NEWS FROM REDW BENEFITS LLC (JUNE 2008)

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Depositing Employee Contributions
When should participant contributions be deposited to a retirement plan? This question has been considered by retirement plan specialists for years. Now the Department of Labor (DOL) has proposed a 7-day safe harbor for depositing participant contributions for small retirement plans (plans with fewer than 100 participants). This means contributions should be deposited into the plan no later than the 7th business day following the date the funds are withheld from the employees' paycheck. The DOL will consider a participant contribution as deposited to the plan on the date it is placed in an account of the plan. The contribution is not required to be allocated to an individual participant's account or a specific investment by the safe harbor deadline.

The current requirement states that employee contributions must be forwarded to the plan as of the earliest date they can reasonably be segregated from the employer's general assets. The outside limit is the 15th business day of the month following the month in which the contribution is received or withheld by the employer. The new safe harbor protects employers with regard to identifying the "earliest date" - as required by the general rule.

Employers should take notice that the DOL is very serious about employers depositing funds withheld from employees' compensation to retirement plans without delay and is stepping up its enforcement efforts. The new proposed safe harbor is not yet final, but employers can currently rely on the rule.

Please note, the proposed safe harbor rule does not apply to large plans (plans with 100 or more participants). However, the DOL is also considering a safe harbor for large plans.

Investment Policy Statements
Although federal benefit law does not currently require an Investment Policy Statement (IPS), it does require that fiduciaries "provide a procedure for establishing and carrying out a funding policy and method consistent with the objectives of the plan." Simply put, the IPS creates a framework of a plan's investment goals and a roadmap for the investment manager on how to achieve those goals. A recent survey of plan sponsors found that more than 80% have an IPS. But the real question should be, how many sponsors are actually reviewing and keeping the IPS up-to-date?

An IPS should be specific enough to address the unique features of the plan and should not be a simple declaration of investment rhetoric. It usually contains information on the selection of investment options offered to participants, and should detail the "how" and "when" investment options are monitored and reviewed.

Plan sponsors wishing to make any changes to their retirement plan, such as providing automatic enrollment, managed accounts, lifestyle/lifecycle funds, or individual brokerage accounts should assess the impact to the IPS and make changes to the IPS, if necessary. In today's world of fiduciary accountability, an up-to-date IPS can be a fiduciary's greatest asset protection.

Email Security
Email (Electronic Messaging) has transpired into a quick and easy way to correspond with friends, family and business associates. Email was actually around before the Internet and was a critical tool used in the Internet's creation. With new technology emerging fast and furiously, email is easily accessible not just using home or business computers, wireless connections in your local coffee shops, hotels and airports, but it can also be accessed by Smartphones and Personal Digital Assistants (PDA).

When email was first introduced its intent was for trivial correspondence. The ease of this new form of communication caught on quickly, and now millions of people world-wide utilize email daily. When used correctly, email can be a very effective way of communicating and conducting business. When used incorrectly, it can become a security nightmare both personally and professionally.

Reflection moment:
Think about how you would feel if a stranger received your personal information without your knowledge. Electronic messaging uses a protocol called Simple Mail Transfer Protocol (SMTP); the key word being 'Simple'. Email messages are sent in a simple clear-text format, and are not secure unless your business or email application or Internet email provider has an email encryption product. Another little known fact for many world-wide "emailers" is that there is no guarantee that your email will reach its intended recipient. If your message does reach its official destination it can then be forwarded on to others without your knowledge or consent. Once the Send button has been selected you have no control over what happens to your email message. Numerous copies of one email message can be saved and sent to a variety of places. Businesses also backup their email servers, giving them the ability to recall email messages from years prior.

Clean out the Junk:
Unfortunately, email can also be used by others to send bulk email or unsolicited email, also known as spam. These messages are similar to the junk mail we all receive in our home or business postal boxes. There are products available to curtail this intrusion from flooding your email inbox, such as your email software's "junk mail" feature, or even pricier solutions such as "spam firewalls" for businesses. Spam email is also used as a gate-way to infect your computer or network with viruses and Trojans.

Let's go Phishing:
Beware of email phishing scams. Phishing scams are designed to trick you into giving out your personal information such as passwords, credit card numbers, bank or other account data or even your social security information. Con artists will send out millions of fraudulent emails, mimicking legitimate organizations that you trust. They use the same logos and pictures from legitimate websites to dupe you into clicking links that redirect you to a bogus website they have created. Once you have been redirected to this copycat website, login information or other personal information can be captured with ease. Organizations such as PayPal, financial institutions and government websites are well-known targets for phishing scams. Phishing scams can also come in the form of a pop-up window when you're surfing on the Internet.

Simple Safety Tips:
Listed below are some useful email safety guidelines for both personal and business email correspondence.
• Never assume email is secure, or that it will always reach its intended recipient.
• Never send passwords, account details or confidential information in an email message, whether it be your own or a business associate's information.
• Never update credit card information because an email was received stating your account could be closed (phishing scam). Call to verify your account status.
• Always scan email attachments for viruses.
• If you receive a suspicious email do not open it.
• If you receive an email message with an attachment or link from an unknown sender do not open the attachment or click on the link.
• Always type website addresses into your Internet browser bar instead of clicking links provided in an email message (phishing scam avoidance).
• Do not open .zip files or .exe files received via email as these are most likely viruses.
• Remember that financial institutions and government offices will never contact you by email asking you for login credentials, passwords or other personal information. If you receive an email from your financial institution call the organization to verify the validity of the message. Do not call the phone number provided in the email message.

401(k) Fees
You may be a disciplined saver through your company's 401(k) plan, but do you know what you're paying in plan fees? Chances are that you're like many of the other 50 million workers who participate in a 401(k) plan - you don't know what the costs of your plan are, and you don't know where to find that information. Based on a recent analysis by the Governmental Accountability Office (GAO), more than 80% of workers don't know how much they pay for the management of their retirement savings accounts. This is extremely important information - according to the GAO, a 1% increase in fees can reduce retirement benefits by nearly 20%.

Generally, fees on 401(k) plans fall into four categories: investment fees, product and transaction costs, investment advisory services, and administrative fees. If your 401(k) plan is invested through a typical brokerage relationship, it may be difficult to determine what the actual costs of your plan are. In such an arrangement, there are many fees hidden from 401(k) plan participants: undisclosed trading costs, commissions, direct investment expenses charged by the mutual fund companies, custody fees, variable annuity wrap fees, and administrative "pass throughs". It's also likely that unless your investment advisor or third party administrator is paid based on a "fee only" arrangement, they are receiving "soft dollar" revenue sharing or sub-transfer agent payments (rebates) from the mutual fund companies.

All this points to the need for greater transparency in the fees charged for 401(k) plans. In response to this concern, the Securities and Exchange Commission (for mutual funds) and the U.S. Department of Labor (for 401(k) plans) have proposed new rules regarding disclosure of fees for 401(k) plans. The SEC said its proposal would require that mutual fund investors be provided a "concise summary of key information about a mutual fund's investment objectives, strategies, and costs". The Department of Labor's proposal strives for "enhanced disclosure for participants in 401(k) plans of their provider's compensation and potential conflicts of interest".

Unfortunately, the disclosures that these proposals contemplate simply include information that is already found in other documents, such as mutual fund prospectuses. These proposals also don't address the critical need for complete disclosure of all fees and expenses to plan participants.

On the legislative front, bills requiring firms to disclose the fees paid by participants in 401(k) plans are progressing through both the House and the Senate. What the final law will be is still unknown. The basic premises of the bills are as follows:
• Disclosure of all 401(k) fees, broken down by administrative fees, investment management fees, transaction fees and other fees
• Provision of basic investment information on risk, return and investment objectives
• A low cost index fund investment option
• Disclosure of financial relationships, so that sponsors of 401(k) plans can be sure that there are no conflicts of interest

Some industry groups and investment companies argue that this information is not needed by employers and employees, and will burden 401(k) plans with unnecessary costs. At the same time, though, better transparency of 401(k) plans and disclosure of fees is definitely needed.

So, in the meantime, how can employers and plan participants better understand the fee structure of their 401(k) plans? Consider asking your service providers for the following information:
• Expense ratios (or internal fees) for all mutual funds offered
• Information on how your investment advisor is compensated, and the total compensation paid for the previous year. This will include investment management fees charged on a "fee only" basis, "soft dollar" revenue sharing, sub-transfer agent payments, variable annuity charges, wrap fees, commissions, and transfer fees.
• Specific information on the fees charged by your third party administrator, including: participant level reporting, contribution and testing calculations, regulatory reporting, and meetings with participants or the plan's Retirement Committee.

As fees charged on 401(k) plans become more transparent, employers and plan participants can make more informed decisions on investment alternatives and how to structure their plan. With more understanding of their retirement plan, it's likely that plan participants will become more engaged in planning for their retirement, which is a good result for everyone!

Questions or comments on this newsletter?

, CPA/PFS, CEBS, CMA, CMS at 505-998-3200.


, SPHR, CEBS, CMS, RPA at 505-998-3296.


, SPHR, CEBS, QKA, QPA, CPC at 505-998-3200.