We have just been announced with the adjustments for the cost of living that will be applicable to pension plans and also other matters, for the 2009 tax year.
The Internal Revenue’s Service code section 415, deals with the adjustments in contributions into plans that qualify under retirement plans. This section also states that the Commissioner should adjust these limits annually, in relation to the rise of the cost of living.
A good number of the limitations in pension plans will be changing during this year, since the rise in cost of living index, has covered the statutory requirements. Other limitations will however remain as they are.
In August of last year, we have been issued with Act 186, which changed the Puerto Rico Internal Revenue Code of 1994. This change was an increase in the limitation of the annual contribution that an employee makes which is pre tax.
This change affects plans that qualified as retirement plans under the Puerto Rico Code. This amendment has resulted in the elimination of the percentage of the pay limit, and also the amount of dollars, is going to gradually increase, until the year 2013.
As from January 1st, 2009 there has been an increase in the limit on the yearly benefit of plans that are found within the definitions of Section 415 b1A. The increase is of 10,000 dollars to a total of 195,000 dollars. Participants, who have been alienated from service before this date, have to calculate the limitation by multiplying their return limits.
Plan administrators that have been given constructive determination letters, should refrain from asking for new ones, just because of the annual amendments for the adjustments of the maximum plan limitations.
Reference: http://www.401khelpcenter.com/2009_401k_plan_limits.html
Saturday, April 4, 2009
What is a 401k plan?
A 401k plan is an employee sponsored retirement plan that allows for participants, to make pre-tax contributions to their plan. 401k plan contributions are normally deducted automatically for each employee, every time the employee gets paid. By pre-tax contribution we mean that the money is taken out of the salary, before the salary is taxed.
The money contributed is then invested in one or more funds that are provided by the plan, always at the employee’s direction. Employers will normally ‘match’ the amount that the employee is paying, but in reality an employer is not bound by law to do so.
Over time, the contributions that are saved up in investments are meant to gradually grow, and the contributor is not liable for tax on this growth.
401k plans do offer other advantages to their participants, such as:
• Any business from corporations to self employed individuals may have a plan.
• The company is eligible to set the requirements upon establishment of the plan.
• Employers have the right to restrict individuals like new employees from being eligible.
• Contributions come from voluntary participant’s salary reduction and may be matched by employer.
• An individual could in 2008, defer up to $15,500 of his salary or 10% of his salary, whichever is the least.
• Participants aged over 50, may do contributions of $5000 as catch up payments.
• Withdrawals from employees aged 59.5 or younger, may be penalized.
• Employers are not obliged to match the employees’ payments.
• You may choose to have an internet plan.
• There are on average 15 investment choices.
• Loans can be taken from the plan, and also hardship withdrawals.
• The employer may receive some tax benefits if he matches his employees’ contributions.
• The plan is subject to unfairness testing.
Reference: http://www.401khelpcenter.com/401k_defined.html
The money contributed is then invested in one or more funds that are provided by the plan, always at the employee’s direction. Employers will normally ‘match’ the amount that the employee is paying, but in reality an employer is not bound by law to do so.
Over time, the contributions that are saved up in investments are meant to gradually grow, and the contributor is not liable for tax on this growth.
401k plans do offer other advantages to their participants, such as:
• Any business from corporations to self employed individuals may have a plan.
• The company is eligible to set the requirements upon establishment of the plan.
• Employers have the right to restrict individuals like new employees from being eligible.
• Contributions come from voluntary participant’s salary reduction and may be matched by employer.
• An individual could in 2008, defer up to $15,500 of his salary or 10% of his salary, whichever is the least.
• Participants aged over 50, may do contributions of $5000 as catch up payments.
• Withdrawals from employees aged 59.5 or younger, may be penalized.
• Employers are not obliged to match the employees’ payments.
• You may choose to have an internet plan.
• There are on average 15 investment choices.
• Loans can be taken from the plan, and also hardship withdrawals.
• The employer may receive some tax benefits if he matches his employees’ contributions.
• The plan is subject to unfairness testing.
Reference: http://www.401khelpcenter.com/401k_defined.html
Tips for Plan Fiduciaries
The ERISA demands that employee benefit plans fiduciaries; both manage and administer these plans with prudence and always in the interest of the participants and also the beneficiaries. To carry out their job as above, fiduciaries regularly rely on professionals such as pension consultants for assistance. Studies have shown that in come cases these consultants, are not fully disclosing any conflicts of interest that could affect the impartiality of the advice they offer.
The Department of Labour in conjunction with the SEC, have come up with a set of rules, to assist fiduciaries in ascertaining the impartiality of the advice provided. This is what they should ask in relation to their consultants:
1. If the consultant is registered with the SEC as an investment advisor. If he is, then he should provide all the disclosures that are needed including the ADV form part 2.
2. If he or any related company, have any relation with the money managers that they consider for their recommendation. If they do have, then they should give more details about their relation.
3. If he or his related company receives any sort of compensation, from the managers he recommends. If he does, he should provide more details such as the ratio of the payments to his total income.
4. If he has in effect a set of procedures to address conflict of interest, and whether he has any policies that prevent this compensation, from being taken into consideration while providing advice.
5. Whether he allows plans to pay for his consultation fees from the brokerage commission.
6. If he does allow the above, then how is the situation monitored, to ensure that the plan receives best implementation.
7. Whether he has any arrangements with dealers or brokers.
8. If he will acknowledge in writing his fiduciary obligation as an investment advisor to the plan, in the case that he is hired.
9. If he considers himself under the ERISA as a fiduciary, in respect to the recommendations he will provide for the plan
10. To what extent do his plan clients make use of money managers or services of brokerage, from which he is receiving fees.
Reference: http://www.401khelpcenter.com/401k/selecting_and_monitoring_pension_consultants.html
The Department of Labour in conjunction with the SEC, have come up with a set of rules, to assist fiduciaries in ascertaining the impartiality of the advice provided. This is what they should ask in relation to their consultants:
1. If the consultant is registered with the SEC as an investment advisor. If he is, then he should provide all the disclosures that are needed including the ADV form part 2.
2. If he or any related company, have any relation with the money managers that they consider for their recommendation. If they do have, then they should give more details about their relation.
3. If he or his related company receives any sort of compensation, from the managers he recommends. If he does, he should provide more details such as the ratio of the payments to his total income.
4. If he has in effect a set of procedures to address conflict of interest, and whether he has any policies that prevent this compensation, from being taken into consideration while providing advice.
5. Whether he allows plans to pay for his consultation fees from the brokerage commission.
6. If he does allow the above, then how is the situation monitored, to ensure that the plan receives best implementation.
7. Whether he has any arrangements with dealers or brokers.
8. If he will acknowledge in writing his fiduciary obligation as an investment advisor to the plan, in the case that he is hired.
9. If he considers himself under the ERISA as a fiduciary, in respect to the recommendations he will provide for the plan
10. To what extent do his plan clients make use of money managers or services of brokerage, from which he is receiving fees.
Reference: http://www.401khelpcenter.com/401k/selecting_and_monitoring_pension_consultants.html
Default Investments
In 2006, the government has added a new subdivision to the ERISA of 1974, which states that a plan need not necessarily receive funds from contributors, without supplementary investment control from the given individual.
Section 404 of this act states that a contributor in an individual retirement account, should be treated as though he has control over the funds that he has saved in his individual account. There are however some conditions for this to be true:
• The contributor does not put forward his investment selection
• The contributor’s plan covers the notice needs in section 404c 5B and
• That the plan invests the contributor’s account, in agreement with the default investment rules that have been produced by the Labour Secretary.
Now the PPA needs the DOL to circulate the rules that give guidance regarding the appropriate kind of default investments, which comprise of a mixture of various assets that are in consistence with
• Appreciation of capital in the long term
• Capital protection and
• A mixture of capital protection and appreciation of the capital in the longer term.
Therefore the new ERISA subsection allows default investment portfolios to be made of investments that are regarded to as very conservative.
These rules are definitely controversial, since they go against the ERISA which says that default investments should be excluded if the portfolio is made entirely of stable investments that allow capital protection. The regulations also state that it is the fiduciary that is able to determine what the default investment should be for the participant, since he is always in obligation to do so.
In conclusion, the ERISA regulations should not be interpreted as giving a list of the cautious investments. The regulations also do not in any way restrict the fiduciary, from adopting the alternatives he thinks suit best the needs of his default participants.
http://www.401khelpcenter.com/401k/whitehouse_qdia.html
Section 404 of this act states that a contributor in an individual retirement account, should be treated as though he has control over the funds that he has saved in his individual account. There are however some conditions for this to be true:
• The contributor does not put forward his investment selection
• The contributor’s plan covers the notice needs in section 404c 5B and
• That the plan invests the contributor’s account, in agreement with the default investment rules that have been produced by the Labour Secretary.
Now the PPA needs the DOL to circulate the rules that give guidance regarding the appropriate kind of default investments, which comprise of a mixture of various assets that are in consistence with
• Appreciation of capital in the long term
• Capital protection and
• A mixture of capital protection and appreciation of the capital in the longer term.
Therefore the new ERISA subsection allows default investment portfolios to be made of investments that are regarded to as very conservative.
These rules are definitely controversial, since they go against the ERISA which says that default investments should be excluded if the portfolio is made entirely of stable investments that allow capital protection. The regulations also state that it is the fiduciary that is able to determine what the default investment should be for the participant, since he is always in obligation to do so.
In conclusion, the ERISA regulations should not be interpreted as giving a list of the cautious investments. The regulations also do not in any way restrict the fiduciary, from adopting the alternatives he thinks suit best the needs of his default participants.
http://www.401khelpcenter.com/401k/whitehouse_qdia.html
Thursday, April 2, 2009
The Value Of Independent Fiduciaries
The 401k plans are mostly managed by individuals, who resist the fiduciary status, and most importantly the high level standards that are expected from fiduciary status. An Independent fiduciary, can provide substantial value. So what is the cost of hiring a fiduciary? Is it worth it?
Prudence is the cornerstone of all independent fiduciary actions and procedures. Such practice, if operated with prudence will yield excellent results for both the participants and beneficiaries. Lacking fee disclosure and transparency is another problem that we have been reading about, and which is very real.
Now since a fiduciary has the obligation to make sure that the 401k plan is paying only the reasonable expenses, therefore a fiduciary must know exactly who is being paid and how much. Appointing an Independent Fiduciary to lead this sort of investigation is a very wise decision, since the price structure of the 401k plans is a complicated and obsolete one. Such a professional however, has all the experience and expertise needed to uncover both explicit and implicit fees, which threaten the plan’s success.
High costs are already a problem with 401k plan performance, and when you combine this with a negative investment performance, the result is an unsuccessful retirement. Participants sometimes decide to take a do it yourself approach. Studies however show that such participants lacked sufficient knowledge and skill, and ended up with little gains on their 401k accounts.
A professionally managed approach will not only benefit the plan sponsor but should also deliver better returns over time for all the participants.
Achieving the best results in a retirement plan requires skill and diligence. Independent Fiduciaries have this skill and are able to spread the risk and increase benefits to the plan participants therefore securing them a better future. Hiring an Independent Fiduciary may be the difference between a marvellous retirement, or a horrifying one. Wouldn’t you want additional income worth thousands of dollars? This is the value of an Independent Fiduciary.
http://greenspringwealth.com/documents/TheValueofanIndependentFiduciary.pdf
Prudence is the cornerstone of all independent fiduciary actions and procedures. Such practice, if operated with prudence will yield excellent results for both the participants and beneficiaries. Lacking fee disclosure and transparency is another problem that we have been reading about, and which is very real.
Now since a fiduciary has the obligation to make sure that the 401k plan is paying only the reasonable expenses, therefore a fiduciary must know exactly who is being paid and how much. Appointing an Independent Fiduciary to lead this sort of investigation is a very wise decision, since the price structure of the 401k plans is a complicated and obsolete one. Such a professional however, has all the experience and expertise needed to uncover both explicit and implicit fees, which threaten the plan’s success.
High costs are already a problem with 401k plan performance, and when you combine this with a negative investment performance, the result is an unsuccessful retirement. Participants sometimes decide to take a do it yourself approach. Studies however show that such participants lacked sufficient knowledge and skill, and ended up with little gains on their 401k accounts.
A professionally managed approach will not only benefit the plan sponsor but should also deliver better returns over time for all the participants.
Achieving the best results in a retirement plan requires skill and diligence. Independent Fiduciaries have this skill and are able to spread the risk and increase benefits to the plan participants therefore securing them a better future. Hiring an Independent Fiduciary may be the difference between a marvellous retirement, or a horrifying one. Wouldn’t you want additional income worth thousands of dollars? This is the value of an Independent Fiduciary.
http://greenspringwealth.com/documents/TheValueofanIndependentFiduciary.pdf
How Many Fees Are Being Paid From Our 401k Plan?
In the US, we have been living through increasing concerns regarding our 401k plans. While the debates and issues continue over the excessive and hidden fees that come along with the 401k plan, it is certain that this plan is loaded with unnecessary services, which carry unnecessary fees, which are also hidden from the participant.
There are a lot of different categories of fees; such as investment management costs and plan level costs. Now to evaluate the 401k plan fees, we have to start at the beginning. In a conventional 401k plan, 14 different parties are charging their fees to the plan. Here’s who they are:
1. The brokerage firm takes hidden commission for clearing the trades of the fund.
2. The fund company takes rebates from the brokerage firm commission, for providing the shareholders with research services.
3. The fund company charges for managing the funds.
4. 401k plans which are being managed by insurance companies may have extra costs.
5. The clearing agent.
6. The custodian who holds the account for the benefit of the trust and provides data for record feeders and administrators.
7. The record keeper is also paid to take aggregate accounts at custodian level and tracks them at a participant level.
8. Sales people are paid commission for bringing new business to the above mentioned parties.
9. Fiduciary investment advisors are invoicing the plan trustee, so they get paid from the assets.
10. The many consultants who provide their services such as checking compliance.
11. Communications specialists share commissions with brokers
12. The annual accounting services
13. The plan’s legal council
14. Insurance premiums that indemnify fiduciaries.
These parties all stand to gain from the 401k plan’s assets, and this entire hidden fee problem is a result of a bad approach to the management of the plan. As long as the retirement plan industry continues defending the 401k plan and the way it works, litigation will continue and no changes will be made. What should be done is for the industry to seek an independent advice to fix the whole system, thus gaining again the trust of all future retirees.
Reference: http://www.401khelpcenter.com/pdf/mdh_understanding_fees_v4.pdf
There are a lot of different categories of fees; such as investment management costs and plan level costs. Now to evaluate the 401k plan fees, we have to start at the beginning. In a conventional 401k plan, 14 different parties are charging their fees to the plan. Here’s who they are:
1. The brokerage firm takes hidden commission for clearing the trades of the fund.
2. The fund company takes rebates from the brokerage firm commission, for providing the shareholders with research services.
3. The fund company charges for managing the funds.
4. 401k plans which are being managed by insurance companies may have extra costs.
5. The clearing agent.
6. The custodian who holds the account for the benefit of the trust and provides data for record feeders and administrators.
7. The record keeper is also paid to take aggregate accounts at custodian level and tracks them at a participant level.
8. Sales people are paid commission for bringing new business to the above mentioned parties.
9. Fiduciary investment advisors are invoicing the plan trustee, so they get paid from the assets.
10. The many consultants who provide their services such as checking compliance.
11. Communications specialists share commissions with brokers
12. The annual accounting services
13. The plan’s legal council
14. Insurance premiums that indemnify fiduciaries.
These parties all stand to gain from the 401k plan’s assets, and this entire hidden fee problem is a result of a bad approach to the management of the plan. As long as the retirement plan industry continues defending the 401k plan and the way it works, litigation will continue and no changes will be made. What should be done is for the industry to seek an independent advice to fix the whole system, thus gaining again the trust of all future retirees.
Reference: http://www.401khelpcenter.com/pdf/mdh_understanding_fees_v4.pdf
How Important Are Risk Tolerance Questionnaires?
In the investment world, before an advisor suggests to his client any form of investment, he must first assess the client’s risk tolerance. This is done though the completion of a risk tolerance questionnaire. Without this awareness, one cannot possibly build – in good faith – a client’s investment portfolio as should be.
401k plan contributions are being routed towards various investments; meaning that the above mentioned concept should also apply. A fiduciary should realize that his investment decisions should reflect his clients and their particular risk tolerance levels.
This would translate as follows. If your employees are older, more risk conscious and conservative, then the options that you provide them should reflect this. If on the other hand they are younger and more aggressive, then you should be providing them with higher risk investment options.
So how can you know the risk tolerance of your employees? You should provide each and every participant with a risk tolerance questionnaire; help them understand what it is for and assist them in completing it.
Help your employees in filling out the information and make them realize what their personal risk tolerance is. It is not the case of explaining how stocks, shares and investment work, but at least they should realize what their risk profile is. Once you are able to estimate the risk tolerance, only then, you can select investment options.
Even though risk tolerance questionnaires are not currently mandatory on 401k plans, they should. This questionnaire will make your employees feel more in control and you will be providing them with a good service. After all, there’s their future at stake here.
Reference: http://www.401khelpcenter.com/401k/mcalmond_risk_tolerance.html
401k plan contributions are being routed towards various investments; meaning that the above mentioned concept should also apply. A fiduciary should realize that his investment decisions should reflect his clients and their particular risk tolerance levels.
This would translate as follows. If your employees are older, more risk conscious and conservative, then the options that you provide them should reflect this. If on the other hand they are younger and more aggressive, then you should be providing them with higher risk investment options.
So how can you know the risk tolerance of your employees? You should provide each and every participant with a risk tolerance questionnaire; help them understand what it is for and assist them in completing it.
Help your employees in filling out the information and make them realize what their personal risk tolerance is. It is not the case of explaining how stocks, shares and investment work, but at least they should realize what their risk profile is. Once you are able to estimate the risk tolerance, only then, you can select investment options.
Even though risk tolerance questionnaires are not currently mandatory on 401k plans, they should. This questionnaire will make your employees feel more in control and you will be providing them with a good service. After all, there’s their future at stake here.
Reference: http://www.401khelpcenter.com/401k/mcalmond_risk_tolerance.html
Wednesday, April 1, 2009
The Real 401k plan problem
During the last two years, much has been going on in DC, with regards 401k plans, their structure and their fees. If you’re looking at the situation from the outside, it is easy to say that disclosure is better, that the fees are too high and so on.
As opposed to what many people think, the fees in the retirement industry are not so high. If you look at the investment consulting firms, you will find that there are only a few who specialize in retirement investments, simply because the fee margin that they get from the retail section is higher. An analysis is done on various 401k plans, and the results show that these are not really inundated with charges like the general public was lead to think, from all the negative publicity the plan structure has been getting.
Not even disclosure is a real problem. If you look, you will find that lots of information is being provided to the contributors. Conflict of interest can also be another easy target, with investment decisions being biased towards the advisor’s own company.
To concentrate more on the 401k plan fees, I would also like to mention the services delivered in relation to this. When conducting fee analysis we found out that contributors weren’t actually getting any value out of the fees the pay. We found out that investment oversights and lack of service overall were happening, and it is these factors that are in reality essential to all the plan participants, and what needs to be concentrated on.
The 401k plan problem is not an illusion; it is really there, but we have to make out what is real and what is just a product of negative media publicity.
Reference: http://www.401khelpcenter.com/401k/graham_401k_fees.html
As opposed to what many people think, the fees in the retirement industry are not so high. If you look at the investment consulting firms, you will find that there are only a few who specialize in retirement investments, simply because the fee margin that they get from the retail section is higher. An analysis is done on various 401k plans, and the results show that these are not really inundated with charges like the general public was lead to think, from all the negative publicity the plan structure has been getting.
Not even disclosure is a real problem. If you look, you will find that lots of information is being provided to the contributors. Conflict of interest can also be another easy target, with investment decisions being biased towards the advisor’s own company.
To concentrate more on the 401k plan fees, I would also like to mention the services delivered in relation to this. When conducting fee analysis we found out that contributors weren’t actually getting any value out of the fees the pay. We found out that investment oversights and lack of service overall were happening, and it is these factors that are in reality essential to all the plan participants, and what needs to be concentrated on.
The 401k plan problem is not an illusion; it is really there, but we have to make out what is real and what is just a product of negative media publicity.
Reference: http://www.401khelpcenter.com/401k/graham_401k_fees.html
Who’s responsible for your 401k plan?
When employees purchase a 401k, they expect their fiduciary to provide them with the best product possible. Since most employees are not knowledgeable about investment choices and returns, they trust their fiduciary, to choose the right seller that will take the best care of their retirement money. They are basically placing their future in this person’s hands.
Apart from this, a fiduciary is legally bound to manage his clients’ money, in their best interest. In reality however, does it really work this way? The fiduciary’s employer does not authorize his employees to help you select the proper 401k vendor. Nor is the fiduciary allowed, to help you choose the funds where you want to allocate your contributions. This would put them at risk, of being sued by the employees in cases where the plans underperform or not properly managed.
The trouble with this system is that employers are not realizing that their agent is not giving the employees investments advise. At the end of the day, what’s important for fiduciaries is getting more commission and more money in their pocket. What they are doing is just handing over the forms, and wishing the employees the best of luck with their new 401k plan. What would you call this? I can barely call it educating employees. This approach is definitely not helping employees in making the right financial decisions.
It seems that employees barely check their retirement plan statement as they should. So how can you expect them to make good investment decisions? Since 2008, 401k vendors have been licensed to give their clients investment advice. Then again, this does not solve the problem, since bank or insurance companies who own investment funds, will obviously recommend their own funds to your employees.
The new pension law, allows investors to have more information regarding their investment, from their 401k plan provider. It also supports an increase in 401k plan contributions. This is definitely the way to go. To improve the situation furthers, employers need to be knowledgeable buyers, who understand their responsibility as fiduciaries, and acknowledge that they are responsible for their employees’ retirement money, and also their future. Employers need to do their home work; study how the 401k plans work, and what the pricing structure is.
Finally the authorities have to realize the abuses that take place, and assist, in providing a more accountable system.
Reference http://www.401khelpcenter.com/ackley_fees.html
Apart from this, a fiduciary is legally bound to manage his clients’ money, in their best interest. In reality however, does it really work this way? The fiduciary’s employer does not authorize his employees to help you select the proper 401k vendor. Nor is the fiduciary allowed, to help you choose the funds where you want to allocate your contributions. This would put them at risk, of being sued by the employees in cases where the plans underperform or not properly managed.
The trouble with this system is that employers are not realizing that their agent is not giving the employees investments advise. At the end of the day, what’s important for fiduciaries is getting more commission and more money in their pocket. What they are doing is just handing over the forms, and wishing the employees the best of luck with their new 401k plan. What would you call this? I can barely call it educating employees. This approach is definitely not helping employees in making the right financial decisions.
It seems that employees barely check their retirement plan statement as they should. So how can you expect them to make good investment decisions? Since 2008, 401k vendors have been licensed to give their clients investment advice. Then again, this does not solve the problem, since bank or insurance companies who own investment funds, will obviously recommend their own funds to your employees.
The new pension law, allows investors to have more information regarding their investment, from their 401k plan provider. It also supports an increase in 401k plan contributions. This is definitely the way to go. To improve the situation furthers, employers need to be knowledgeable buyers, who understand their responsibility as fiduciaries, and acknowledge that they are responsible for their employees’ retirement money, and also their future. Employers need to do their home work; study how the 401k plans work, and what the pricing structure is.
Finally the authorities have to realize the abuses that take place, and assist, in providing a more accountable system.
Reference http://www.401khelpcenter.com/ackley_fees.html
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