Access the briefs on the Society’s website:

http://www.soa.org/research/research-projects/pension/research-managing-retirement-decisions.aspx

Deferrals (401(k) salary deferrals) and catch-up deferral contributions are always limited on a calendar year basis. For 2012, the deferral limit has increased from $16,500 to $17,000, while the catch-up deferral contribution limit remains unchanged at $5,500. A participant may make catch-up deferral contributions only if he or she will have reached their 50th birthday by the end of the year. And, as always, a participant cannot defer more than 100% of his or her compensation. Remember, the deferral limit is a personal limit, so if your 401(k) plan has immediate entry, and you have a new participant who defers close to the limit, you may need to discuss the deferral limit with the participant so that the total amount deferred by that participant (to all plans) does not exceed the deferral limit ($17,000 if under age 50, $22,500 if age 50 or older).

For plan years that begin in 2012, the compensation that may be used to calculate benefits, contributions, and deduction limits is limited to $250,000. This is an increase from $245,000 for the prior year. You should check your plan document to make sure you are including the correct items in plan compensation.

For defined contribution plans, the amount that a participant may have contributed to his or her account is the “Annual Additions Limit”. This total includes allocations of contributions, deferrals (but not catch-up deferral contributions), and forfeitures. For the plan year ending in 2012, the Annual Additions limit is $50,000; this is an increase of $1,000. Again, as with the deferral limit, a participant’s “annual additions” cannot exceed 100% of compensation.

If you have a participant in your plan with fairly low compensation, who defers close to 100% of compensation, that participant may have to have deferrals returned to him or her if you make an employer contribution. Most plan documents require participant deferrals to be returned first if the annual additions limit is exceeded.

In defined benefit plans, the annual benefit, rather than the annual contribution, is limited. For a participant with at least 10 years of participation and a normal retirement age of 62 through 65, the maximum annual benefit has increased from $195,000 to $200,000 for plan years ending in 2012. If the participant has less than 10 years of participation, the limit is prorated. For participants with a retirement age less than 62, the $200,000 is actuarially reduced. For participants with a retirement age greater than 65, the $200,000 is actuarially increased. Again, as always, the benefit cannot exceed 100% of the highest three consecutive plan year average compensation, prorated for years of service less than 10.

Now, as this article written by Ed Frauenheim points out, more employees may finally be figuring out that it is not a good deal.  In the quest for acquiring and retaining valuable employees, employers may have to rethink the shape of their retirement benefit plans.

First and foremost, defined benefit plans offer retirees a guaranteed income stream at retirement. The value of this plan characteristic has been illustrated in the last few years as we’ve seen how a financial crisis can significantly erode a defined contribution plan participant’s ability to fund their retirement. This higher degree of uncertainty associated with a defined contribution plan demands that a participant overshoot their actual retirement goal in order to compensate for the possibility of the market turning against them.

Another possible effect in play here is that the nature of a defined benefit plan is such that it “forces” an employee to save for retirement more than a defined contribution plan. In a defined contribution plan, at least part of the plan’s funding is accounted for by salary deferrals, which are made at the participant’s election. It takes discipline to accept less pay now in order to meet a retirement goal years down the road, and many employees don’t have that discipline. In a defined benefit plan, benefits are typically funded solely by the employer each year without any participant election. Making regular contributions leads to a larger accumulation at retirement, which allows more defined benefit plan participants to retire in any given year than defined contribution plan participants.

While any number of other factors could be driving the outcome of this study, the result is worth some thought. Both defined benefit and defined contribution plans have their merits and a company looking to implement a retirement plan for its employees should consider how that plan will help its employees meet their retirement goals.

Such (mis)perceptions are not uncommon. The reality is that many of the plans I work with are invested in funds that appear to be fee free. We’ve all heard the cliché, there is no such thing as a free lunch. 401(k) plans are no exception.

Fortunately (depending on whose side you are on), new regulations will take effect soon requiring many service providers to unveil fees to employers that, up until now, they have been able to keep secret. Furthermore, by 2012, all plans with participant directed 401(k) accounts will have to provide quarterly expense statements to employees. As noted in this NY Times article, these expense statements will highlight mutual fund costs that up until now have been kept secret from both employers and employees.

Read the full article here.

Steve Diess, president of Independent Actuaries, Inc. talks about retirement with Troy and Tyler of Financial Focus Radio. Click on the links below to listen to the broadcast.

Financial Focus Radio, Segment 1

Financial Focus Radio, Segment 2

To learn more about Financial Focus Radio, visit their website at FinancialFocusRadio.com.

Let’s face it; defined benefit plans are complicated to begin with.

I personally like to keep the day-to-day administrative tasks as easy as possible for my clients. I am finding that more difficult as we drive into the fourth year of the new funding rules, most particularly around plan sponsor elections.

The Pension Protection Act of 2006 (PPA) requires that plan sponsors take active involvement in the choices of actuarial assumptions and in the accounting and maintenance of excess contributions. In theory, this is a great idea. We have to remember that the IRS is merely trying to ensure that plan sponsors play an active role in the funding of their defined benefit plan.

When the rubber hits the road though, there are other factors that play into this seemingly easy task. There are timing implications with the assumption election and complex calculations involved in excess contribution elections. Furthermore, the administrative process of preparing, obtaining signatures for and maintaining these elections are an added burden in the eyes of defined benefit sponsors.

As actuaries and consultants, it is our job to break down the calculations and their respective complexities into an understandable language for our clients. While I would love to delve into the intricacies of IRS funding codes, most plan sponsors rely on our expertise to advise them.

For those interested in reading more details about plan sponsor elections with respect to excess funding, check out our reference section. Otherwise, rest assured we have thought through all the complexities before sending you another piece of paper to sign!

Whether ‘tis nobler in the mind to suffer, plan sponsors find themselves asking “how long should I keep retirement plan records?”. The short (and not very helpful) answer is: “it depends”.

As you may be painfully aware, there can be many, many different types of records associated with maintaining a retirement plan: the plan document, annual reports, employee records, government filings, and asset trust statements to name a few.

There may be different retention requirements for different types of records, but to avoid the IRS’s slings and arrows, we generally recommend plan sponsors keep all plan records until six years after the plan has been terminated, all benefits have been paid and the last government filing has been submitted. It is especially important that employee records supporting the compensation and years of service used in determining benefits are kept.

Some sponsors find that they can meet these requirements via electronic files ceasing the heart ache of retaining numerous paper files. Let us know if you have any questions about which specific records must be kept, how long and in what format.

Note that any references to Hamlet are unintentional in nature.

My colleague Alan Stonewall is showing us how it’s done. Alan began his career as an actuary in 1969, founded Stonewall Pension Services (SPS) in 1979, sold that business, did a stint at Deloitte & Touche, and then reunited with some of his colleagues from SPS when he joined us at IAI in 2001. Since then he has worked a flexible schedule, infrequently in the office but always available by phone. Although he has technically been a part-time employee, he has carried a heavy and challenging workload.

This month, Alan takes another step toward his phased retirement as he transitions from employee to independent contractor with IAI. He will be doing a bit of consulting on his own, and will continue to do some business development and consulting work for IAI. However, he won’t be a regular presence in our office, and both he and (especially) his wife Roxie envision his spending more time with family and in other non-work pursuits.

Alan has been a wonderful colleague, boss, mentor and friend to each of us here, and he has left an indelible mark and legacy with this company. It’s inaccurate to say that we at IAI will miss Alan greatly, because we will continue to work with him on a regular basis. However, we do wish him all the best in this next step of his long fade into the sunset.

(Alan can be reached by email directly at mailto: alan@northwestactuarialconsulting.com, or by phone at 503-407-8331. You can also leave messages for Alan with our main number, 503-520-0848.)