Dave Baker

Several interesting articles in the media today, re the Massachusetts Secretary of State's interest in prohibiting employers from locking employees into company stock in a 401(k) plan ... http://www.boston.com/dailyglobe2/339/busi...k_policy+.shtml http://news1.iwon.com/article/id/191722|po...28|reuters.html Does anybody think such a law would have more than a snowball (in hell)'s chance of avoiding ERISA preemption?

In an article called "The pitfalls of defined benefit schemes" at http://www.townhall.com/columnists/bruceba...b20011123.shtml the author says a "new study suggests that defined-benefit pension plans were a key culprit in the stock market bubble of recent years. As the value of such plans were inflated by stock market gains, companies were able to withdraw excess pension assets, which went directly into corporate profits, further buoying stock prices. This is yet another reason for shifting workers away from defined benefit (DB) plans to defined contribution (DC) plans." The article was included in the list of linked articles in the November 26 issue of the BenefitsLink Newsletter, Retirement Plans Edition. A reader, Eric Hansen, has the following comments about the article, which he asked me to use to start a message thread: The above article appears to be a poorly veiled attempt at convincing us we should abandon traditional pension plans in favor of defined contribution plans. First, the author suggests pension plan sponsors have withdrawn "vast sums" from their pension plans and that these withdrawals were "a key culprit in the stock market bubble of recent years." He goes on to suggest "shifting workers away from defined benefit plans to defined contribution plans" will solve this problem. Nonsense. In my experience, since the excise tax on "reversions" was generally increased to 50% (effective October 1, 1990), the number of pension plan sponsors taking reversions has decreased dramatically. And he neglects to mentions the vast sums being withdrawn (and spent) from defined contribution plans by participants who change jobs. Who is going to pick up the tab for these folks when they retire? Next, the author suggests the back-loaded nature of traditional pension accruals is bad. What makes a back-loaded accrual worse than a front loaded accrual? These patterns are simply a function of the ERISA requirement that retirement plans not discriminate in (pick one) contributions or benefits. The author also says participants "cannot withdraw their assets before retirement without paying a hefty penalty" and suggests defined contribution dollars are more likely to be available at retirement. Again, this is nonsense. The hefty penalty is just a fraction of the reversion penalty. In fact, as employees quit or change jobs, there is a ton of money pouring out of defined contribution plans. I'm not suggesting traditional pension plans are superior to defined contribution plans. Rather, they have different characteristics and are more appropriate in some circumstances than others. But to suggest we should shift workers away from defined benefit plans to defined contribution plans regardless of circumstances is naive.

The company stock is held by your 401(k) plan account and you'd like to have the plan sell it and then distribute to you the sales proceeds?

I always thought the rationale behind full vesting upon a plan termination was that the employees would have no further chance to earn additional years of service for vesting purposes (because the plan's going away). So if the plan has a five-year cliff vesting schedule, somebody who only has three years of service for vesting at the time of termination would be out of luck but for the full vesting rule, which essentially gives the employee the benefit of the doubt -- "OK, we'll assume you would have worked two more years of service." When a money purchase plan is merged into a profit sharing plan or when its formula is changed so that the promised annual contribution becomes a discretionary employer contribution, this doesn't affect the terms of the plan regarding vesting service. Employees continue to have the ability to earn additional years of service for vesting, after the merger or amendment. So there seems to be no rationale in such a situation for requiring full vesting.

More on this question is here: http://benefitslink.com/boards/index.php?showtopic=10884

Here's the file Tom was trying to upload.

(pax can get away with posting these -- he's an actuary, too )

Amazing! Technically they're right, in that at least nobody's going to jail for perjury (signing an incorrect return), but that approach goes way beyond any kind of good faith effort to comply with the rules! You'd think a lawyer could grasp the importance of that.

The tribal wisdom of the Dakota Indians, passed on from one generation to the next, says that when you discover that you are riding a dead horse, the best strategy is to dismount. But in modern business, education and government, because heavy investment factors are taken into consideration, other strategies are often tried with dead horses, including the following: 1. Buying a stronger whip. 2. Changing riders. 3. Threatening the horse with termination. 4. Appointing a committee to study the horse. 5. Arranging to visit other sites to see how they ride dead horses. 6. Lowering the standards so that dead horses can be included. 7. Reclassifying the dead horse as "living-impaired." 8. Hiring outside contractors to ride the dead horse. 9. Harnessing several dead horses together to increase speed. 10. Providing additional funding and/or training to increase the dead horse's performance. 11. Doing a productivity study to see if lighter riders would improve the dead horse's performance. 12. Declaring that the dead horse carries lower overhead and therefore contributes more to the bottom line than some other horses. 13. Rewriting the expected performance requirements for all horses. 14. Promoting the dead horse to a supervisory position.

(unknown author) Count Your Blessings If you woke up this morning with more health than illness ... you are more blessed than the million who will not survive this week. If you have never experienced the danger of battle, the loneliness of imprisonment, the agony of torture, or the pangs of starvation ... you are ahead of 500 million people in the world. If you can attend a church meeting without fear of harassment, arrest, torture, or death ... you are more blessed than three billion people in the world. If you have food in the refrigerator, clothes on your back, a roof overhead and a place to sleep ... you are richer than 75% of this world. If you have money in the bank, in your wallet, and spare change in a dish someplace ... you are among the top 8% of the world's wealthy. If you can hold someone's hand, hug them or even touch them on the shoulder ... you are blessed because you can offer God's healing touch. If you can read this message, you are more blessed than over two billion people in the world who cannot read at all. Have a good day, count your blessings, and pass this along to remind everyone else how blessed we all are.

Line 10g on the 2000 Form 5500-EZ asks for "Amounts received by the plan other than from contributions." The instructions to line 10g, say "Include rollovers, direct transfers under section 401(a)(31), transfers under setion 414(l), and net income received by the plan for the year. Do not include unrealized and realized gains or losses." My question is whether this line is really asking the sponsor to go into the plan's investment records and peel out interest, dividents, rents, and any other sort of investment "income" except realized and unrealized gains or losses. There's no line item asking for the amount of realized or unrealized gains or losses. It doesn't seem to make sense to lump such income into an item along with rollovers and transfers. For data collection purposes, wouldn't the government want to have some way to separate the increase in a trust fund due to investment results from those that are due to transfers into the plan (whether by employer contributions, rollovers, 414(l) mergers, etc.)? Is the "income" to be reported merely referring to some obscure kind of income to the plan's trust other than investment income?

Here is a note that Benefits Boards user Ken Wilke wrote and asked me to pass along: I read your recently linked article regarding taxation issues of 401(k) participation titled "Does Participating in a 401(k) Raise Your Lifetime Taxes?" and thought that it painted a rather dismal picture of the benefits of participating in a 401(k). Many readers may read the article and think "well, gosh... I can't participate if it will raise my taxes!" Of course deferring taxation of an amount today will cause higher taxation after the amount grows and is then distributed as a greater amount, however, the article did not adequately illustrate that the benefits of tax deferred growth, whether principal is taxed today or tomorrow, far outweigh the increased taxation. Just to sum it up, I would rather have 90% of 100 than 100% of 50 any day of the week. Look at it another way... Would you rather get a 6% return on a Municipal Bond that is triple tax exempt or a 12% return on a taxable mutual fund portfolio??? I would take the taxable account even at 25% taxation, which probably won't happen to today's low earners in 15 years during retirement. Even at the 25% tax rate I would realize a 50% greater return than the 100% non taxable Munies. Another problem I have with the article... the authors assumed returns lower than several bond indexes. I don't think any Financial Advisor with a clue would advise clients in accumulation phases of life to sink all their retirement assets into bond funds or bonds! That would be ludicrous in most situations. The authors actually make a recommendation against 401(k) participation! Are they financial advisors? Are they aware that a hearty handful of software programs exist that will calculate growth, present taxation, and future taxation of retirement plan assets to illustrate the results of many types of investing? I believe it's irresponsible to advise the poor to stay poor to avoid paying a higher percentage of tax. Anyway, just thought I would reply...

The Federal Reserve Bank of Cleveland study is here: http://www.benefitslink.com/links/20010620...20-011497.shtml

RPT is Crystal Reports (right, Tom?) -- PNG is a graphic format that is better than GIF and was supposed to replace it, but I'm not sure the most recent browsers are even supporting it (after CompuServe decided the GIF format was proprietary).

I don't think so. Only certain extensions are allowed by the software (though I can expand the list, as I did with the ".rpt" extension that Quantech uses for certain reports). Most or all of those extensions (e.g., .txt) should be recognized file extensions that are already associated on your computer with commonly installed Windows programs (e.g., Notepad).

Let's see if the file attachment feature works.

Here's an article about employee ranking, from today's USA Today: More firms cut workers ranked at bottom

Wow! What was the "cause of action," do you know? Some sort of privacy law?

Here's an interesting perk -- Forbes magazine (5/28/2001) is reporting that Cognex Corp. of Natick, Mass. provides awards to the top 10% of its 800-employee workforce but also has its chief executive officer send a letter to each of the winners' parents describing their awards! Sure sounds to me like a cost-effective way to make employees proud and happy. (Though the top-10% process at Cognex sounds like it involves employee ranking, which is controversial, I understand.)

The Internal Revenue Code, which supplies most of the rules that apply to IRAs, has no direct prohibition against an IRA owning a piece of a company in which the IRA owner also owns a piece. So my IRA can invest in IBM common stock even though I also own some shares of IBM common stock. But as an IRA owner (which makes me a "fiduciary," due to my ability to decide how to invest my self-directed IRA), I am prohibited from "dealing" with the assets of my IRA in way that is "in my own interests or for my personal account" -- basically I'm supposed to invest my IRA with nothing but the IRA's long-term retirement investment interest in mind (not whether I am able to get some current side benefit personally from the way the IRA invests). IRC 4975© provides: © Prohibited transaction (1) General rule For purposes of this section, the term "prohibited transaction'' means any direct or indirect-- (A) sale or exchange, or leasing, of any property between a plan and a disqualified person; (B) lending of money or other extension of credit between a plan and a disqualified person; © furnishing of goods, services, or facilities between a plan and a disqualified person; (D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan; (E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or (F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. Could you purchase all of the assets of the company using your own personal funds (or funds you borrow personally), without using any of the IRA's funds (which I understand would come from a rollover of your 401(k) account in the terminating plan)? If you would have a hard time making the purchase without the IRA's help, then it would seem that you are "dealing" with the IRA's funds in a way that bootstraps you into being able to make the personal investment. If you could somehow prove that you could purchase the assets entirely on your own and that hence the use of the IRA's funds to invest in the new company is just a shrewd investment on the part of the IRA, then maybe the IRS would be less likely to question the transaction. Still, I worry about your being the majority owner of the company. That gives you certain abilities with respect to how the company uses the capital that would be invested in the company by the IRA (e.g., the ability to appoint the directors who decide how to spend the money), which might be considered an indirect use by you personally of the IRA's funds. This is probably especially so if you are going to be compensated by the new company as an employee or as a director -- the IRA's funds would be enabling you to get a new job or earn some self-employment income.

Itzhak Perlman Article from the Houston Chronicle On Nov. 18, 1995 Itzhak Perlman, the violinist, came on stage to give a concert at Avery Fisher Hall at Lincoln Center in New York City. If you have ever been to a Perlman concert, you know that getting on stage is no small achievement for him. He was stricken with polio as a child, and so he has braces on both legs and walks with the aid of two crutches. To see him walk across the stage one step at a time, painfully and slowly, is an unforgettable sight. He walks painfully, yet majestically, until he reaches his chair. Then he sits down, slowly, puts his crutches on the floor, undoes the clasps on his legs, tucks one foot back and extends the other foot forward. Then he bends down and picks up the violin, puts it under his chin, nods to the conductor and proceeds to play. By now, the audience is used to this ritual. They sit quietly while he makes his way across the stage to his chair. They remain reverently silent while he undoes the clasps on his legs. They wait until he is ready to play. But this time, something went wrong. Just as he finished the first few bars, one of the strings on his violin broke. You could hear it snap - it went off like gunfire across the room. There was no mistaking what that sound meant. There was no mistaking what he had to do. People who were there that night thought to themselves: "We figured that he would have to get up, put on the clasps again, pick up the crutches and limp his way off stage - to either find another violin or else find another string for this one." But he didn't. Instead, he waited a moment, closed his eyes then signaled the conductor to begin again. The orchestra began, and he played from where he had left off. And he played with such passion and such power and such purity as they had never heard before. Of course, anyone knows that it is impossible to play a symphonic work with just three strings. I know that, and you know that, but that night Itzhak Perlman refused to know that. You could see him modulating, changing, recomposing the piece in his head. At one point, it sounded like he was de-tuning the strings to get new sounds from them that they had never made before. When he finished, there was an awesome silence in the room. And then people rose and cheered. There was an extraordinary outburst of applause from every corner of the auditorium. We were all on our feet, screaming and cheering, doing everything we could to show how much we appreciated what he had done. He smiled, wiped the sweat from this brow, raised his bow to quiet us, and then he said, not boastfully, but in a quiet, pensive, reverent tone, "You know, sometimes it is the artist's task to find out how much music you can still make with what you have left." What a powerful line that is. It has stayed in my mind ever since I heard it. And who knows? Perhaps that is the way of life - not just for artists but for all of us. Here is a man who has prepared all his life to make music on a violin of four strings, who, all of a sudden, in the middle of a concert, finds himself with only three strings. So he makes music with three strings, and the music he made that night with just three strings was more beautiful, more sacred, more memorable, than any that he had ever made before, when he had four strings. So, perhaps our task in this shaky, fast-changing, bewildering world in which we live is to make music, at first with all that we have, and then, when that is no longer possible, to make music with what we have left.

An eyewitness account from New York City, on a cold day in December: A little boy about 10 years old was standing before a shoe store on the roadway, barefooted, peering through the window, and shivering with cold. A lady approached the boy and said, "My little fellow, why are you looking so earnestly in that window?" "I was asking God to give me a pair of shoes," was the boy's reply. The lady took him by the hand and went into the store and asked the clerk to get half a dozen pairs of socks for the boy. She then asked if he could give her a basin of water and a towel. He quickly brought them to her. She took the little fellow to the back part of the store and, removing her gloves, knelt down, washed his little feet, and dried them with a towel. By this time the clerk had returned with the socks. Placing a pair upon the boy's feet, she purchased him a pair of shoes. She tied up the remaining pairs of socks and gave them to him. She patted him on the head and said, "No doubt, my little fellow, you feel more comfortable now?" As she turned to go, the astonished lad caught her by the hand, and looking up in her face, with tears in his eyes, answered the question with these words "Are you God's Wife?"

Cute story, from the Internet (not my own): As I was driving home from work one day, I stopped to watch a local Little League baseball game that was being played in a park near my home. As I sat down behind the bench on the first-base line, I asked one of the boys what the score was. "We're behind 14 to nothing," he answered with a smile. "Really," I said. "I have to say you don't look very discouraged." "Discouraged?" the boy asked with a puzzled look on his face. "Why should we be discouraged? We haven't been up to bat yet."

Goosebumps! I got goosebumps.

There are some articles talking about work/life issues on BenefitsLink, including sabbaticals -- click the "BL" button at the lower-right corner of your message.