There have been a lot of questions within the retirement plan community regarding the application of the regulations to participant directed brokerage account windows. I have heard a few people opine that paragraph (d) does not apply to brokerage account windows. This may be wishful thinking—paragraph (d) requires numerous (and some would say onerous) disclosures to participants. FAB 2012-2 Q&A-30 states that a self-directed brokerage account does not get a pass on the requirements under paragraph (d) for any investments within the account that are designated investment alternatives.  The relevant question is then, how does one define a designated investment alternative?  According to the DOL, it is any investment “specifically identified as available under the plan.”  While many practitioners, prior to FAB 2012-2, would not have worried about the application of paragraph (d) to brokerage account windows,  I think that post-FAB 2012-2, they may be looking closely at the communications made to participants about a plan’s investments.  You can read all 23 pages of the FAB by clicking here.

The proposed Small Business Pension Promotion Act of 2011, if passed, would help eliminate or modify for the small plan sponsor some “large plan” rules, including:

• Offering the possibility of relief from Required Minimum Distributions in times of general economic decline (which would help older participants retain more tax-sheltered retirement savings).
• Including pension and IRA deductible contributions in the calculation of net earnings for self-employed individuals.
• Providing benefit restriction relief in certain cases for small defined benefit plans that have “advance funded” contributions in past years.
• Repealing the tax on nondeductible contributions to qualified plans.
• Offering the possibility of flexibility and relief from the burden of required interim plan amendments to qualified plans.
• “Grandfathering” certain plans to allow for earlier normal retirement age definitions.

So what are the chances of passage? Less than 1%, according to the prognosticators at GovTrack.us.  And even with passage of this proposed bill, numerous “large plan” rules would continue to apply to the small plan sponsor (note that the employer elections of actuarial assumptions aren’t touched in this proposal).  Oh, well.  It’s nice to know that someone’s at least trying to look out for the little guy this time.

For small business owners, the opportunity comes in the form of large, tax deductible contributions. That opportunity is as available today as it has ever been in the past. However, for many larger corporations, the risk of a DB plan can often outweigh the reward, especially in today’s economy.

The problem is that DB plans, while long-term in nature (benefits are expected to be paid out over many decades), are treated as short-term commitments by both the IRS and the Financial Accounting Standards Board. Both of those agencies require that plan liabilities be valued as if the plan was terminating and paying out participants today.

In certain circumstances, that treatment is tolerable. However, in today’s markets where asset returns have been tremendously volatile and where the Fed is working to keep interest rates at historically (and artificially) low levels, unfunded DB plan liabilities can spike, wreaking havoc on the plan sponsor’s bottom line.

This news release from the American Benefits Council does a good job of explaining these dynamics, and has a link to a simple proposal for funding relief that would considerably ease the burden on DB plan sponsors beginning with 2012 plan years. The proposal is simple, logical, and necessary for the short-term preservation of these plans that provide vital benefits to millions of retirees. Adoption of a proposal like this would help illustrate the fallacies of current funding and accounting rules, and be a push in the right direction for the long-term viability of DB plans.

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.