A Pithy New Take on March Madness

Most of America just doesn't get it. They think that March Madness is comprised of the nice round number of 68 basketball teams and ends on April 4 at Reliant Stadium in Houston. They have their brackets and they lament every time one of their picks bites the dust. They say that the team that messed them up is a bracket-buster.

But, every good Enrolled Actuary knows that is not the real March Madness. OK, John, you've lost your mind, what is going on here?

March Madness starts this Sunday afternoon and including the post-event wrap-up, it runs essentially continuously through Thursday at noon. And, it doesn't change venues from year to year. There's a (program) grid, but there are no brackets. The headliners don't wear shorts. They don't do chest bumps and if they rise above the crowd, it's by walking up a few steps.

OK, I'll let you in on it. It's the 36th Annual Enrolled Actuaries Meeting jointly sponsored by the Conference of Consulting Actuaries and the American Academy of Actuaries. It's at the Marriott Wardman Park Hotel in the northwest corner of Washington DC. This, my friends, is the place to be. This is where you go to be seen. This is where you can have your own brush with fame.

In all seriousness, it's a great meeting. It has more government attendance than any other similar meeting. The speakers are almost all highly-rated. The Conference staff runs the meeting as perfectly as any meeting anywhere. You're not signed up yet? You can still get in. Register here.

You can't afford to miss it. The referees don't blow any calls. There are no bracket-busters. There is no home court advantage. And, what's more -- you get continuing education credit.

Be there or be square!

Are Your Consultants Getting It Right? Ask Another Consultant to Check for You.

Are your retirement plan consultants doing a good job? How do you know? Are the fees they are charging you fair? How do you know?

The answers to those questions, in reality, for most companies, are probably a consistent "I don't know", or "I hope so." The fact is that much like relationships with audit firms prior to Sarbanes-Oxley, the typical company has no way of knowing. Oh, they know if there is a disaster, but beyond that, they really don't know if they are getting quality service or high value for the fees that they pay.

Do you? I didn't think so. I bet that you would like to know how to find out.

Perhaps, in the long run, you will save money and get better value from your consulting relationship by engaging a consultant to monitor, or at least review your consultants. Sounds counterintuitive, huh? It is, but if you really think about it, it makes sense.

Essentially what you are doing is finding a consultant who will agree to not seek your ongoing work, but whose purpose is to review the quality and the value of the work that you are actually getting from your actual consultants. If done properly, such a review should be able to answer these questions:

• Are your consultants following accepted professional standards of practice?
• Are they holding to their fee agreements with you?
• Are their fees fair?
• Is the work that they do for you accurate and complete?
• Is the work technically sound? Have any consulting letters explored all the issues, or simply given you the same solution, packaged very slightly differently, that they give to all their clients?
• Are appropriate levels of consultants servicing your account? In other words, is the team too top-heavy, too bottom-heavy, or about right?
• Is the relationship still fresh? Often times, teams that have seen no change do not bring you new ideas?
• What are their other clients saying about them that is particularly good or bad? Would you agree with the good things? Have you seen the bad things? If not, are they not present on your account, or are they just doing a good job of hiding them?

Based on feedback from clients, you see much more variability with the larger firms. Are you getting the A team or the C team? Don't you think it's time you found out?

IMHO: The Stupidest Rule

NOTE: This post, in particular, is my opinion. It may not be the opinion of my employer, and advertisers, or anyone else, for that matter.


There has to be a stupidest rule. I think I know what it is. You probably disagree, and if you do, you are free to ignore me, comment, or blog about your own choice. But, with apologies to Leslie Gore, it's my blog and I'll give my opinion if I want to.

So, what is it? It's Section 953(b) of the Dodd-Frank Act, sometimes known as the pay ratio rule. Before we talk about what's in this dreaded, or should I say dreadful, subsection, let's understand how it got there. It wasn't in the original language developed by Rep. Barney Frank (D-MA), but Sen. Robert Menendez (D-NJ) insisted that this was an important provision of financial reform. We'll return to this later.

What does this subsection require SEC registrants to do? It requires them to disclose the total annual compensation of the Chief Executive Officer (CEO) and that of the median employee of the employer when ranked by compensation, and then to disclose the ratio of the pay of the median employee to that of the CEO. Now, understand, total annual compensation isn't just cash. It's also the value of equity compensation, the value of pension accruals, the value of perquisites, and pretty much everything else that has value. Calculating this for the CEO is not an easy task, but companies have to do it anyway as part of their proxy reporting for the CEO and four other generally very well-paid employees. So, that part is done.

Now let's return to Senator Menendez. Many people upon reading the law said that Senator Menendez must have meant that this exercise was only to include full-time US employees. According to the senator, they were wrong. He said that when he wrote every employee of the employer, he meant every employee of the employer.

Now, I'm sure that Senator Menendez is a smart man. Like many of his brethren in the US Senate, he graduated from law school. And, in the House of Representatives (before being appointed to the US Senate by then Governor Corzine), he rose quickly through the ranks of Democratic Congressman to assume a key leadership role. But, I wonder if he understands what he hath wrought.

For the mathematically challenged among us, let me digress. What exactly is a median, other than the center of a highway where some governing entities let pretty things like wildflowers grow? You find the median of a set of data by ranking all the data points from top to bottom and picking the one exactly in the middle. So, if you have 101 employees, this would be the 51st when ranked, because 50 would be higher-paid and 50 would be lower-paid. If you have 100,001 employees, this would be the 50,001st when ranked, and so forth. OK, that sounds easy enough, but first you have to rank them. And, in order to rank them, you need to, at least in theory, determine the total annual compensation of each person who works for your company.

Let's consider some of the challenges. If your company has a defined benefit pension plan, then you need to determine the increase during the year in the actuarial present value of accumulated plan benefits for each individual from one year to the next using a set of pretty much prescribed actuarial assumptions. With apologies to Ringo Starr, this don't come easy, you know it don't come easy. Maybe you grant broad-based stock options. If so, have you calculated the grant date value of all the options that vested in that year? That don't come easy either. And, then, let's assume that you are a multinational corporation -- not one of those that many think are evil because they ship jobs oversees -- that has employees in various countries around the world both for distribution purposes and for purposes of harvesting the raw materials that you use to make your products. You have to determine the compensation of each of those non-resident aliens as they are known in the Internal Revenue Code. Hmm, how do you do that? Suppose you pay some of your people in Slovakian Koruny (how else would you pay your Slovakian employees). Do you convert all of their Koruny to US dollars on one date, and if so, at which exchange rate? Or, do you do it separately using a then current exchange rate for each pay period? Perhaps if I asked Senator Menendez, he would know which method he intended. On the other hand, could it be that he didn't consider this complication?

So, now we have calculated this obviously very useful number for all of our employees who worked for us during the year. We rank them and count them. And we find the monkey in the middle (that was a childhood game where I grew up and we all took turns at being the monkey), so to speak. Finally, we take the total annual compensation for that person and divide it by the total annual compensation for the CEO.

Let's consider some possible numbers that might not be unusual for a Fortune 100 company. The CEO was rewarded with $7,685,249 in total compensation for the year while Ms. Median earned 54,992. I punch these numbers into my handy-dandy HP-12C calculator (as my brain has gotten too rusty to do the math in my head) and I get .007156, at least that's what I get when I round to 6 decimal places. Hmm, is that the correct number of decimal places? I don't know. If I round it to 2 decimal places, I get .01 (that's the same result that I would get for every ratio from .005000 up to .014999, so I don't think that is what was intended). Maybe Senator Menendez wanted 4 decimal places. If so, I'll report .0072.

I wonder if that's right. Perhaps I'll ask Senator Menendez. Well, unfortunately, I don't have ready access to him, and in any event, the law gives the wonderful mathematicians (oops, they're not mathematicians) at the Securities and Exchange Commission (SEC) the obligation to regulate this oh so important provision.

So now that I have decided to report my result as 0.0072, what gets done with this? Is that a good result? Will our shareholders be impressed? Will they think this is horrible? Will they wonder how much money it cost us to determine this number (probably not)? How about the shareholder advisory service firms? Will this number be important to them (I certainly hope not)? Perhaps instead of reporting this silly number, I should report its reciprocal (approximately 140, meaning that on this basis, the CEO made 140 times as much as the median employee). Nope, that's not what the rule says, even though this number would mean more to most observers.

Before concluding, I need to note that I do think that lots of CEOs are paid far more than they are worth. Yes, executive compensation has gotten out of hand, but this is not the answer. I consider myself far more informed than the typical shareholder on this issue, and I can assure you that the first time that I see a proxy statement including this ratio, I won't know if it's too high or too low, and frankly, I won't care. But, I do fear that some person with too much time on their hands is going to get this number for each company in, for example, the Fortune 500, and rank the Fortune 500 companies by this number. Surely, some reporter who is looking for an inflammatory story will take those rankings and tell us how some executives and compensation committees are evil. Frankly, they might be, but this isn't the way to determine.

And, finally, Senator Menendez, do you know what I would like to be able to do with those numbers. I'd like to find out what each Fortune 500 company's compliance burden is to do the work necessary to comply with Dodd-Frank Section 953(b). And, I'd like to compare that to CEO pay, and tell you how many companies in the Fortune 500 I have found whose cost of complying with your pet provision exceeds the total annual compensation for their CEO.

Perhaps that is what was really intended for this, the stupidest rule ...

On the Prudence of Company Stock in a DC Plan, or What in the World is The Moench Presumption?

Leaving ESOPs aside for the moment, is it prudent for company stock to be an investment option in a defined contribution (DC) plan? To me ... well, actually it doesn't matter what I think. If I were working for a company that had company stock as an investment option in a DC plan, and I were considering that investment, then my opinion would matter, but only to me.

For the rest of the plan participants in the US, whether or not such an investment option is prudent (we're talking about the option to invest here, not the investment itself) is a subject of much debate, and of much litigation. If you follow DC litigation at all, then you know about the myriad of stock-drop lawsuits. What is a stock-drop lawsuit? It is litigation brought by plan participants who make the claim that such an investment option should have been removed from the DC plan prior to a significant drop in the value of company stock. The current Department of Labor (DOL) has written amicus curiae (friend of the court) briefs saying, in essence, that plan sponsors should be held to the same standard of prudence with respect to company stock as an investment option as they would be with any other option. The DOL says that not doing so applies a more lenient judiciary-created standard of prudence to the company stock option than that created by ERISA.

The courts have disagreed. They have taken that far more lenient reading of ERISA with respect to company stock, in essence saying that since ERISA contemplates investments in company stock, there is a rebuttable presumption that such an investment option is prudent. This is often known as the "Moench presumption", as it was first espoused in Moench v Robertson. 


While the courts have largely taken this as the law of the land, many ERISA litigators and legal scholars have been amazed. In fact, the Moench presumption has been so strong that 1) decreases in stock price of more than 80%, company-wide financial distress, accounting violations, ill-fated mergers, and reverse stock splits are not sufficient evidence to rebut the Moench presumption.

Wow!

This observer could see someone taking that to mean that having company stock as an investment option might even satisfy the judiciary standard for ERISA prudence if the Committee who selected the option knew that the company was about to file for protection under Chapter 7 of the Federal Bankruptcy Code. Surely, committees need some protection, but Moench has largely been the law of the land for 15 or more years and it seems an awfully difficult presumption to rebut.

As always, this author is not an attorney and does not practice law. Anyone seeking legal advice on this, or any other legal matter, should seek appropriate legal counsel.

DC Plan Investment Prudence -- How About Your Own Funds?

I think we may have the first fiduciary litigation of a slightly new style. Barbara Fuller, a former 38-year employee of SunTrust Banks, has filed suit against the company, its president, members of the Board who served on the Compensation Committee, and the bank's investment and capital management subsidiaries.

Here is the new twist: the suit alleges that SunTrust monitored non-SunTrust funds carefully, and terminated those managers who underperformed or whose fees were unreasonable, except for one. That one was funds that were managed by SunTrust or a subsidiary. In other words, according to the complaint, when a SunTrust fund underperformed or charged excessive fees, it was not terminated. Ms. Fuller asserts that this mismanagement resulted in losses in the tens of millions of dollars due to excessive fees and poor investment performance. A spokesman for SunTrust said that "[W]e believe the suit to be without merit and we will vigorously defend ourselves."

Let's step back for a second and consider, without attempting to consider the merits of this particular litigation, the issue here. I suspect that all large banks and other investment management firms in the US face this particular dilemma. Probably all of these companies sponsor a 401(k) plan. Further, I believe that all of these companies, or certainly most of them, have funds which they seek to have chosen as investment options in defined contribution plans. The plan Committee is under a fiduciary obligation to monitor all of the plan's investment options, and presumably, to monitor all of them in the same fashion.

We are about to go into a hypothetical. While some of these hypothetical facts and circumstances may resemble those in the SunTrust plan  in question, such resemblance is purely accidental. As such, this is not intended to place blame on the SunTrust Committee, nor is it intended to absolve them of such blame.

Now, let's put you, dear reader, in the shoes of one of the Committee members. You are looking at your most recent quarterly reports for all of the funds offered in your plan. Let's say that there are 25 of them. Of the 25, let's assume that 15 offer no good reason for removal; that is, they have consistently been top or second quartile performers, net of fees, and there are no red flags (such as manager change or style change) that suggest that there is reason for new concern. That leaves 10 funds that deserve some scrutiny.

For sake of identity, we're going to call your company Really Big Investment Management People, or RBIMP. As you are performing your Committee function, you notice that of the 10 funds on your 'I need to look at this group of funds really carefully' list, 6 are RBIMP funds. Ouch!

If the RBIMP 401(k) Plan fires its own funds, word will probably get out. And if that happens, those funds may lose other mandates, and if that happens, RBIMP's profits may go down, and if that happens, your bonus is going to be smaller, and those stock options that you already have are going to be worth less.

Uh oh.What are you going to do?

Now, I know that if you are one of my readers that you will take the high road and look at RBIMP's funds exactly as you look at all the rest of the funds. So, at the next meeting, you vote (on the record, of course) to terminate two of those six RBIMP funds and to put three of the other four on a watch list. You argue that the remaining fund has changed managers as a result of poor performance and that it deserves a few quarters to see if it will turn things around (yes, maybe it should go on a watch list as well, but that's not your vote). But, the vote comes down and a few of your Committee colleagues do not hold themselves to quite as high a standard as you do, and the votes are to not even put any of the six on a watch list. Next quarter, when you reconvene, the five funds that concern you have underperformed again, and the Committee still decides to take no action with regard to them.

Is this outside the realm of possibility? I don't think so. Do I think this is happening for real? I don't know, I've never done a study to see whether this practice actually occurs. Do I think this could happen? Absolutely!

This case was just filed on March 11, so there are as of yet no interesting twists and turns, but as this appears to be the first of a genre, I thought you should read about it here.

Another Knife Stabs COLI

Most of us have heard of it -- corporate owned life insurance (COLI). In the 80s and part of the 90s, it was one of the ultimate gimmicks. It had great tax treatment and great accounting treatment, and yes, it often performed well. But, over time, COLI began to get a bad name. Battling for tops among the reasons were two: brokers of COLI products were making what were viewed by many as unconscionably large profits selling the product; and many companies were buying what was known in the pejorative as janitor's insurance. That is, they were buying life insurance policies on everyone down to the janitor to fund perquisites and benefits for top executives.

Well, over time, these benefits of COLI have eroded. Someone could write a book on just that, but that discussion is for a different day here. But, in the latest blow to COLI, the IRS has released Revenue Ruling 2011-9 . What, you may ask is this, and what does it do? It adds particular teeth to [Internal Revenue] Code Section 264(f). So? What in the world is Code Section 264(f) and why do you care? Be patient, dear reader.

Section 264 is entitled Certain Amounts Paid in Connection with Insurance Contracts. Subsection (f) deals with expensing certain related interest costs on a pro rata basis.

Here is why this matters.


As COLI laws have been tightened, companies that purchase COLI have become more and more concerned about having an insurable interest in the individuals on whom they purchase insurance. So, for example, if Microsoft purchases life insurance on Bill Gates, even the most cynical among us would probably argue that Microsoft does, in fact, have an insurable interest in his life. But, suppose instead, Microsoft purchased insurance on the life of Horatio Hornblower [Note: to the best of my knowledge, they have neither done this nor considered it]. Even the most fervent COLI supporters among us would likely argue that there is no insurable interest there.

Where this turns grayer is with regard to policies held on past employees, or when a policy on a past employee is exchanged for one on a current employee. I digress. Code Section 1035 generally allows a policyholder to exchange one bona fide policy for another without creating a taxable event. So, as the insurable interest rules have tightened, many companies have routinely exchanged policies on employees who have recently terminated for policies on employees who have recently joined. That sounds innocent enough, doesn't it?

Now, let's look at Section 264(f). It says that, in general, a portion of a taxpayer's interest deduction based on the ratio of the sum of the unborrowed cash values on life and annuity contracts it owns to the adjusted basis of all of the taxpayer's assets is disallowed. Notably, Section 264(f)(1) provides an exception for officers, directors, employees, and 20% owners at the time of policy issuance. So, if all of your COLI is held on the exempted group, you get your full interest deduction. Right?

Not so fast. There is a good chance that some of the policies that you hold on the exempted group were not originally held on the exempted group. In other words, some of these policies were acquired through the use of Section 1035 Exchanges. And, the exchanges were likely (a euphemism here for perhaps 100% certain) done after the original insureds were no longer in the exempted group.

According to this ruling, both new and old policies that were acquired through a 1035 exchange after the original insured was no longer in the exempted group are not exempted. This would say that an employer needs to contemplate the termination of an employee and perform the exchange prior to that employee's termination. I think most would say that this is not practical.

From a reality standpoint, here's what this does. When COLI no longer has its most favorable tax treatment, it becomes what is sometimes referred to as an underperforming asset.. According to the revenue ruling, if an exchange is not done on a timely basis, either the interest deduction goes away because of the untimely exchange or the company now holds a policy on an individual who is no longer exempted. What did Joseph Heller call his book: "Catch-22"?

What should companies do about this? Companies that hold COLI need to check all of their policies to see which ones no longer get them the presumed deduction. Then, they need to make decisions with regard to those policies to see if they should somehow unwind them and use the assets for other purposes. Worse yet, the stated proposal of the current administration is to take away the exemption in Code Section 264(f)(1).

We can help you wade through this mess.

But, as always, neither this author nor his employer provide tax, legal, or accounting advice. This can only be obtained from someone licensed to provide such counsel.

IRS Still Auditing Executive Compensation

Over a year ago, the IRS announced that it was stepping up its audit program with respect to executive compensation. Frankly, any activity at all would have been a step up. For the majority of the time since we have had an income tax (and therefore an Internal Revenue Code) in the US, audits of executive compensation have been virtually nonexistent. Why? The biggest reason is that there have not been a whole lot of rules. Number two on the list is that the IRS has not chosen to place its resources there.

For many who are fortunate enough to be the beneficiaries of executive [levels] of compensation, the good news is that most are still not getting audited. However, with the interplay of Code Sections 83 (constructive receipt and the economic benefit doctrine plus some other related stuff), 162(m) (the million dollar pay cap), 409A (taxing people to death when they mess up their deferred compensation programs), and 3121(v) (FICA tax on deferred compensation), the IRS has plenty of things to audit. Surprisingly, at least to this writer, we're finding that they are catching people on some fairly tricky applications of the law.

Notably, I've seen or heard of multiple people getting dinged on these infractions:

• Stock awards that vest at a retirement date, causing constructive receipt under Section 83
• Linked retirement plans where the offset from the qualified plan is not well enough specified, causing a 409A violation
• Failure to pay FICA tax on deferred compensation that employers didn't realize technically was deferred compensation
• Improperly constructed performance pay plans that run afoul of 162(m) by not qualifying as performance pay
• Severance pay plans that did not have a 6-month payment delay for specified employees because they looked like broad-based plans. The fact that the compensation considered exceeded the pay cap (401(a)(17)) caused the problem.
• A 409A plan having a plan document that specifies for one set of administrative procedures, but the plan being administered the way it always was before someone wrote a document without bothering to check to see how it was being administered.

There are more, plenty more. There are a few ways that you can handle this.

• Do nothing and play audit roulette.
• Have your documents reviewed by someone other than the person who wrote them (the person who wrote them will read what they intended even if nobody else reads it that way).
• Have your administrative processes reviewed by someone who is not your administrator, but has experience with the administration of nonqualified deferred compensation plans.
• If you find problems, take corrective action. The IRS has been nice enough to give us corrective methods that lessen or eliminate the additional tax burden, but only if you fix them before the IRS catches you.

The Next Big Thing?

I read today that Retirement Readiness is the next big thing (buzz word) in the retirement community. With the general demise of private defined benefit (DB) plans and companies providing far smaller benefits in defined contribution (DC) plans than they did in their DB plans, it's no wonder. It's also no wonder because most people are carrying huge amounts of consumer debt.

Think about it -- how can someone be preparing for retirement while carrying large amounts of consumer debt. And, while you're at it, add in a mortgage whose outstanding balance may exceed the value of their house. That's not a pretty picture, is it?

The person in that combination position, though, is left with some difficult decisions. Let's consider an individual earning $75,000 (before taxes) per year. That's $6,250 per month. Let's add in that they have $15,000 in outstanding credit card debt, and that the interest rate on that money is 15% per year. Let's assume that our hero(ine) decides to stop using his or her credit card and pay off the debt in 5 years. That's not too bad. Their monthly payments will be just above $350. But then they realize that they have been deferring 6% of pay to their 401(k) plan and that by redirecting that $375 per month, they could pay off their credit card debt in just two years instead of five. That sounds like a great idea. But their employer matches 50 cents on the dollar on the first 6%, so that's an automatic 50% return on their investment, far in excess of the 15% interest rate on their credit card.

Oh, the decisions!

Bottom line, though, most people don't really consider the two of them in combination. They just act, or they just react. And, they don't stop using their credit card.

So, while retirement readiness is a great new buzz word, it's not a new problem. It's been with us for a while, but people still aren't ready. The circumstances just don't seem to be working.

So, where did it come from? Well, none of the other 'best practice' ideas seem to have accomplished anything, so we now have the new thing to talk about.

And, this too shall pass.

Leave it to the Experts

I'm not allowed to practice law. I don't have a law degree, and I have not passed the bar exam in any state in the US. I'm not allowed to practice accountancy. I have not passed the CPA exam. For whatever reason, though, some people in both of those esteemed professions think that (apparently because of the nature of who they are and what their professions are) they are highly qualified to do things that I and my brethren do.

There are lots of really good attorneys out there, and similarly, there are plenty of fine accountants. You know what, they aren't the ones who are typically treading outside of their space.

It's the rogues that concern me. I'm not going to name them, but you know who I am talking about. I read a piece earlier today written by an attorney (not even one who lists his or her specialty as ERISA or tax) explaining how certain actuarial calculations should be done. It involved lump sum calculation in a qualified defined benefit plan. Here I paraphrase:

Take the annual benefit amount. Look on the internet for the life expectancy for a person of that gender (at birth). Subtract the annuitant's current age. Multiply the annual benefit amount by that difference. Add annual interest for that period at 5% per year. That gives you the lump sum amount.

WRONG!

Yesterday, I read from an accountant who was discussing whether FICA taxes should be paid on nonqualified defined benefit plans annually as they vest rather than at retirement. He discussed the tax benefits (I could easily take either side of this argument), and then went on to say IN WRITING that paying FICA taxes annually is easier to administer. And, he built a case for it (well, he thinks he built a case for it).

WRONG!

Each of us has our own area of expertise, although I do concede that there is often significant overlap. You wouldn't take your problem with your automatic transmission to your favorite bartender. You wouldn't ask your golf pro to fix your roof.

So, don't ask me to give you a legal, tax, or accounting opinion. And, don't ask your lawyer or accountant to dabble in actuarial, plan design, or plan administration work.

Most Blame Decline in Pensions on Congress

The National Institute on Retirement Security (NIRS) surveyed American workers about their retirement. While I don't find the results of the survey surprising, in general, I did find it interesting how and where the blame for worker's anxiety about their retirement is placed.

Here are some of the highlights of the survey, along with some (probably pithy) commentary:

• 83% of Americans are concerned about their retirement. That is the biggest number that I have ever seen for this statistic.
• 84% say that the current economy is an impediment to their preparations or their ability to prepare for retirement. While this is surely true, this is the first period since the passage of ERISA where employer-provided retirement benefits have been cut so drastically at the same time as the economy has plummeted. In previous recessions (although the recession of about a decade ago foretold how employers would likely react to this one), employer-provided retirement benefits have been much more sacred.
• Only 11% of Americans expect their retirement to include things like travel, restaurants and hobbies. On the other hand, 34% will be happy to just get by.
• Nearly 90% of those surveyed believe the US private retirement system is flawed.
• 77% are of the opinion that the downfall of pensions has made it harder to live the "American Dream."
• Roughly 80% of Americans think Congress doesn't understand how difficult it is to prepare for retirement, while a full 80% think that Congress needs to do more to help Americans to be able to prepare for a secure retirement.

I find the last bullet most interesting. 37 years ago, after many years of debate and revisions, Congress passed, and President Ford signed into law ERISA. That was the dawning of the golden age for pensions in America. Not only did the number of employer-sponsored pension plans increase, but those pensions were far more secure than they had been previously. But, we couldn't leave a good thing alone.

Bring the alphabet soup of laws affecting retirement plans to the rescue, so to speak. REA, passed in 1984 raised pension costs significantly. SEPPAA, passed in 1986, made it more difficult to terminate a plan once you started one, and, combined with the Tax Reform Act of 1986, made certain that the surplus in a pension plan belonged mostly to the government in the event that an employer chose to terminate a plan. OBRA 87 added pointless volatility to pension plans. It also signaled the beginning of the era in which Congress showed that it is far better in choosing reasonable actuarial assumptions than people trained (and certified through examination) as actuaries (of course Congress knows more, they know more about everything). Various laws throughout the 90s and early 2000s created further turmoil. And, all along, the accounting profession also tried to lay claim to thinking that it knows more about pensions than the people with specific training. And, finally, we got the worst named law in history: the Pension Protection Act of 2006. It has done more in a short period of time to ensure that the majority of Americans will not accrue a pension than any law previous to it. Yes, it has done a wonderful job of protecting the PBGC, but as I have said before in this blog, rather than protecting private pensions, it has decimated them.

Well, according to this survey, Americans may not know how it happened, but they do seem to know, or at least believe that the fault lies with the Fools on the Hill (Congress). But, they think they fixed the problem.

And, so it goes ...

Most Want to Change Jobs, But Most Are Not. What's Going On?

Almost every day lately, I see that some firm has done a survey to see what percentage of workers plan to change jobs over the next 3, 6, or 12 months. The answers are pretty consistent: while the majority of workers are unhappy with their current employers, the majority (presumably a different majority) do not plan to change jobs.

Why is this? First off, the job market is still horrible. Companies are still implementing layoffs. Companies that are hiring generally are not doing it across the board. And, perhaps it goes back to the old story about the devil you know being better than the one you don't.

Let's consider the unhappiness, though. Where is this coming from? I'm going to state up front that I am not a fan of the pay ratio comparisons that many (including last year's Dodd-Frank Act) have called for. The ratio of CEO pay to the average pay for everyone else, or to the median pay for everyone else is often not a useful comparison. And, when it's not useful, it's often misleading. But, let's face it, total compensation in the US for CEOs has risen faster than total compensation for most everyone else. In fact, when a CEO is credited for growing profitability, it may be partially (or more) because he or she has cut labor costs.

This creates a very interesting dynamic where the pay ratio that I mentioned in the last paragraph becomes more distorted at least in part because the CEO is doing what shareholders asked him to do. While not fitting any of the cutely named paradigms (Occam's Razor, Hobson's Choice, Morton's Fork), it seems to be a combination of all of them without necessarily having the characteristics of any one.

All this having been said, in virtually all of the surveys that I mentioned at the top of this post, the single biggest reason for dissatisfaction is compensation. The surveys don't ask whether compensation is cash or cash plus benefits, but I don't think it matters. The fact is that across-the-board pay (cash) raises have largely disappeared in recent years. Even during the booming economy (it's ok if you don't believe the economy was really booming then) of late 2002 through mid 2008, pay raises were far smaller than they had been at almost any time during my lifetime. But, in addition, benefits have been cut.

Let me repeat that -- benefits have been cut. This doesn't mean that employers' cost for benefits has gone down. What is does mean is that the value to employees of those benefits has gone down significantly. Let's consider.

• Defined benefit plans continue to be frozen or terminated. The 'replacement' 401(k) plans are nowhere near as generous, on average.
• Health plans, over my working lifetime have gone from 'employer-pay-all' (or almost all) traditional indemnity plans to 'employee-pay-lots' non health insurance plans (the less cynical among us call them high-deductible health plans or consumer driven health plans). Employers can point to their costs having increased at rates far greater than inflation, but employees' costs have increased at rates that dwarf those absorbed by employers.
• Other benefit offerings have increased, but as often as not, those increases are at no direct cost to the employer. Yes, it is nice as an employee to be able to buy some useful benefit at negotiated group rates as compared to individual ones, but the amount that the employer is spending is at or near zero.

At the end of the day, pay for the rank-and-file is increasing (slowly), but purchasing power is lower. The only thing, in my opinion, that has helped to maintain purchasing power is highly available credit. But, as we all know, that seems to be on its way (if not already there) to being  a thing of the past. 

So, as the cost of daily life increases, the value of employment decreases and the value that goes to retirement decreases. Employees want to work longer, but employers seem to want them to work for shorter durations. Employees want more purchasing power, but employers provide them with less. But the grass doesn't seem to be any greener on the other side. So, of course employees want to leave, but the problem is that they can't find anyplace they want to go.

House Votes to Repeal 1099 Requirement

Yesterday, the House of Representatives voted to repeal the silly 1099 requirement in health care reform (PPACA). For those who have been in hibernation, this provision requires businesses to provide Forms 1099 to report payments for goods and services in excess of $600.

When this language, that is oh so related to health care, was put in PPACA, it was clear that the drafters were looking for a way to make the act revenue positive. Little did they seem to realize or care about the tremendous burden that this would put on businesses, especially small businesses.

Given the public uproar over this provision, one would think that its repeal would fly through the Senate as well for signature by President Obama. However, Democrats in the Senate are reported to be concerned about how this affects the price tag on PPACA.

To me, this is what happens when we load up a bill with things that are entirely unrelated to the bill's intent,or at best, peripherally related to it. Some may recall that the Pension Protection Act (PPA) of 2006 had pages and pages of provisions that were encouraged by lobbyists. Even going back to my earlier days in this business, the Tax Reform Act of 1986 had provisions that applied, for example, to every company whose primary business is in the field of widget-making and which was incorporated in the State of Delaware on some random date in 1923. Every company, huh?

The 1099 provision needs to be repealed. While I usually try to keep this blog apolitical to the extent that I can, this provision neither improves health care, changes the cost of health care, nor stimulates the economy. Companies can react in one of several ways, but I expect that most small businesses will simply see an increase in their cost of outsourcing their reporting, and that can't be good.

In any event, if the Senate does pass this, I am sure that it will make the news, but I will do my best to cover it here.

Did the Participants Really Get Protected by ERISA?

US District Judge Charles R. Breyer of the Northern District of California approved a settlement in the case of Kanawi v Bechtel . The settlement, in a class action case that started back in 2006, relates to Bechtel's failure to use the magnitude of its 401(k) plan assets to get lower fees from vendors, likely in the form of institutional, as compared to retail, share classes.

For background, it is common in the defined contribution industry that recordkeepers will credit a portion of asset management revenues (particularly when the plan uses funds of the recordkeeper's asset management arm) back against fees. Oversimplifying significantly, many funds are available on both an institutional basis and on a retail basis. Retail is the basis (including fees whether embedded or explicit) on which an individual investor might invest in a mutual fund. Institutional is the more favorable basis on which, for example, a large retirement plan might invest in the same (or virtually identical) fund.

After the court failed to grant summary judgment on behalf of defendants (again oversimplifying, a court grants summary judgment on behalf of defendants when even if all of plaintiffs allegations are assumed to be true, defendants would still prevail), Bechtel took the position of looking to settle presumably to protect against an overwhelming verdict.

The settlement called for Bechtel to pay $18.5 million to a settlement fund. Of that amount, approximately $4.85 million is to be paid to the attorneys for services and an additional $1.57 million for expenses. That leaves roughly $12 million to be distributed to the accounts of current participants who were in the plan between January 1, 1992 and September 30, 2010, and in cash to participants during that period who are no longer in the plan. I looked on the Department of Labor website and found that as of the end of 2009, there were more than 19,000 participants in the plan. If I do the math, that's in the neighborhood of $650 per participant. Frankly, that's not a large sum of money. On the other hand, the attorneys made millions from this case.

So, Bechtel is a loser here, but one could certainly argue that they deserved to be a loser. The aggrieved participants were probably made partially whole as compared to where they would have been had Bechtel availed itself of the ability to use institutional funds. And, that leaves the winners. The attorneys!

I'm sorry. I have a lot of friends who are attorneys, and many of them are ERISA attorneys, but this is just wrong. ERISA is the Employee Retirement Income Security Act. Here, it didn't do too much to protect the retirement income security of the aggrieved class of participants, but it sure did wonders for their counsel.

As always, the author of this post is not an attorney and does not provide legal advice. Any efforts of his to explain legal matters while those explanations are intended to be correct should be construed as a lay person's attempt to simplify for the lay reader.

Wellness Programs Aren't Free and Cheap Ones Aren't Worth Anything

A recent study by Sibson Consulting found that while an average company spends about $80,000 per year on the pay, paid time off, and benefits for an average employee, only 0.16% of that, on average, is spent on wellness programs. For the mathematically challenged, or for those who would rather I do the math for them, 0.16% of $80,000 is $128 (the study reports that the average is $126 with the difference between my number and theirs due to rounding). That's not very much. What that tells me is that the average company wants to say that they have a wellness program, but that's it.

Sibson went on to conclude that companies that do invest in their wellness or healthy workplace programs do have a decrease in their employee health care costs that exceeds the cost of the program. They pointed out nine key employer actions that are characteristic of companies with the healthiest enterprises.

• Have a program leader and wellness committee. If the program's success doesn't fall to an individual or a small group of individuals, no one will take ownership, no one will fight for it, and the company will see little return on its investment.
• Align a healthy enterprise strategy with the overall business strategy. When employees see the connection, they are more likely to adopt these healthy behaviors.
• Assess the current state. What do you have now and how well is it working?
• Involve stakeholders. Get early buy-in from everyone from top management to groups of employees. While the study report does not say this, it occurs to me that having champions who support the program are an appropriate and useful way to engage employees.
• Consider all the employer programs that contribute to a healthy workforce. This does not just include the standard things like smoking cessation and weight loss programs. Companies should consider how some of their other programs affect employee well being, especially mental health. For example, when a company cuts its 401(k) match, how might this change the stress levels of employees, how will this change the mental well being, and how, in turn, will this affect absenteeism, productivity, and turnover?
• Focus on getting employees to embrace the program. Effective communications are important. Cheesy communications will turn employees off. Be sure that leaders live the message.
• Create an effective workplace. I am not a fan of the word effective here, but I couldn't find a better one than the one that Sibson used. They point out that factors such as lack of trust and respect, as well as harassment, are seriously detrimental to workplace health. While it is difficult to build this into a wellness program, I think this is an excellent observation that negatively affects not just employee productivity, but employee health as well.
• Consider dependents. While the typical American family may no longer have 1.7 kids, dependents typically still represent about one-half or more of total health care costs. Having some programs for dependents may well save an employer more than it spends. And, a program that is available to an entire family is likely to get higher participation from employees than one that they have to participate in without their family members.
• Measure outcomes. No initiative in modern times is complete with measuring it. Successful measurement, though, isn't just focused on the total program, but is able to measure the successes and failures of various components. From this type of measurement comes the ability to make changes to the program to further increase its effectiveness.

Finally, while Sibson did not mention this, I am going to add two more elements to the list. Make it a friendly competition and make it fun. More than 30 years ago, I saw first hand how well this can work. I was working for a very large company that had lots of divisions. While wellness programs were non-existent back then, safety programs were all the rage. Each division had goals to improve its safety performance, and rewards were given to divisions that improved, as well as divisions that had the best safety performance. It made it fun, and it meant that employees didn't cut corners in doing their jobs, if it made it less safe for them or for their co-workers.

Congress Must Have Lots of Strange Dreams

We had tornadoes here yesterday. Thankfully, I don't know of any damage or injuries that affected anyone that I know. This isn't a weather blog, though, so what's the point.

I took some time when we had no cable and no internet to ruminate on the Internal Revenue Code. Ultimately, the statute has been created by Congress (or Congressional staffers). I've got to tell you, somebody has had some strange ideas. In fact, a lot of people have had some strange ideas.

Let's start with the math behind the ADP and ACP tests (If you don't know what they are, the math will make just about an identical amount of sense). Essentially, you get to use your choice of three tests, but mathematically, the tests work like this:

• If your eligible nonhighly compensated employees (NHCEs) defer on average less than 2% of pay, then your highly compensated employees (HCEs) are allowed to defer on average the NHCE percentage times 2.
• If your eligible NHCEs defer at least 2% of pay on average, but less than 8% of pay, then your HCEs are allowed to defer on average the NHCE percentage plus 2%.
• If your eligible NHCEs defer on average at least 8% of pay on average, then you are doing something really right, and your HCEs are allowed to defer on average the NHCE percentage times 1.25.

Does that make sense to you? It makes no sense to me. George Carlin could have had a field day with it. Can you imagine, a whole comedy routine on the ADP test? Nobody would get it, but it would be funny. Come to think of it, nobody that I know of really understands the rationale for the ADP test.

And, then there's Section 162(m) of the Code. Generally, it disallows corporate tax deductions when they pay someone a salary in excess of $1,000,000, unless of course the company was a TARP recipient (until they pay back their TARP loans) or the company is for the most part, a health insurance provider, in which case the limit is $500,000. Those are nice numbers, I suppose. Why pick them? Why not have a limit of $836,297? It would make just as much sense. But, then if a piece of that pay is performance-based, it doesn't count against the $1,000,000 limit. Nothing in the law says that the performance targets need to be reasonable, the excess just needs to be based on performance. Please tell me how that makes sense. By the way, since Section 162(m) was added to the Code, virtually any observer would tell you that pay for top executives has gotten more out of hand rather than less. Another great job -- let's have a round of applause for Congress.

And, then there are some of the rules that Congress left to the IRS to interpret and regulate. I think that Congress and the IRS must share some of the same staffers (although I have to say that in recent years, the IRS has gotten much better and sought more input from regular people on what might be appropriate in regulations). But, get this one. Suppose you are performing something called the Average Benefit Test (you can find it in Code Section 410(b) if you want to look). It's a 2-part test and one of the parts called the Nondiscriminatory Classification Test (NDT) has two parts. One of those two parts is subjective and one is objective. We'll focus here on the objective part. Here is (oversimplified, believe it or not) the math behind this one.

1. Determine the percentage of your population who are NHCEs
2. Round it down to the next lower integer (unless it's already an integer)
3. Subtract that result from 100% (now wouldn't it have been easier to do the same calculation on the HCEs and round up to the next higher integral percentage, but not have to do a subtraction?)
4. Multiply that result by 0.75
5. Add that result to 20%, but don't let the answer get above 50%. That is called the safe harbor percentage, one of perhaps two or three hundred safe harbor percentages that you can find in the Code.
6. Subtract 10% from the safe harbor percentage, but don't let the answer go below 20%. That is called the unsafe harbor percentage, a far more unique term within the universe of the Code.
7. If your ratio percentage, defined as the percentage of nonexcludible NHCEs who are currently benefiting under the plan divided by the percentage of nonexcludible HCEs who are currently benefitting under the plan, is at least as big as the safe harbor percentage, you pass this part of that part of the test. If your ratio percentage is below the unsafe harbor percentage, then you fail this part of the test which means that you will likely have to resort to qualified separate lines of business (QSLOBs) which are far more complicated than the NDT could ever dream of being. And, finally, if your ratio percentage is between the harbors (but not near Somalia where they have pirates), it all comes down to facts and circumstances which means you still don't know if you pass, but your legal counsel will probably tell you that you are just fine.

It sure feels good to be done with that explanation since it makes oh so much sense.

Well, enough on lambasting our rulemakers for the moment. It's time to look for something more useful to write about.