IRS 401(k) Savings Plan Checklist

The Internal Revenue Service (IRS) has published a brochure and checklist to assist 401(k) savings plan sponsors in conducting a “check-up” of their plans. The booklet, “Have you had your Check-up this year?” describes the 401(k) Plan Checklist, lists publications and forms that are helpful in operating a 401(k) savings plan, summarizes common mistakes and briefly describes the IRS’ correction programs.

The 401(k) Plan Checklist includes ten questions about the plan’s compliance with key IRS rules. The Web-based version of the Checklist has links to expanded explanations and IRS resources. For example, one can use links to detailed information about highly compensated employees, nondiscrimination testing and eligible employees.

The booklet, Publication 3066, can be viewed at http://tinyurl.com/ye89au.

The 401(k) Plan Checklist, Publication 4531, can be viewed at http://tinyurl.com/yk2mah.

Both can also be obtained by contacting the IRS at 800-829-3676.

Of course, one way to avoid issues that these types of “check-ups” tend to uncover is to work with a true discretionary fiduciary with a spotless client audit record. Did you know, that NO Client has ever failed a DOL or IRS audit of its qualified plan while Unified Trust served it? One of the reasons why? Unified conducts a rigorous “front-end fiduciary audit” of each plan it takes over. In this process, we attempt to uncover plan shortfalls, historical prohibited transactions or other possible fiduciary breaches and guide and assist the client in correcting these before they become an issue down the road. While no service provider can guaranty a clear audit, we are proud of our record and proud that our guidance has assisted clients remain compliant with DOL and IRS guidelines.

Automatic Enrollment Mandatory? Maybe?

President Obama recently released an outline of his fiscal year 2010 budget, A New Era of Responsibility: Renewing America’s Promise available here at http://www.whitehouse.gov/omb/budget/.

Of interest to this writer (and hopefully the readers) is that previous improvements to retirement arrangements that were part of the Bush tax cuts will not expire after 2010. This reinforces the permanency granted by the Pension Protection Act of 2006 (PPA). In addition, this budget also includes several proposals intended to strengthen the private retirement system.

1. Payroll-deduction individual retirement accounts (IRAs) for workers whose employer does not sponsor a qualified retirement plan.
2. An expansion of the Saver’s Credit.
3. Mandatory Automatic Enrollment.

Automatic IRAs
Almost one out of every two workers – or 75 million working Americans – have no employer-sponsored retirement plan. As a solution, the budget proposal would require employers that do not offer a retirement plan to enroll employees automatically in a direct-deposit IRA program. Employees would have the ability to opt out of the savings arrangement. The budget outline provides very few details on the automatic IRA proposal. Other proposals of this type have suggested that employers with less than 10 employees or employers that have been in business less than two years would be exempted. Smaller employers (up to 100 employees) would be entitled to a tax credit for the first two years that they maintain a payroll deposit arrangement. The credit would be $25 for each employee who uses the arrangement, up to a total of $250.

Expansion of the Saver’s Credit
The Saver’s Credit is a tax credit for certain low and moderate income individuals who contribute to workplace retirement plans and IRAs. However, many Americans are unable to take advantage of the credit because they do not have any tax liability, or earn more than the AGI eligibility limit ($55,500 for families/ $27,750 for single taxpayers). The budget proposes making the credit fully refundable so that all Americans can benefit from the credit, and expanding eligibility to families earning up to $65,000 per year. The current non-refundable Savers Credit ranging from 50% down to 10% of the first $2,000 of contributions would be replaced with a uniform refundable credit of 50% of the first $1,000 for all eligible savers.

Mandatory Automatic Enrollment
Interestingly, the budget appears to not only propose automatic enrollment for payroll deduction IRA’s, but that ALL employer-sponsored retirement plans be required to automatically enroll employees. Many of you are already familiar with The Unified Success Pathway®. For those unaware, one of the keys to success, in our view, is making the default for the plan, the path of least resistance. To us that means removing as many barriers as possible to achieving retirement success. Such barriers include joining the plan, increasing deferral rates periodically, asset allocating properly and rebalancing. By automating these and requiring employees to opt out rather than opt in, plan success is more achievable. What is success? A plan that provides an adequate benefit for participants to live on during their retirement years.

Click here to learn more about The Unified Success Pathway®.

Participant Behavior - Buy High, Sell Low...HUH?

Recently, there was a very interesting article written by planadviser Magazine (http://www.planadviser.com/investing/ article.php/3353) discussing how 401(k) assets in stable value reached an all-time high in November. The article cites data from the Hewitt 401(k) Index. Here's a few of the details:

-“The Index for November shows stable value funds gained $342 million from participant transfers, and by the end of the month, the allocation to stable value was 33.4%, up from 20.5% just one year ago. Balanced and money market funds also received $61 million and $12 million in inflows, respectively, Hewitt said."

-“Outflows mainly came from large U.S. equity, lifestyle, company stock, and international funds.”

-“On average, 401(k) participants transferred 0.06% of balances on a net daily basis in November (slightly above the trailing average of the past 12 months).”

-“The direction of transfers was fixed income-oriented on 58% of the days in the month.”

-“The level of transfers was above normal four days of the month, with money moving toward fixed-income investments on all four days, each of which was immediately following large declines in the stock martket.”

This is just more supporting evidence that the vast majority of participants do the wrong thing at the wrong time (usually because of emotion). It's also a large contributing factor to why most participants earn sub-par returns. DALBAR releases a study each year showing the 20-year return of the S&P 500 as compared to the average equity investor. Every year it seems the average investor trails the index by roughly 7-8%!

There is no question that the past three months have been incredibly trying for every investor, whether novice or professional. The velocity with which information flows in a globally connected world hasn't helped, especially when just about every newspaper, magazine, website or news station has contributed to doomsday scenarios. Couple that with our Nation’s leadership questioning the validity of the Retirement System and specifically the 401(k) and you can hardly blame the average person for running for the hills.

November 20th represented the low point so far for the S&P 500 when it reached 752, having fallen 100 points in two days. Presumably, one of the four days during the month where the level of transfers was above normal was on or around November 20th and those investors who transferred their money into stable value/fixed income locked in huge (and permanent) capital losses. Many are likely to be nowhere near retirement and therefore had no immediate need to sell other than the emotional distress they were experiencing (pointing, in part, to a risk tolerance/time horizon problem). Assuming the market reverts to the mean and returns its historical average of approximately 10%, it would take those investors roughly 4 years to make their money back. Interestingly, since November 20th the S&P has gained approximately 20%.

How many of those people who went to cash do you think are still sitting there? Probably most of them. If these investors remain in “safe” investments until the market has recovered, they will have missed the gains (yet again) and thus continued the poor cycle of buying HIGH and selling LOW.