Understanding retirement plans during troubled times

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For years, pensions were a part of American life. As long as employees worked 35 years for a company, they didn’t have to fret about retirement plans — it was the employer’s responsibility.

But bygones are bygones. Over time, employees have had to take personal responsibility for their retirement planning.

“We’ve shifted from the pension world of defined benefits to defined contributions,” said Tim Watson, Strategic Financial Partners.

The Pension Protection Act of 2006 allows for employees in a participant-directed plan to be defaulted into a Qualified Default Investment Alternative — if they don’t direct their investments.

“It’s a way to give people a push into saving for retirement,” Watson said.

But many QDIAs are invested largely in target date funds — a “diversified” portfolio that’s pre-packaged, so to speak, and is “built to be more conservative over time,” Watson said.

But not all fund managers agree on what’s “conservative.”

“Some companies allocate as high as 75 percent to the equity portion,” he said, which for many investors is far too weighted in stocks — too risky.

“The onus is on the employee to know if the equity allocation is right for them,” Watson said. “Qualified Default Investment Alternatives were intended to mitigate fiduciary liability — but a lot of them are not in the best interests of the employees.”

As for employers, during difficult economic times, it’s more important than ever for 401(k) plan fiduciaries to dot their I’s and cross their T’s.

Most pension plans don’t fail — they are acquired, and even in the event of insolvency, plan assets are held in a separate trust, said William Mahaffey, an attorney with Rothgerber, Johnson & Lyons LLP.

If the bank fails, the fund is insured to $250,000 per plan participant by the Federal Deposit Insurance Corp. If the brokerage firm fails, funds cannot be reached by creditors. And in the event of theft, fund assets are protected by the Securities Investors Protection Corp.

That said, fiduciaries would be under scrutiny if the bank or brokerage firm, holding a plan’s assets, fails.

“Fiduciaries need to be able to demonstrate how much of your participants’ money was in the bank at the time it failed,” Mahaffey said.

And in case of theft, “if you’re the one monitoring the plan, you have to look at your trade reports and monthly statement to make sure your assets aren’t stolen,” he said. “If you don’t monitor it properly and frequently enough, then the SIPC can refuse to insure and pay out.”

However, fiduciaries don’t have to worry about being perfect or all-knowing. The key is to make a decision “in the right way.”

Otherwise, fiduciaries can be held personally liable for the losses that participants suffer.

“You have to show that you made the decision the right way — even if the decision was bad,” Mahaffey said.

One of the traps that people fall into, he said, is becoming a fiduciary without being aware of it.

If someone chooses which funds to make available to employees for their 401(k) plans, then he or she is a fiduciary. Members of advisory committees must make “careful notes” about how they went about selecting which funds to make available.

Plan fund investment alternatives should be reviewed at least annually, he said.

Employers who fail to deposit employee contributions in a timely manner may be investigated by the Department of Labor, if they owe the plan money.

Both employers and payroll personnel act in a fiduciary capacity, he said, when they withhold 401(k) deferrals.

Mahaffey advises that companies have diversification — rather than having a bundled service provider.

“I personally recommend that you have a bifurcation of service,” he said. “If it’s bundled — they all point fingers at each other when something goes wrong. And it’s good to have diversification in case one goes out of business, you have another.”

For instance, an unbundled service might have a 401(k) plan provider, a third party administrator and a financial adviser to service the account.

And employers need to ensure that third-party administrators keep offsite backup records of their plan records — for three to five years after a person’s employment terminates.

A word to the wise — employers, trustees and plan administrators who don’t heed the rules keep attorneys in business.

“How I make a living is when people don’t administer their loans correctly,” Mahaffey said.