The DB(k): Pension of the Future

When hiring picks up again, this blend of defined benefit and 401(k) features will help snag top talent.

Kiplinger.com

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

August 19, 2009

An attractive new option for employer sponsored retirement plans becomes available next year. The “DB(k)” offers businesses with 500 or fewer employees an opportunity to provide a strong retirement plan for their employees with fewer hassles and less financial drain than a traditional pension plan.

The DB(k) melds a 401(k) savings plan with a small guaranteed income stream. … The key elements of the plan:

• A defined benefit equal to 1% of final average pay for each year of the employee’s service, up to 20 years.

• An automatic enrollment feature for the 401(k) portion. Unless an employee specifically opts out or changes the contribution level, 4% of pay is automatically shunted into 401(k) savings.

• An employer match of at least 50% of employee 401(k) contributions, with a maximum required match of 2% of pay.

To induce employers to participate: An exemption from “top-heavy” rules … . In addition, the paperwork burden is much lighter for a DB(k) plan than if a company operates separate pension and 401(k) plans, says Martella Turner-Joseph, a pension actuary and a member of the board of the American Society of Pension Professionals & Actuaries. With the DB(k), a company need have only one plan document and file one Form 5500 -- the annual information return for benefit plans -- even though it is essentially operating two plans.

The DB(k), authorized by Congress as part of the 2006 Pension Protection Act, is designed to repair a flaw in the current retirement system. The 401(k), originally conceived as a supplement to employer paid pensions, has become many people’s primary source of retirement income. … Indeed, for a majority of workers with no pension plan, the lump sum 401(k) distribution they receive at retirement, even if managed well, may not last. So Washington policymakers set out to encourage a comeback in pensions, … . The much more limited size is intended to ensure that employers won’t find their plan in need of considerable new funds, as so many pension plan sponsors have in the past several years.

… But we expect the concept to pick up steam as the economy strengthens and competition for good workers again becomes keen. Indeed, there is already discussion among pension industry officials about pushing Congress to make DB(k)s available to larger companies, too.

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How many investment options are too many?

fi360 Blog

Last week we received a call from an AIF designee who was working with a plan that had over 75 investment options available for participants to choose from. He knew it was too many, but asked for our help in putting together a compelling case as to why too many options is not a good thing and what a reasonable number might be. …

First, a study from the Journal of Finance found investors tended to choose a small number of funds to invest in, no matter how many were offered, and that they tend to invest roughly equal amounts in each of the funds they select. So, at least in this one study, a large number of options does not correspond in participants taking advantage of them.

So what's the harm in making a large number of options available? … A study from Columbia University found that when the number of investment options went up, enrollment went down, all the way to just 60% participation when the number of investment options approached 60. (This study and others are cited in an Executive Summary from Vanguard on the subject).

… One study from AllianceBernstein shows that as the number of investment options go up, so does the conservative nature of the funds chosen. The only factor that should be influencing selection should be which options help the beneficiary achieve their end goal.

… In a review of its own state employee retirement system plan, the state of Missouri found that offering too many similar options was contributing to overlap and therefore improper diversification. It also found that by decreasing the number of options available and introducing target-date funds, it would be able to save on management fees and, potentially, administrative costs to the plan.

But perhaps the best case study I found demonstrating an effective and thorough process for selecting asset classes and investment options came from an investment option review by the Federal Thrift Savings Plan. The review found the plan to be comparable to peer plans with 10 available options. The TSP review also includes great insight into their evaluation of investment options and why the individual asset classes either were or were not included among available options, and why some asset classes had only one option versus multiple options. You may find the 80+ page report excessive to reproduce for your own needs, but it demonstrates the type of thought process and documentation that a plan should be considering when building a prudently built portfolio of fund options that suits the goals and objectives of the end beneficiaries.

Other Resources:

• Plan design is just one of the metrics measured by Fiduciary Benchmarks, Inc., see this sample report.
• TIAA-CREF put together a research summary on plan investment options and investor behavior.
• Fi360 Tools offers an asset allocation optimizer for building diversified portfolios.

…

3 Technologies to Help You Take Advantage of the Economic Recovery

Business.Gov

08-17-2009 04:38 PM

By smallbiztrends

Twenty-seven economists polled by the Wall Street Journal said that the Great Recession is over*. …

I don't know whether these economists are right or wrong.

But I do know this: ALL recessions eventually end. At some point I assure you there will be an end ... and customer demand will pick up. …

When the recovery happens, you want to be ready to jump on opportunities. If the recession's been tough on your business, consider the recovery a time for a reboot. With that in mind, here are 3 tools that can help your small business sell more and do so profitably, as the recovery takes hold:

1) CRM Software

CRM stands for "customer relationship management." … The real question is, what does customer relationship management add to your bottom line? How important is it?

Let me drive the point home in dollars and cents. It's a lot cheaper to retain existing customers and sell more to them, than it is to go out and find new customers. According to Brent Leary, Principal of CRM Essentials*: "Even in good economic conditions it can be 10 times more expensive to bring on new customers as it is to keep the ones we have. Small businesses are turning to CRM applications to help extend relationships with current customers, while increasing opportunities to connect with prospects more efficiently."…

One of the key metrics I urge you to start tracking if you don't already, is "customer acquisition cost." Know what it costs you to get a new customer. When you start tracking that metric, you will begin to appreciate the dollars-and-cents value of CRM.

2) Email Marketing Solution

Email marketing is a fantastic way to market to existing customers - at one-fifth or less of the cost of direct mail (snail mail). …

There are many email marketing software solutions on the market today that automate the entire process -- from signup, through managing your list database, to designing and sending bulk emails. A key advantage of using an email marketing software solution is that it saves a lot of time and labor, versus sending out emails on your own, managing your subscriber list manually through a spreadsheet, etc. …

However, I caution you not to assume that email marketing is right for every situation. Paper direct mail still is a far better way to get NEW customers. … Prospecting for new customers is one situation when email marketing has not replaced paper direct mail - here are some other situations*.

3) Website Analytics

It's easy to fall into the trap of thinking that putting up a website is a one-time event. …

Websites are living breathing organisms. In fact, today you can think of your Web presence as an ecosystem. You have a presence in microcommunities (i.e., other websites, including social media sites) and those presences work together with your website. And then there are the search engines, which index your website's pages for various keywords, and bring potential customers to your virtual door when they search for those keywords. It's all dynamic and constantly changing and evolving.

It is crucial to know about your website traffic, if you want your website to help get sales. Because if you don't know what's happening on your website, how can you know what to improve?

Install a good analytics package. Google Analytics is free and is a solution that many small businesses start with. Examine the data it generates, regularly. It's a goldmine!

(1) It tells you where your traffic is coming from. You will see which sites or search engines are sending visitors; which keywords or search terms people used to get there; the links they clicked on. This can tell if you need to develop more inbound links, or do a better job with content for more relevant search terms, and so on.

(2) It tells you information about your visitors. You'll learn which countries they come from; which days and times they like to visit; which browsers they use; even what screen resolution they have. This tells you who you are appealing to, and provides design considerations for your website.

(3) It tells you what's working in your website - and what isn't. You will see how long people stay, which pages they abandon, or whether they are converting to paying customers from particular online ads but not others. This will help you improve your website, your graphics and content, and your online ad campaigns. Sometimes a small change (moving a graphic from one spot to another, or a change in wording) makes a big improvement.

In conclusion, the above 3 tools are not the only ones, but they are worth their weight in gold. They will not only help you sell more, but do so cost effectively and efficiently.

*This hyperlink goes to a non-governmental web site.

IMHO: “To Do” List

PLANSPONSOR.COM

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated.

In my experience, most who find themselves in that role (see "IMHO: Duty Bound") I think do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job, and the purpose of this column—and the one will follow it next week—is to focus on those issues that come up regularly in my discussions with plan sponsors, advisers, and industry experts.

…This is a list compiled based on three decades of experience working with retirement plans; numerous conversations with providers, plan sponsors, regulators and advisers; as well as a review of documented compliance shortfalls.

… This listing is a combination of the things that you must do and things that you do not have to do—but that, if done, would keep you and your plan(s) in good stead. …

1. Not having a plan/plan investment committee

ERISA only requires that the named fiduciary … make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA … requires that, if you lack the requisite expertise, you enlist the support of those who do have it.…

… Make sure your committee members add value to the process. (Hint: Once they discover that ERISA has a personal liability clause, casual participants generally drop out quickly.)

2. Not HAVING committee meetings

Having a committee and not having committee meetings is potentially worse than not having a committee at all. … [But] if there is a group charged with overseeing the activities of the plan, and that group doesn't convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires.

3. Not keeping minutes of committee meetings

… [A] written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.

More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted—properly documented, of course.

4. Not having an investment policy statement

… [The] reality is that the law does not require one…. Of course, if the law does not specifically require a written investment policy statement (IPS)—… ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should find it easier to conduct the plan's investment business in accordance with a set of established, prudent standards ….

It is worth noting that, though it is not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. … [If] there is one thing worse than not having an investment policy statement, it is having an investment policy statement—in writing—that is not followed.

5. Not removing “bad” funds from your plan menu.

Whether or not you have an official IPS, you are expected to conduct a review of the plan’s investment options as though you do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. That’s when you will find the true “mettle” of your investment policy; do you have the discipline to do the right thing and drop the fund(s), or will you succumb to the very human temptation to leave it on the menu (though perhaps discouraging or even preventing future investment)? … [How] can leaving an inappropriate fund on your menu—and allowing participants to invest in it—be a good thing?

Next week - the rest of the list…

Nevin E. Adams editors@plansponsor.com

5 Personal Core Competencies for the 21st Century

BNET

By Sean Silverthorne

August 13th, 2009 @ 5:32 am

Every epoch requires people and organizations to develop core competencies or skills needed to be successful. …

What are the core competencies needed in this century? Harvard Graduate School of Education professor Helen Haste has identified five that we should begin teaching our students. We business managers should also consider how to bring these skills to our companies and careers.

• Managing Ambiguity. “Managing ambiguity is that tension between rushing to the clear, the concrete, and managing this ambiguous fuzzy area in the middle. … Because we have to counter the story of a single linear solution.”
• Agency and Responsibility. “We have to be able to take responsibility and know what that means. Being an effective agent means being able to approach one’s environment, social or physical, with a confidence that one actually will be able to deal with it.”
• Finding and Sustaining Community. “Managing community is partly about that multitasking of connecting and interacting. …”
• Managing Emotion. “Really it’s about getting away from the idea that emotion and reason are separate…”
• Managing Technological Change. “When we have a new tool, we first use it for what we are already doing, just doing it a bit better. But gradually, the new tool changes the way we do things. It changes our social practices.”

See her video Five Competences for Adapting to a Changing World. (Sorry, no direct link available.)

What’s missing from this list? What personal core competencies would you add that are necessary to be successful in our new century?