Newsletters

Prime Money Market Funds v. Government Debt Money Market Funds v. Stable Value Funds: Should You Care Which One You Have In Your 401(k) Plan?

By: David I Gensler, MSPA, MAAA, EA

How much time have you and your advisor spent on your 401(k) plan’s “ultra-safe” instrument, its money market fund? If you are like most of us, the answer is probably none. But the times, they are a changin’.

Money market funds are mutual funds that invest in short-term debt. About 47% of defined contribution plans offered money funds or some other cash equivalent in 2014 (Source – Data gathered by the Plan Sponsor Council of America). It is viewed by most participants as the ultimate safe investment. Their thinking is simple: it is a safe haven for my money. It may not go up by very much (it won’t) but it won’t go down. And it becomes particularly attractive for those participants getting closer to or already in retirement. They know that they can take a distribution from their good old money market fund and not have to worry if the market is up or down.  And, of course, there are no redemption fees.

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Beneficiary Designation Forms: Do They Matter?

By: David I Gensler, MSPA, MAAA, EA, AIF®

Do Beneficiary Designation Forms Matter? And Whose Responsibility Is It To Keep Them Up To Date?

Does keeping your beneficiary designation up to date matter? And should your retirement plan have a clear procedure as to how a beneficiary form should be modified? The short answers are yes and yes. You see, the beneficiary designation is the ultimate arbiter in deciding to whom a participant’s death benefit should be paid to. It trumps your will and any other non-plan related documents that a participant may have completed. It certainly trumps any verbal agreements that a participant may have engaged in.

People’s family circumstances change. Weddings, divorces, blended families are all a fact of life. In my experience, no document is as important and no document is given shorter shrift than the plan’s beneficiary designation form.

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Target Date Funds: Must You Use Your Provider’s Proprietary Target Date Fund Offering?

By: David I. Gensler, MSPA, MAAA, EA, AIF®

Do You Have A Proprietary Target Date Fund In Your 401(k) Plan? Do You Know You Might Have An Option You Did Not Have Before?

Target Date Funds (TDFs) in 401(k) plans have become ubiquitous. Love them or hate them, they have become the “go to” option for the majority of 401(k) participants. The reason why they are so popular is pretty simple. Despite what have sometimes been herculean efforts at participant driven investment education, many participants are still unfamiliar with terms like asset allocation and diversification. So TDFs provide the “set it and forget it” investment methodology that an overwhelming majority of 401(k) participants want. But is the TDF in your 401(k) plan the right one? Well, maybe not.

When TDFs took off in the late ‘90’s and early 2000’s, they were embraced by both participants and 401(k) providers. The participants flocked to them for the previously stated reasons. But the investment platform recordkeepers were fans too. TDFs are “funds of funds” that get automatically rebalanced by the fund manager. As the participant gets closer and closer to retirement, the portfolio is rebalanced to become more conservative. The theory being that as a participant gets closer to retirement; they have less time for their account to recover if the market goes down.

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An Important IRS Deadline Is Looming, Different Types of Plan Documents

By: David I. Gensler, MSPA, MAAA, EA, AIF®

In 2006, Congress passed the Pension Protection Act of 2006 (PPA). As a result, every defined contribution plan, other than 403(b) plans, must be completely restated, so that they comply with PPA.  The “drop dead” date to sign and date the restated plan is April 30, 2016. So if you sponsor a 401(k) plan, a profit-sharing plan or any other sort of a defined contribution plan, the plan must be restated, signed and dated by that date. If your plan gets audited by the IRS, the very first thing that they will ask you for is a copy of the plan document. That is not the time to be wondering if you ever updated your plan or not.

There are basically three types of plans that a plan sponsor could adopt:

A Prototype Plan – This type of plan contains two elements: an adoption agreement and a separate trust document. Many of you are familiar with the adoption agreement, which generally contains various choices for eligibility, vesting, whether the plan will be a safe harbor plan or not, etc. You choose which provisions that your particular plan wants to operate under by checking the appropriate box in that section of the document. The IRS has pre-approved all of the various options, so you cannot pick anything that would be in conflict with the law.

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Pension Overpayments: Who’s At Fault? What’s The Deal?

By: David I. Gensler, Enrolled Actuary

An error is made and an employee’s monthly benefit is overstated. The employee relies on that information and decides to retire, rather than continue working. The error is uncovered. How does this get fixed (if indeed, it gets fixed at all)?

When a pension plan overpays an employee’s monthly benefit, many plans believe that as a matter of fiduciary duty, that they are required to seek repayment of those benefits, with interest. In a recent lawsuit (Lebahn v. Owens), the courts agreed, but not necessarily for the reasons that you might think.

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Automatic Enrollment and Automatic Escalation – The IRS and the Department of Labor Love Them – But Should You?

By: David I. Gensler, President

Both the IRS and the Department of Labor (DOL) love the concept of automatic enrollment and its sibling, automatic escalation of an employee’s salary deferrals. But just because the government is in love with the concept doesn’t mean that you need to be.  Or (more importantly) that you are administratively geared up to handle it.  So if you are thinking seriously about modifying your plan document to change your 401(k) plan to be an “auto enroll” 401(k) plan, there are some real potential administrative speed bumps that you need to be aware of.

The concept is fairly simple. You modify your plan document, via an amendment, to automatically enroll participants at some specified deferral percentage (the one that I have seen most often is 3%).  Some plans extend the concept to all participants, others have it impact only new participants.  Now, in order to stop the deferrals, rather than formally opting in, the participant must, in writing, opt out.

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Recent 401(k) Lawsuits – What’s Behind Them?

By: David I. Gensler, President

So the recent spate of 401(k) litigation continued as a law firm challenged the $19 billion dollar Chevron plan’s decision to offer participants the Vanguard Prime Money Market Fund rather than what they deemed to be a better-performing and lower-cost stable value fund. The suit claimed that Chevron failed to follow its own Investment Policy Statement (IPS) that required the plan Fiduciaries to “seek maximum current income… consistent with preservation of capital and liquidity.”  The stable value fund, as per the suit, would have offered participants “a high degree of safety and capital preservation.”

The lawsuit further alleges that Chevron could have (and should have) negotiated for a separate account version, or a collective trust rather than pay the higher mutual fund fees. The lawsuit also questions the plan’s use of revenue-sharing to pay the plan’s recordkeeping fees.  On this particular point, they challenge that by using revenue sharing to pay the recordkeeping fees, as the plan’s assets increased (from $13 billion to $16 billion and then to $19 billion) the revenue to record keeper went up, even though the record keeping services did not significantly increase.  The lawsuit further claims that Chevron failed to direct that a competitive bidding process for recordkeeping services be undertaken.

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Why does a 401(K) plan need a recordkeeping program?

There are still many companies that may be implementing a 401(k) plan for the first time. Still other companies have maintained a profit-sharing plan, where the plan’s assets were invested on a pooled basis that is adding a 401(k) feature for the first time. There are still other companies that sponsor a 401(k) plan but wonder why in the world they are told that they need a “recordkeeper” to track the assets in their 401(k) world. To many of these companies, the recordkeeper and their investment platform seems unnecessary and expensive. However, using a recordkeeping firm to track the assets in your 401(k) plan is a critical component in maintaining a successful 401(k) plan. In fact, there are many third party administrative (TPA) firms that will not take on the responsibility of providing TPA services without a recordkeeper being involved. Why is that?

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Business Owners: Find Your Best Retirement Plan—Part 2

By the Madison Pension Editorial Team

As we addressed in Part 1, your options for implementing a retirement plan for yourself and your employees extends beyond the typical 401(k) plan. Retirement plan sponsors should investigate popular retirement vehicles, even to supplement their 401(k) plans, to ensure they are maximizing benefits for participants based on the unique needs of their organizations.

In Part 1, we covered a defined benefit (DB)/defined contribution (DC) combo plan, which can help businesses lower their income taxes and make up for lost time in putting aside money for retirement. In this segment, we will highlight one particular DB plan known as a cash balance plan, which also contains many elements of a DC plan. A few of its elements also closely resemble those of a 401(k) plan. If this all sounds a bit confusing, read on to see how it all irons out.

While cash balance plans are the fastest-growing retirement plans in the country, only about 10,000 such plans exist in the United States, compared to about 500,000 401(k) plans.  Yet, cash balance plans grew in popularity by around 500 percent during the 2001-2011 decade. Why? These plans allow owners of small firms (50 or fewer employees) to avail themselves of considerably higher tax-deductible contribution limits than 401(k) plans allow.

Let’s look at how cash balance plans compare to other types of plans noted above:

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Business Owners: Find Your Best Retirement Plan—Part 1

By the Madison Pension Editorial Team

When most business owners think “retirement plan,” they automatically presume a 401(k) plan. With approximately 513,000 401(k) plans covering more than 88 million American workers as of April 2014, this is the most common retirement plan companies offer to employees.

There are a number of reasons why the 401(k) has remained a go-to for so many business owners. The plan offers their employees the opportunity to defer their own money on a pre-tax basis as well as significant flexibility in terms of the employer’s contributions. Overall, for many business owners today, a 401(k) plan is considered one of the easiest and more cost-effective retirement plans to maintain on a day-to-day basis.

But just because the 401(k) plan has, over the years, emerged as the retirement plan option of choice for U.S. companies does not mean that it is in your best interest to follow the herd. Rather, a savvy retirement plan sponsor should explore other plans that may be best for his or her organization based on its unique specifications—not what is well-liked among the many.

To determine which retirement plan is right for your organization, you must first familiarize yourself with retirement plan options that exist outside of a traditional 401(k) plan. In this blog we will explore a defined benefit/defined contribution (DB/DC) “combo” plan—the first of a few alternate plans in this ongoing series designed to help business owners and/or plan sponsors determine the best-fitting plan for their organization.

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