WSJ on 401(k) Debit Cards

So as not to be left behind in the debate over 401(k) debit card loans after the New York Times report I wrote about last week, the Wall Street Journal's Jonathan Burton reports [subscription required]: "Critics Detail the Ills Of 401(k) Debit Cards." In this report, Mr. Burton quotes several adverse reactions from the who's who in the retirement and financial planning world. Some choice comments:

"We absolutely hate it," said Jean Setzfand, director of financial security at AARP, the organization for people 50 and older. "A 401(k) loan is a last resort."

"A horrible idea," said Linda Lubitz Boone, president of investment advisory firm Lubitz Financial Group in Miami. "It's hard enough to save to begin with."

Even official watchdogs are on alert. The Financial Industry Regulatory Authority issued a stern warning about 401(k) debit cards, calling them "a tempting convenience that can have significant repercussions" on your retirement security.

The cards also have become Public Enemy No. 1 for some Washington lawmakers; Sens. Charles Schumer (D., N.Y.) and Herb Kohl (D., Wis.) blasted them this month as an apparent abuse of 401(k) plans and proposed legislation to outlaw them.

The heightened controversy about 401(k) debit cards comes with the times. There is an increasing concern that with things so tough, people living paycheck to paycheck will increasingly turn to retirement savings as a source of cash. Mortgaging your future, unless it is for an emergency or to enhance your education or career, is almost always a poor decision. You will have less money to support yourself after you retire or you will have to work more years before calling it quits.

The report does list some advantages of such loans over regular 401(k) loans:

For starters, the ReservePlus card is flexible; it can be used multiple times, for any purpose. As with a typical loan, employers set a borrowing limit based on how much you have saved for retirement. By law, the upper limit is generally $50,000 or 50% of your account balance, whichever is less. The approved amount is set aside in a money-market fund and earns tax-deferred interest until you use the card.

With every transaction, you have five years to pay back the money, and the interest rate -- now about 8% -- may be better than certain people can get elsewhere.
One advantage of a debit card is that if you are laid off or leave the company, there may be no pressure to reconcile the debt immediately. With a typical 401(k) loan, the outstanding amount must be repaid in full, usually within 90 days. Otherwise the loan amount is considered a taxable distribution.

I am sure of one thing: we have not heard the last word on this controversy yet.

401(k) Death Match (Sorry! - Death of 401(k) Match)

The Financial Advisor Magazine reported last week, quoting a PlanSponsor.com study: "Bye-Bye To Employer 401(k) Matches?" This is a potentially ground-breaking study, which implies, and I quote:

"Some researchers are suggesting that employers can put in place automatic enrollment plans and eliminate their 401(k) matches without any adverse effect on participation or contribution rates. In fact, researchers are suggesting that an employer might be better off using the matching-contribution money to minimize 401(k) plan fees, reduce health care costs or pay for other employee benefits. The money might also be better spent getting employees who are not saving for retirement to save rather than helping those who are already saving. In short, this tradition of employer matching employee contributions is being questioned and may someday disappear from plans, especially in light of current economic conditions and a new pension law. That, in essence, is the gist of an upcoming article in PlanSponsor magazine."

Whoa! What will they think of next? I hadn't seen this one coming...

Weekend DOL Blotter - 7/20/2008

After a short respite last week, the DOL released information on several new cases that were resolved or are in the process of being pursued in courts. First we turn our attention to: "U.S. Labor Department protects 401(k) plan assets of former American Systems Consulting Inc. employees in Dublin, Ohio."

A federal district court in Columbus has granted the U.S. Department of Labor a consent judgment to distribute more than $600,000 in 401(k) assets owed to former workers of American Systems Consulting Inc. of Dublin.

Under the judgment, Larry Lefoldt was appointed as an independent fiduciary to terminate the plan after distributing plan assets to eligible participants and beneficiaries. The judgment resolves the department’s lawsuit against the company, Cliff Gallatin and Loree Gallatin to recover 401(k) plan assets that were improperly used for the benefit of the company. The Gallatins, former plan trustees and officers of the company, have paid $100,860 in delinquent employee contributions and lost opportunity costs owed to the plan.

Our next case comes from Salina, KS: "U.S. Labor Department seeks to restore employee contributions owed to Salina, Kansas 401(k) and health plans."

The U.S. Department of Labor has sued the trustees of the 401(k) and health plans of defunct B&W Electrical Contractors Inc. (formerly of Salina) for failure to forward $22,670.22 in employee contributions to the 401(k) plan and $7,584.82 in health care premiums to the health plan.

The lawsuit alleges that trustees Warren Merrill and Jeffrey Merrill violated the Employee Retirement Income Security Act (ERISA) by failing to forward employee contributions to the plans from May through August 2005. The suit asks the court to require that the Merrills restore all losses to the plans and participants.
Warren Merrill was the president and owner and Jeffrey Merrill was the vice president of B&W Electrical Contractors, an electrical contracting business before ceasing operations in 2005.

Going back to Toledo, OH: "U.S. Labor Department recovers funds owed to Toledo-based Tana Corp. retirement savings plan."

The U.S. Department of Labor has obtained a consent judgment restoring more than $25,000 owed to the retirement savings plan of Tana Corp. in Toledo as resolution of its lawsuit against the company and plan fiduciary Sharon Scherkoske.
The suit alleged the defendants improperly used funds intended for an employee retirement savings plan for the benefit of the company in violation of the Employee Retirement Income Security Act (ERISA).

“The department will not hesitate to act when plan fiduciaries fail to carry out their duty to protect the retirement plan assets held on behalf of participants,” said Joseph Menez, director of the Cincinnati Regional Office of the department’s Employee Benefits Security Administration (EBSA). “Protecting workers’ benefits is a top priority for this administration.”

The department’s suit alleged that plan fiduciary Scherkoske failed to segregate, remit and timely forward employee contributions and loan repayments to the retirement savings plan and used the funds for the company’s benefit beginning in January 2002. As of December 31, 2006, the plan had 18 participants, the latest data available.

A Google search showed that Sharon Scherkoske was prosecuted by the Ohio Attorney General's office in 2005 for failure to pay worker's compensation premiums. Hopefully justice will be served this time.

Where to Spend a 401(k) Debit Card Loan? Choices... Choices...

The New York Times (Ron Lieber) is reporting on the use of 401(k) Debit Cards, and efforts underway by Senators Chuck Schumer (D-NY), and Herb Kohl (D-WI) to ban their use. The one company that offers this feature is called Reserve Solutions. If such debit card loans were to be outlawed or curbed, I will speculate that the one trick pony business model of Reserve Solutions could cause it to fail as a company.

Ron Lieber at NYT interviewed both Senator Schumer and the founder and chairman of the parent company of Reserve Solutions, Bruce Bent. It makes for a very interesting reading - I highly recommend reading the whole thing. Some excerpts:

Q. How did you first get interested in creating legislation around debit card access to 401(k) loans?
SCHUMER Over 10 years ago, I read in the paper that Bank One was offering access via a card to 401(k) loans, and I thought, this is outrageous. America has to save. If people need to access their 401(k)s because of unusual circumstances, that’s one thing. But to encourage people to take money out with a card is encouraging all the wrong values. So I said then that I was going to put forth legislation, and the bank dropped it and I thought it was over.

...

Q. Is this really that much different than simply going online and moving loan money from Fidelity or another 401(k) account administrator to your bank account?
SCHUMER It is totally different. A debit card allows people to spend on impulse. Not having one attached to a loan is sort of like having a waiting period for a gun.

Q. Are there particular types of workers to whom the debit card is especially appealing?
BENT It’s bringing in lower income and younger workers. They don’t come into the 401(k) plan in the first place because they’re unhappy with the concept of losing access to their money. Or invariably, the plans and the loans don’t work for them because they’re transient, working for one construction company at one time and another during another season.

Q. One plus of a debit card is that the issuer can see how people are actually using their money. So are they spending it on frivolous things?
BENT I can’t say. It’s proprietary, and it’s also personal information.

Q. Could an employer see that information?
BENT Well, if you outlaw the debit card, Big Brother’s ability to control expenditures is limited. They can’t control it then. With a debit card in place, Congress could dictate to us that Vendor 23, Victoria’s Secret, or Vendor 85, Joe’s Massage Parlor, don’t qualify. Or they could restrict entire categories of vendors where people could spend the money.

Weekend - DOL Blotter - Enron Flashback

It was a slow news week at the Department of Labor's EBSA enforcement division - so this time we will take this opportunity to review some Enron-related goings on in February and March 2008 which actually related to Hewitt, the behemoth HR outsourcer. This issue has largely stayed out of the mainstream media news coverage.

On February 7, 2008, the DOL posted a news release on it's website: "U.S. Labor Department seeks contempt order against Hewitt over improper distribution of assets from Enron litigation settlement fund." The news release claimed:

The U.S. Department of Labor today announced that it has asked a federal district court in Houston, Texas, to hold Hewitt Associates LLC in civil contempt for failing to comply with an allocation formula approved by the court when it disbursed court-supervised settlement funds to Enron employees at the end of 2006. The proposed motion for civil contempt must be approved by the U.S. District Court for the Southern District of Texas.

Hewitt caused the settlement fund to have insufficient cash to pay Enron workers, retirees and beneficiaries all amounts due them. The fund holds recoveries obtained by the department and class-action plaintiffs in related lawsuits regarding Enron's pension plans. Even with other corrective action being undertaken by parties to fix the misallocation, there will be a $9.15 million shortfall in the settlement fund as a result of Hewitt's noncompliance with the court-approved allocation formula. Hewitt served as the administrator for the settlement fund.

"This department has been relentless in seeking to protect the retirement security of America's workers and their families," said U.S. Secretary of Labor Elaine L. Chao. "With this legal action we are seeking to ensure that the pension plan participants receive all the funds they are entitled to."

Hewitt did not perform the allocation correctly and some participants received too much in settlement proceeds at the expense of the remaining participants — amounting to $22 million being overpaid. The settlement fund now has insufficient funds to pay the correct amounts to participants who were underpaid.

The Labor Department asks the court to require Hewitt to provide funds sufficient to permit the allocation of settlement funds in accordance with the allocation formula approved by the court. The department also asks the court to prohibit Hewitt from collection, repayment and other actions against participants who received overpayments without the court's permission. The department's motion is in addition to a separate motion filed by Enron to hold Hewitt 100 percent responsible for an interest-free loan to Enron's pension plan for the full amount needed to make whole the underpaid participants.

Then, inside of one month, the DOL posted this news release: "Hewitt and Enron to restore $11.2 million to Enron litigation settlement fund"

Thus bringing an end to the sordid pension drama (just kidding). The news release quoted Secretary Chao stating that this settlement will result in "...all pension plan participants will receive all the funds to which they are entitled."

What was left unaddressed was what about the participants who were overpaid?

Preserving Your Pensions in Tough Times - NPR Interview

Teresa Ghilarducci, Professor of Economics at Notre Dame was featured on NPR's Fresh Air radio program on July 7th. You can listen to the entire interview at the title link above or by clicking here. Ms. Ghilarducci was promoting her new book titled "When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them."

This is a great radio program, and undoubtedly will be a great book to read. I look forward to reading it and writing something about it as soon as I get a chance. Here's the introduction from the NPR website:

"Stock and bond funds in 401(k) accounts took a hit this past quarter, and many people are worried about their retirement funds. Economist Teresa Ghilarducci addresses financial concerns about retirement and offers her own solution to the pension problem.

Ghilarducci is a professor of economic policy analysis at the University of Notre Dame, where she specializes in pension benefits. She is also the director of the Higgins Labor Research Center and a Wurf fellow at the Labor and Worklife Program at Harvard Law School.

Her latest book, When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them, proposes that pensions should be managed by the federal government rather than Wall Street."

I am going to try and stay out of this political debate for a bit, but I can't help but comment that as a Democratic sweep of the upcoming general elections becomes more apparent over the coming months, I can start to hear the drumbeats getting louder calling for greater legislation on Wall Street.

Business Week - 2008 Retirement Guide

Business Week's 2008 Retirement Guide is out this week. As expected from a magazine of this stature, it was fairly well put together. The tone of the headlines seems to reflect the dour mood prevailing in the financial economy, and in some ways a tad alarmist, starting right from the headlined article.

"Retirement Strategies for Tough Times"

"Will You Outlive Your Money?"

"How to Enjoy a Scam-Free Retirement"

and one chock full of cautionary tales:

"Ruined by 401(k) Predators"

"Will You Outlive Your Money" visits the familiar topic which we have covered before in "WSJ Report - How to Bulletproof Your Nest Egg." Notable by their absence, are any references to the new payout mutual funds developed by Vanguard and Fidelity. These funds offer the retirement-stage investor the ability to cheaply obtain a regular income stream without paying the higher fees typically associated with retirement annuity products.

Vanguard's products called "Managed Payout Funds" are based on a given investor's appetite for risk, whereas, Fidelity's product called "Income Replacement Funds" are similarly structured with the biggest difference being their emphasis on "target dates" kind of like target date date portfolios in reverse.

One great article mentioned in the 2008 report is, "Target-Date Funds Hit Their Stride." Some interesting factoids on target date funds:

• Assets collectively hit $204.2 billion at the end of May 2008, as compared to $116 billion last year
• Funds managing for a 2020 retirement date snagged the largest share of target date assets
• Exposure to international equities increased from 7% in a typical fund in 2005 up to 17% in 2007
• Exposure in REITs has also increased with AllianceBernstein target date funds allocating up to 10% of their assets in this asset class
• Hedging strategies are also turning up in this class of funds, with TIPs and commodities (the "usual" hedges), along with Bank of America's funds considering some exposure to Asian currencies, nuclear power and water.