RMDs," notes Laffie.
Consider taking the RMD holiday (i.e., suspending RMDs) for 2009 if:
  • More of your social security payments will become taxable. Taxpayers receiving social security, but whose payments have not yet triggered 85 percent taxability (joint filers with MAGI under $44,000, or under $34,000 for singles and HOHs), should consider forgoing RMDs. …
  • Your income is high. If taking an RMD would subject you to a phaseout of itemized deductions and/or personal exemptions, it is probably beneficial to skip the RMD.
  • You have other sources of income to pay bills, and therefore do not need the RMD. …
"Skipping or taking the RMD holiday, or taking only partial RMDs, is an individual decision requiring analysis of various factors," advises Laffie. "Before 2009 ends, taxpayers should take a look at their overall tax picture and make the decision that's optimal for them."
Donating IRA Funds to Charity
Until the end of 2009, those age 70 1/2 and older can contribute up to $100,000 from their IRAs directly to one or more charities. This transfer is not included as income on the federal tax return. But you do not get a charitable deduction, and the withdrawal does not count as an RMD because RMDs are not required for 2009.
So why consider such a donation now? "For those who are very charitably inclined, the technique may hold appeal, in part because these donors won't reach the ceiling on charitable deductions," observes Laffie. "Also, by using IRA money to make the donation, a taxpayer retains more of his other savings for his own use. In addition, because the amount transferred isn't included as income on the federal return, it won't trigger deduction and/or exemption phaseouts. Finally, it may be a good strategy for people who don't itemize, because they are not losing out on a charitable deduction."
"While the RMD holiday and the ability to transfer IRA funds directly to charities end when 2009 ends, it's possible one or both of these tax breaks could be extended into 2010 or beyond," says Laffie.
About Thomson Reuters
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Monday, December 7, 2009

The Plan Sponsor’s Ability to Evaluate Conflicts of Interest

Reish & Reicher
When making decisions about their retirement plans, plan sponsors have a duty to understand and evaluate conflicts of interest that could impact the plan. In some cases, plan sponsors are prohibited from entering into transactions that involve conflicts of interest.
Those conflicts fall into two broad categories. The first is where the plan sponsor has a conflict. The second is where a service provider has a conflict of interest.
On the former, a plan sponsor must put the interest of the participants ahead of its own when making decisions about retirement plans. For example, if a bank told a plan sponsor that it would get a lower interest rate on its corporate loans, or a larger extension of credit if the administration of the plan was placed with the bank, the plan sponsor would have a conflict in making that decision. That is because, from a corporate perspective, it would be in the plan sponsor’s benefit to get the better loan. However, from a retirement plan perspective, it may or may not be in the best interest of the participants. But, in this case, the plan sponsor cannot avoid the conflict simply based on the quality of the bank’s 401(k) services. That is because ERISA strictly prohibits the plan sponsor from gaining any advantage from its use of plan assets. Even if the arrangement is favorable to the employees, it is strictly prohibited by ERISA.
Some conflicts are not prohibited by law, but even then, a plan sponsor must evaluate the conflict and act in the best interest of the participants. …
The balance of this article is about the second type of conflicts – those involving service providers.
So that you fully appreciate the legal responsibility, let’s look at what the DOL says:
With regard to the prudent selection of service providers generally, the Department has indicated that a fiduciary should engage in an objective process that is designed to elicit information necessary to assess the provider’s qualifications, quality of services offered and reasonableness of fees charged for the service. The process also must avoid self dealing, conflicts of interest or other improper influence.
That is a difficult job because, while the provider knows about its conflicts, a plan sponsor may not. So, the starting point is for the plan sponsor to ask the provider to describe, in writing, all materials conflicts of interest that could impact the plan and/or the participants. …
What are material conflicts of interest? Typically, but not always, a material conflict involves money. For example, is your adviser receiving money from one of the providers or from the investments? If so, that creates a conflict where the adviser may favor the provider or the investment over the plan and the participants. It doesn’t mean that the adviser will make biased decisions (and, in our experience, most do not), but it does mean that there is the potential for a biased decision. …
…[If] your provider refuses to give you the information (but you want to continue to work with that provider), you have a fiduciary duty to investigate in order to determine whether there are any conflicts. Among other things, that means that you need to carefully read all of the materials that the provider gives you—and you should probably have your ERISA attorney review those materials and advise you on potential conflicts as well. …

Any U.S. federal income tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed herein.

© 2009 Reish & Reicher, A Professional Corporation. All rights reserved. The REPORT TO PLAN SPONSORS is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish & Reicher does not warrant and is not responsible for errors or omissions in the content of this report.

The Different Flavors of ERISA Fiduciaries

Morningstar Advisor
by W. Scott Simon  | 12-03-09
…The significance of the added protection afforded a plan sponsor when it utilizes the services of an advisor serving as a fiduciary under section 3(38) of the Employee Retirement Income Security Act of 1974 as opposed to an advisor serving as an ERISA section 3(21) fiduciary
ERISA Selection, Monitoring, and Replacing Functions
…A critical duty is the sponsor's legal responsibility (and therefore legal liability) to select, monitor, and (if necessary) replace the plan's investment options. This duty is so central to any ERISA-qualified retirement plan that its breach is often pleaded in the recent cases filed against plan sponsors involving plan investment options bearing costs that are not reasonable. … The appropriate fiduciary of a plan must (affirmatively) find costs to be reasonable in order to justify their expenditure for the corresponding services rendered. …

An ERISA Section 3(38) Fiduciary
ERISA provides that a plan sponsor can delegate the significant responsibility (and therefore significant liability) of the selection/monitoring/replacing functions to an ERISA section 3(38)-defined "investment manager" who, upon delegation, then becomes an ERISA section 405(d)(1)-defined "independent fiduciary." An ERISA section 3(38) fiduciary can only be (a) a bank, (b) an insurance company or (c) a registered investment adviser (RIA) subject to the Investment Advisers Act of 1940. This means that a stand-alone broker-dealer, for example, cannot be an ERISA section 3(38) fiduciary. …

An ERISA 3(38) fiduciary has ERISA legally defined "discretion" that makes it a decision-maker. This means that a 3(38) fiduciary actually makes decisions for which it is legally culpable (and for which the plan sponsor is no longer legally culpable). An ERISA 3(38) fiduciary decides what investment options such as stand-alone mutual funds or model portfolios should be placed on a plan's menu, whether to remove them from the menu and, if it does remove them, what investment options will replace them. …

An ERISA Section 3(21) Fiduciary
In sharp contrast to the legally culpable, discretionary decisions made by an ERISA section 3(38) fiduciary are the legally blameless, nondiscretionary recommendations made by an ERISA section 3(21) fiduciary. To the extent that an advisor is even named as any kind of fiduciary in an investment management agreement between a plan sponsor and an advisor, in most cases the advisor is an ERISA 3(21) fiduciary tasked with "recommending," "assisting," "helping," or "advising" the sponsor as the sponsor itself goes about making selection/monitoring/replacement decisions.

Such contracts make clear that an advisor who is a 3(21) has no legally defined "discretion" to actually make decisions about plan investment options but only to be a helpful gnome to the plan sponsor who continues to retain the significant responsibility (and therefore the significant liability) to select, monitor and (if necessary) replace plan investment options. …

In many agreements, of course, the advisor is not even named as a fiduciary and its roles are simply described as "assisting," the plan sponsor in making investment option selections (for which the sponsor is legally responsible and liable).

Summing UpIn a nutshell, here is the difference between ERISA section 3(38) fiduciaries and ERISA section 3(21) fiduciaries:
* An ERISA section 3(38) fiduciary must make decisions for which it has legal responsibility (and therefore legal liability), because such a fiduciary is charged with ERISA-defined "discretion." … This gives a plan sponsor significant cover from fiduciary risk.
* An ERISA section 3(21) fiduciary makes only recommendations for which it has no legal responsibility (and therefore no legal liability), because such a fiduciary has no ERISA-defined "discretion." This does not give plan sponsors cover from fiduciary risk.
An Important Caveat
It's important to understand that the part of the preceding discussion referring to an ERISA section 3(21) fiduciary concerns what can be described as a "limited scope" 3(21). …
Distinct from a limited-scope 3(21) fiduciary (the kind which is almost always discussed in the investment media) is what can be described as a "full scope" ERISA section 3(21) fiduciary. The full scope 3(21) is the "named fiduciary" of a plan; that is, the person who has ultimate authority over a plan. All qualified retirement plans governed by ERISA have a named fiduciary, and that person is always a 3(21) fiduciary, representing the plan sponsor. The plan sponsor, as the originating full scope 3(21) fiduciary of the plan, can delegate all the duties associated with same to an entity that will assume them. …

Friday, December 4, 2009

Will the DB(k) Plan Replace the 401k?

eRollover Blog
 By Mike Rowan, 11/18/2009

Meet the DB(k) Retirement Plan

… One retirement plan that will become available in 2010 offers a 401k alongside a guaranteed pension-like retirement benefit.
This new plan is called the DB(k) and it has its beginning in tax code from 2006. The tax law allows companies with fewer than 500 workers to start the DB(k) after Jan. 1, 2010, and many advocates would like to see it available to everyone. …

Questions and answers about details of the new DB(k) Plan:

Q: What are the features of the DB(k) Plan?

A: There are two parts to the new plan:
Employers will be required to establish a pension fund sufficient to pay  up to 20 percent of that individual’s average annual salary received during the last few years in the workforce. Once the employee has spent three years with a company, their benefits will become fully vested.
… The balance in this retirement account would be paid at retirement like a traditional type of pension plan. …
At the same time, the employer will be required to take 4 percent of a worker’s salary and put it in a 401k plan. The company must match at least 50 percent of the contribution, and would be immediately vested. Upon reaching retirement, the worker could withdraw additional funds from their 401k account as needed.
Employees can opt out of their contribution or they could chose to set aside less.
Q: Why create a hybrid type of pension/401k plan?
A: More companies are dropping traditional pension plans and employees with a 401k often do not save enough, leaving workers woefully unprepared financially for retirement.
The concept behind the DB(k) allows employers to provide the benefits of a combined plan without the paperwork, regulatory requirements, and elevated costs that would come with operating a pension and 401k plan separately. As a result, in theory employees get a more secure retirement with a guaranteed pension alongside their own 401k savings.
Q: What types of companies would be a good fit for a DB(k) and why?
A: Companies must have at least two and no more than 500 workers to implement a DB(k) plan. It is anticipated that DB(k) retirement plans will be offered by companies looking for professional workers in competitive fields. The Employer completely funds the pension and provides matching contributions in the 401k plan
Q: When will we start seeing DB(k) plans in the marketplace?
A: The DB(k) plan is authorized by the Pension Protection Act of 2006, which gives permission for companies to begin offering the plans starting on Jan. 1 of 2010. However, the IRS and the U.S. Treasury Department only recently began developing rules for the DB(k), so it may be delayed until later in the year. …