The Rosenbaum Law Firm P.C. Blog

An article in Plan Adviser Magazine about the role of an administrative committee for retirement plans that features me can be found here.

My latest JDSupra.com article can be found here.

I was quoted in an article on Advisorone.com, click here to read it.

I never met my great grandmother, but my grandmother always used an expression that her mother had: “Don’t run after the carriage if it’s not going to pick you up.” I cling to that expression dearly when I think of business and personal situations where I wouldn’t run or did run after something that was never going to be.

For investors, too many people run after the carriage after the carriage has long left. They do that by chasing returns. They buy investments after they have had extensive appreciation in value. Ask anyone who bought Internet investments in 2000 or real estate investments in 2006.

Unfortunately, retirement plan administrators do the same as well when adding and subtracting investment options to a participant directed plan. The Center for Retirement Research (CRR) at Boston College just did a study on plan investment lineup changes and discovered that when making changes to a 401(k) plan’s investment lineup, administrators chase returns and do not end up improving investment performance. The study looked at investment options that were added and dropped 3 years before and after the actual change was made.

Newly added funds outperformed randomly selected funds before the change was made. However, this outperformance disappeared after the fund changes were made as the added funds did worse while the dropped funds did better.

The research showed that 401(k) plan participants chase returns as well, which is no surprise since that is what most typical investors do.

DALBAR, along with Reason released a ranking of the larger retirement plan providers as it pertains to fee disclosure. The study reviewed the plan sponsor disclosures released by these providers based on transparency analysis.

Does this study mean anything? Well that depends. While cynics will suggest that plan sponsors don’t read them, I believe the rate of the plan sponsor’s comprehension of these disclosures will grow over time.

I didn’t fit in at a law firm and a third party administrator run by an attorney who acted like he was still at a major law firm (despite having run through 3 of them in his first 3 years of practice) and it good chunk of those issues dealt with the way I write. What looks great on a blog and in articles doesn’t work well with memos to law firm partners.

Plan providers such as third party administrators and financial advisors need to look at their disclosures and wee whether the common plan sponsor can understand them. While many plan providers feeling that throwing jargon in them will help keep plan sponsors quiet and/or confused, confused clients are quite unhappier than plan sponsors who understand the fees and services provided by their providers clearly.

As I stated before, one of the provisions of the “fiscal cliff” deal was a provision that allowed 401(k) plan participants to convert their pre-tax salary into a post-tax Roth 401(k) deferrals that will be distributed tax free at retirement. All that’s required is that the participant’s employer’s plan offers the Roth feature. Only 40 to 50% of all 401(k) plans have that Roth feature.

So the only requirement to make the conversion is that the employer plan have that Roth feature. Previous law only allowed Roth 401(k) conversions for participants with so-called “distributable” funds, a relatively small group that mainly included people 59 1/2 and older.

Why did the government allow this provision under the euphemistically titled American Taxpayer Relief Act of 2012? Well, it’s a gimmick to raise revenue because if a participant converts from pre-tax deferrals to post-tax deferrals, a tax bill is due. These conversions are a financial gimmick to get a boost of tax revenue now, and not worry that retirees may get tax free treatment at retirement later. It’s called kicking the can and that’s what the Federal Government does as I still notice that Social Security will run out of money the year before I’m supposed to collect my benefits.

This gimmick of Roth 401(k) conversions is supposed to raise $12 billion over the next 10 years. Here’s three reasons why it won’t:

1. A majority of 401(k) plans still don’t offer Roth.
2. Thanks to the recession and a very weak recovery, 401(k) participants aren’t exactly flush with cash to pay taxes for a conversion.
3. 401(k) participants don’t believe they will have a higher tax bracket at retirement (which means tax free retirement distributions would sound better) or more importantly, they don’t believe that the government will hold up their end of the bargain and keep Roth 401(k) distributions tax free.

As with any gimmick, there are some benefits to it and if I had $5 to my name, I’d consider it. The problem is that most 401(k) plan participants won’t and the government won’t get the revenue they think they will get.

My latest JDSupra.com article can be found here.

When orange juice was on sale, my father in law would buy a few cartons and would proclaim “we’re pushing orange juice this week”.

If you’re in the retirement plan business, you might be considering pushing Roth 401(k)s this week.

The budget legislation passed by Congress to avoid going over the fiscal cliff Jan. 1 lets 401(k) participants to convert any money in their tax-deferred accounts to a so-called Roth 401(k) account, if their employer offers one, which can be withdrawn tax-free in retirement. The change is projected to raise $12.2 billion in revenue over 10 years because those who convert will pay taxes now and enjoy tax free retirement savings later.

If you are a financial advisor or a third party administrator, consider looking at clients who don’t have the Roth 401(k) option and having conversations about the conversion opportunity with those who do have it.

My latest newsletter can be found here.

My latest JDSupra.com article can be found here.