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 Sponsor News - June 2014

The Social Security Letter Forwarding Service is being discontinued

On April 17, 2014, the US Social Security Administration (SSA) announced that it is discontinuing its Letter Forwarding Service (LFS) effective May 19, 2014. Since 1945, the agency has provided the service to help third-parties find "missing" individuals in order to communicate monetary or humanitarian information.

As a part of Department of Labor Field Assistance Bulletin (DOL FAB) 2004-02, utilization of either the IRS LFS or the SSA LFS was a required step in attempting to locate missing participants in a terminated plan. Given that both of these Government-sponsored programs have now been discontinued, it is a clear message that there are highly efficient and more cost-effective private suppliers who can provide this service.


 Internal Revenue Service has issued ruling 2014-9. Effective immediately, the ruling permits a plan administrator for a receiving plan simply to check a recent annual report filing for the sending plan on a public data base, This procedure eliminates the necessity for communication between the two plans (usually through the individual), and expedites the entire process. If it is later determined the amount rolled over was an invalid rollover contribution, the amount rolled over plus any attributable earnings must be distributed to the employee within a reasonable time after such determination.

Are Unmatched 401(k) Contributions a Good Idea?

by: Donald Jay Korn
Sunday, September 1, 2013

It is one of the basic laws of personal finance: Fund traditional 401(k) accounts with enough money to get a full employer match - if one is offered.

"A match trumps all, given that it's effectively an instantaneous 100% or 50% return on the contribution, depending on the match ratio," says Michael Kitces, partner and director of research at Pinnacle Advisory Group in Columbia, Md. If a client with a $200,000 salary is offered a 50% match on the first 6% of pay, for example, the client should contribute at least $12,000 to the 401(k) to get the $6,000 employer contribution.

But during the recession, many employers pulled back on 401(k) matches. Out of their own paychecks, clients who work at those companies can still contribute up to $17,500 this year to a 401(k) or up to $23,000 if they're 50 or older.

Yet many clients wonder: Match or no, should that employee with the $200,000 salary max out their 401(k) this year?

For Kitces, there is a strong case in favor of unmatched contributions. Tax-efficient investment opportunities outside of a 401(k), like tax-managed mutual funds or ETFs, are efficient about deferring tax only on the growth - but "a 401(k) contribution defers taxes on the principal," Kitces says. "That's a gargantuan difference.

"With a $10,000 investment and an 8% growth rate," he continues, "tax-advantaged mutual funds are tax-efficient on $800 of growth, while 401(k)s are tax-deferred on the whole $10,000. It's not even slightly close. The 401(k) contribution will absolutely obliterate the economic value of tax-efficient brokerage investments."

Connie Stone, president of Stepping Stone Financial in Chagrin Falls, Ohio, contends that there are other reasons unmatched 401(k) contributions can work for some clients. "Besides lowering the tax bill," she says, "tax deferral also lowers a client's adjusted gross income. With lower AGI, the amount of AGI-dependent tax deductions and credits can increase and the taxation of Social Security benefits may decrease."

But other advisors see drawbacks to making unmatched contributions to a 401(k). "Generally, 401(k) plans have limited investment options, so returns may suffer," says Norman Boone, president of Mosaic Financial Partners, an advisory firm in San Francisco.
What's more, if a client needs cash, getting money into a 401(k) is easier than pulling it out. Loans can pose tax problems, such as double taxation of interest payments and unwanted taxes on loan defaults. Hardship withdrawals may not be available. Even expected withdrawals in retirement can be painful if future tax rates rise.

Are there better alternatives to unmatched 401(k) contributions? Boone suggests following this list of priorities:

  1. 401(k) contributions that receive a full match.
  2. Repayment of credit-card debt.
  3. Roth IRA contributions, up to the annual limit.
  4. Unmatched 401(k) contributions.

Boone is not alone in valuing Roth IRA contributions above unmatched 401(k) contributions. "Client situations differ," says Joe Lucey, president of Secured Retirement Advisors, an RIA in St. Louis Park, Minn., "but using a Roth IRA before unmatched 401(k) contributions is a common strategy at our firm. We put tax-free money before tax-deferred money." Roth IRA withdrawals are fully tax-free after five years and after age 59 1/2.

Many of Lucey's working clients allocate 10% or 15% of their income to retirement funding. "Say a client earning $100,000 is in a 401(k) that matches up to 6% of pay," he says. "If the retirement savings goal is 10%, that client might put $6,000 into the 401(k) to get the match, and contribute the remaining $4,000 to a Roth IRA, assuming income eligibility."

One major exception is a high-bracket client who expects to have a lower tax rate in retirement: Such a client should make unmatched 401(k) contributions instead to get the more valuable tax break. But "if a client expects to be in the same tax bracket," Lucey says, "I'd probably recommend the Roth IRA."

He also cites another consideration. "I prefer diversification among retirement funds," he says. "A client with money in both a Roth IRA and a traditional tax-deferred plan may have more flexibility in choosing the account to tap in retirement."

Kitces notes other advantages to a Roth IRA. Unlike Roth 401(k)s, Roth IRAs have no required minimum distributions during the life of the account owner. "This advantage applies only while the IRA owner is alive, and only if the IRA owner lives past age 70 1/2, when RMDs begin," he explains. Some clients may value the opportunity to pass a substantial tax-free account to beneficiaries.

Moreover, holding a traditional retirement account at death may mean paying estate tax on money that really belongs to the IRS. That's not an issue for federal estate tax, for various reasons, including the large estate tax exemption now in effect. However, many clients will owe state estate tax, with lower exemptions and no offsetting tax benefits.

Beyond Roth IRAs and taxable investments, there may be other vehicles that are preferable to unmatched 401(k) contributions. Parents of young children could contribute to a 529 account, for eventual tax-free distributions to pay tuition bills, Lucey notes. He adds that contributions to health savings accounts might be a superior choice for people focused on retirement.

Indeed, William Applegate, a Fidelity Investments vice president, suggests that employees consider HSAs as a component of their retirement investing. After a contribution to get a 401(k) match, he argues, "the next dollars should go into an HSA, where employees can get triple tax advantages" - because HSA contributions, investment returns and any distributions used for qualified health care expenses are all exempt from income tax. And because there's no use-it-or-lose-it feature, he says, HSA accounts can grow until they're tapped, tax-free, for future medical bills.

This year, HSA contributions can be as high as $7,450 for families with account holders 55 or older; part of an annual HSA contribution might come from an employer's match, if one is offered. "After contributing as much as possible to an HSA, employees can make unmatched 401(k) contributions," Applegate adds.

Considering the tax advantages, some clients may choose to pay medical bills out of pocket and use an HSA for tax-free accumulation to pay future bills. Stone says that such efforts would involve long-term investment options with substantial upside potential, rather than the ultralow-yield bank accounts currently chosen for most HSAs .

Still, as Ross Levin, president of Accredited Investors in Edina, Minn., says, "You have to make sure that a high-deductible health insurance policy is in place" before a possible HSA contribution even enters the equation because clients must have conforming health insurance to open an HSA.

"Some clients may not be able to fund an HSA for retirement and also fund a Roth IRA," Levin adds, "because they will use their HSAs for medical expenses along the way."

Definition of "Spouse" and "Marriage" under ERISA and the Supreme Court's Decision in United States v. Windsor

Date: September 18, 2013

On June 26, 2013, the Supreme Court of the United States ruled, in United States v. Windsor, that section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. Section 3 provides that, in any Federal statute, the term "marriage" means a legal union between one man and one woman as husband and wife, and that "spouse" refers only to a person of the opposite sex who is a husband or a wife. The Supreme Court concluded that section 3 of DOMA "undermines both the public and private significance of state-sanctioned same sex marriages" and found that "no legitimate purpose" overcomes Section 3's "purpose and effect to disparage and to injure those whom the State, by its marriage laws, sought to protect[.]" The President has directed the Attorney General to work with other members of the Cabinet to review all relevant federal statutes to ensure the Supreme Court's decision, including its implications for federal benefits and obligations, is implemented swiftly and smoothly. Following consultation with the Department of Justice, the Department of the Treasury and other appropriate federal executive agencies, the Department of Labor (Department) is issuing this Technical Release to provide guidance to employee benefit plans, plan sponsors, plan fiduciaries, and plan participants and beneficiaries on the meaning of "spouse" and "marriage" as these terms appear in the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), and the Internal Revenue Code that the Department interprets.(1)

In general, where the Secretary of Labor has authority to issue regulations, rulings, opinions, and exemptions in title I of ERISA and the Internal Revenue Code, as well as in the Department's regulations at chapter XXV of Title 29 of the Code of Federal Regulations, the term "spouse" will be read to refer to any individuals who are lawfully married under any state law, including individuals married to a person of the same sex who were legally married in a state that recognizes such marriages, but who are domiciled in a state that does not recognize such marriages.(2) Similarly, the term "marriage" will be read to include a same-sex marriage that is legally recognized as a marriage under any state law. This is the most natural reading of those terms; it is consistent with Windsor, in which the plaintiff was seeking tax benefits under a statute that used the term "spouse"; and a narrower interpretation would not further the purposes of the relevant statutes and regulations.

For purposes of this guidance, the term "state" means any state of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, Wake Island, the Northern Mariana Islands, any other territory or possession of the United States, and any foreign jurisdiction having the legal authority to sanction marriages.

The terms "spouse" and "marriage," however, do not include individuals in a formal relationship recognized by a state that is not denominated a marriage under state law, such as a domestic partnership or a civil union, regardless of whether the individuals who are in these relationships have the same rights and responsibilities as those individuals who are married under state law. The foregoing sentence applies to individuals who are in these relationships with an individual of the opposite sex or same sex.

A rule that recognizes marriages that are valid in the state in which they were celebrated, regardless of the married couple's state of domicile, provides a uniform rule of recognition that can be applied with certainty by stakeholders, including employers, plan administrators, participants, and beneficiaries.

A rule for employee benefit plans based on state of domicile would raise significant challenges for employers that operate or have employees (or former employees) in more than one state or whose employees move to another state while entitled to benefits. Furthermore, substantial financial and administrative burdens would be placed on those employers, as well as the administrators of employee benefit plans. For example, the need for and validity of spousal elections, consents, and notices could change each time an employee, former employee, or spouse moved to a state with different marriage recognition rules. To administer employee benefit plans, employers (or plan administrators) would need to inquire whether each employee receiving plan benefits was married and, if so, whether the employee's spouse was the same sex or opposite sex from the employee. In addition, the employers or plan administrators would need to continually track the state of domicile of all same-sex married employees and former employees and their spouses. For all of these reasons, plan administration would grow increasingly complex, administrators of employee benefit plans would have to be retrained, and systems reworked, to comply with an unprecedented and complex system that divides married employees according to their sexual orientation. In many cases, the tracking of employee and spouse domiciles would be less than perfectly accurate or timely and would result in errors or delays.

Such a system would be burdensome for employers and would likely result in errors, confusion, and inconsistency for employers, individual employees, and the government. In addition, given the interconnectedness of statutory provisions affecting employee benefit plans, recognition of marriage based on domicile could prevent qualification for tax exemption, lead to loss of vested rights if spouses move, and complicate benefits determinations if spouses live in different states. All of these problems are avoided by the adoption of a rule that recognizes marriages that are valid in the state in which they were celebrated. That approach is consistent with the core intent underlying ERISA of promoting uniform requirements for employee benefit plans. In addition, Congress requires that the Department, the Department of Treasury/Internal Revenue Service (IRS) and the Department of Health and Human Services (HHS) coordinate policies with respect to the Health Insurance Portability and Accountability Act (HIPAA), which has parallel provisions in ERISA, the Code and the Public Health Service Act. HIPAA § 104. The Departments operate under a Memorandum of Understanding that implements section 104 of HIPAA, and subsequent amendments, and provides that requirements over which two or more Secretaries have responsibility (''shared provisions'') must be administered so as to have the same effect at all times. HIPAA section 104 also requires the coordination of policies relating to enforcing the shared provisions in order to avoid duplication of enforcement efforts and to assign priorities in enforcement. Congress also provided that, whenever the Departments of Treasury and Labor are required to carry out provisions relating to the same subject matter under ERISA, they shall consult with each other in order to, among other things, reduce conflicting requirements. ERISA § 3004(a); 29 U.S.C. § 1204(a). The Department has coordinated with Treasury/IRS and HHS in developing this Technical Release, and agreed with those agencies that recognition of "spouses" and "marriages" based on the validity of the marriage in the state of celebration, rather than based on the married couple's state of domicile, promotes uniformity in administration of employee benefit plans and affords the most protection to same-sex couples.

For Further Information
The terms "spouse" and "marriage" appear in numerous provisions of title I of ERISA and the Department's regulations. In addition to the above general guidance, the Department's Employee Benefits Security Administration (EBSA) intends to issue future guidance addressing specific provisions of ERISA and its regulations. Additional information will be made available at

Top Ten Things All Employees Should Know About Their 401k Plan

By Jerry Kalish
October 30, 2013

If you’re at all involved with 401(k) plans, what I’m about to say isn’t a major new flash: Employees have no real understanding of this tax-favored retirement plan and how it can impact their future.

The reasons are many and complex and beyond the scope of today’s discussion. But these are 10 basic things that employees should know about their 401(k) plan. You’ll often see their lack of understanding in the form of questions they will ask:

  1. When can I join the plan?
  2. Can I transfer money from a previous employer's plan or an IRA?
  3. How much can I contribute to the plan each pay period?
  4. Is there a company match?
  5. What investment options are available?
  6. Are hardship withdrawals allowed from the plan?
  7. Can I borrow money against my account?
  8. Does the plan offer any type of educational material or advice service help to me invest my funds?
  9. What happens to my money if I quit working for this company?
  10. Who do I contact if I have questions about the plan?

Obviously, there is a lot more employees need to know. But as an advisor to 401(k) plans, you can help employees get a better understanding of how the plan works and the value it can provide.

An explanation about the Cost of Waiting, Asset Allocation, and Dollar Cost Averaging may also help.

401(k)s: It’s about outcomes, not features

Posted November 7, 2013 by Jerry Kalish
Since the institution of 401(k) plans more than 30 years ago, 401(k) providers have escalated the number of plan features to stay competitive within the marketplace. We've seen the proliferation of such features as:

  • Daily valuation
  • Loans
  • Self-directed brokerage
  • Web access
  • Investment education tools
  • Multi-share classes
  • Co-fiduciary responsibility
  • Advice tools
  • Lifetime income options

But, in order to be successful today in the financial service industry — and avoid commoditization — we can’t sell features. We have to assist clients in achieving positive outcomes.

For those of us in the retirement plan business, it is, simply stated, helping employees meet the retirement income challenge.
Recent research is showing that the relative importance of retirement plan success factors may not be what you think. A 2011 study by Unified Trust Company, Retirement Success: A Surprising Look Into the Factors the Drive Positive Outcomes¸ indicates that the saving rate is the most important:

  • 5 times more important than asset allocation
  • 30 times more important than an annual assessment
  • 45 times more important than fund selection

Putnam in its 2012 study, Defined Contribution Plan: Missing the forest for the trees?, quantified the practical impact of specific tactics used by plan sponsors on retirement outcomes. Putnam reached a similar conclusion that higher deferral rates were the key:

“Our analysis suggests that putting fund performance front and center in terms of the plan sponsor’s priorities is an error with far-reaching implications. That is not to say that fund performance does not matter, but our analysis suggests it is a much less powerful variable compared with asset allocation and, most of all, higher deferral rates.”

For us non-investment experts, maybe we should reprise the old “cost of waiting” example for plan sponsors and 401(k) participants. The one found in an old 401(k) enrollment book that goes something like this:

If you wait for 10 years and contribute for 20 years, you’ll have $90,688. But if you start now and contribute for 30 years, you’ll have $194,903. (This assumes a $200 a month contribution made at the end of the month and earns interest at 6%, etc.).

Getting employees to act, however, is the challenge. We need to, first, educate plan sponsors on the new definition of arriving at positive participant outcomes.