The Rosenbaum Law Firm Review

Roth 401(k) Conversions: Much Ado About Nada. Too many requirements will deprive most participants from making Roth 401(k) conversions.

On September 27th, President Obama signed the Small Business Jobs Act of 2010 into law. One provision of the law allows 401(k) plan participants to transfer their pre-tax contributions into a Roth provision of the Plan in 2010 and pay the taxes in 2011 and 2012. By transferring these contributions to a Roth provision of their 401(k) plan, plan participants would be allowed to have tax free distributions at retirement.

What may seem as a boon to 401(k) plan participants everywhere, the provisi

on is so limiting that very few 401(k) participants will actually be allowed to exercise and for those who can exercise it, very few will because of the gambling proposition of any Roth conversion. What is a benefit for a 401(k) participant is really a boon for the government as the provision to received added tax revenue now, rather than waiting for participants to retire and pay taxes later.

As for the limitations, a participant will only be allowed to convert contributions that would be allowed under a 401(k) plan by law and by the participant's plan. Therefore, participants will only be allowed to convert their salary deferrals and matching contributions until they attain age 59 � (a hardship distribution is not considered an allowed distribution for a Roth conversion). A participant will only be allowed to convert profit sharing contributions based on the plan's in-service distribution option for that contribution and by law; it must require some time requirement (a minimum of 2 years). Also, the conversion will only be allowed if the participant's 401(k) plan has a Roth provision and curiously the law states that an employer can not adopt a Roth provision solely to allow the conversion (how will the government prove that?).

Even if a participant can jump through those hoops, some factors weigh against making the conversion. First off, a conversion will require the payment of income taxes in 2011 and 2012 on contributions that were always tax deferred. Also a Roth conversion only makes sense for participants who are willing to bet the Roth conversion gamble. The Roth conversion gamble is that paying taxes now and doing the conversion makes sense because these participants believe income tax rates will rise, the stock will rise over time, and the government will abide by not taxing Roth distributions as promised. How many 401(k) participants are willing to make that bet when they are 59 � and intend to retire after 65? Seeing how the stock market has performed over the last 10 years, not many.

Also, keep in mind that Roth 401(k) will still require minimum distributions (even though they are tax free). However that can be avoided, if the participant makes an in-service distribution (if allowed by the Plan) and has that distribution rolled over to a Roth IRA (which requires no minimum distributions).

Guidance suggests that any Plan interested in this Roth conversion, an amendment will have to be put in place. Despite all these hurdles, if you are interested in the conversion, please contact me.

Retirement Plans Should Be Tailored Like Suits. One size, doesn't fit all for retirement plan sponsors.

Too many retirement plan sponsors leave money on the table by just selecting a financial advisor and setting up a plan vanilla 401(k) or SIMPLE IRA or SEP without consulting an ERISA Attorney or the consultants at a third party administration firm (TPA).

Retirement plan are like a suit. I wear a 40 short and when I get the suit from Jos. A. Bank (cheap plug) after I order it on the Internet (great bargains, second cheap plug), I have to get it tailored so I can get a proper fit.

The same can be said about retirement plans. While so many advisors take the cookie cutter approach to their clients' retirement plan needs and just use a straight 401(k) plan with a prototype document, so many clients leave money on the table by not getting the right retirement plan and specifications to fit their retirement plan needs.

One size fit alls may be good for some articles of clothing, but that approach doesn't work in retirement plan design because every employer brings different attributes, demographics, and types of business so each retirement plan sponsor should consult with retirement plan consultants including an ERISA attorney to get a retirement plan and design that is the right fit.
There are so many different retirement plan designs out there like unit credit defined benefit, new comparability, safe harbor 401(k), automatic enrollment, cash balance, floor offset, that an advisor would be foolish not to consult with an ERISA attorney and a retirement plan specialist from the TPA.

As I stated in the past, I had a new client who asked me whether he could have a retirement plan that would save him more than the $49,000 he could save from his SEP. As an attorney, he received a $500,000 fee. With his age (75) and income plus no employees, it was a no brainer that a defined benefit plan would get him more bang for the buck. Needless to say, the $200,000+ he contributed to the defined benefit plan that first year was a lot more than $49,000.

I had another client that I have had for 8 years because I simply added a safe harbor matching plan design to a client's 401(k) plan that the payroll provider claiming to be a TPA forgot to bring up.

Under my design, the owner was able to maximize her salary deferral limit instead of returning $10,500 of her then $12,000 deferral limit since the plan failed ADP (actual deferral percentage) testing and the payroll provider forgot to also mention that a corrective QNEC (qualified non-elective contribution) contribution would only cost the company $7,000. Thinking only within the box cost that payroll provider, a client and provided me with a client that has survived 8 years and 3 different firms with me.

Every client has different needs and different business arrangements, so the one size fits all approach doesn't work because the cookie cutter approach doesn't work as no two cookies (plan sponsors are the same). Legally, there is nothing wrong with the cookie cutter approach, but plan sponsors may be leaving money on the table by not maximizing retirement savings for the owners and the employees.

Suits over time may still have to be altered if the suit wearer gains or loses weight. The same can be said of retirement plans. Plan sponsors can grow or contract or have substantial earnings to warrant more retirement plan contributions. So different provisions like safe harbor contributions or automatic enrollment can be added and then deleted, depending on the financial status of the plan sponsor. That is why I advocate that a plan sponsor undergo an annual review to determine what fits and what doesn't.

So retirement plans should be tailored likes suits, just avoid the seersucker suit in January.

Read those 401(k) Provider Contracts.

Making a TPA change? Contract review will eliminate sticker shock and hidden charges.

If you are making a move to a new third party administration firm (TPA) for 2011, I recommend that you review all your service agreements with the current TPA and stable value provider to determine any de-conversion fees, surrender charges, and market value adjustments.

So many retirement plan sponsors that want to make the switch are unaware of these charges and get a sticker shock when they tell the current TPA they are leaving. I remember an advisor who lost a potential client because of the surrender charges in their contract with a bundled, insurance provider.

One of the more sensitive topics is de-conversion costs from the fired TPA. There is a cost associated from a fired TPA sending over the data and files to a new TPA and most firms spell out any cost in their service agreement with the client.

However, I know of one TPA firm that never made mention of any de-conversion costs and clients were alarmed when they tried leaving. What was even more troublesome is that this TPA never had a set conversion fee, it was a sliding scale decided by the managing partner. Plans could expect to pay between $1,500 and $5,000. Since they fees were never spelled out in the service agreement, I advised my clients to dispute these charges because it should have been mentioned in the initial service agreement with the TPA. The TPA drafted the contract, so any provisions that are unclear are construed against the party that drafted the contract.

So review your agreements for any charges and dispute any charges that are not mentioned in those agreements.

More Ways To Follow Me. With Facebook, LinkedIn, Twitter, JDSupra, and now a blog, that's a lot of retirement plan content.

There are just more ways to follow me, I'm just glad I'm not paranoid.

In addition to LinkedIn, Twitter, JDSupra, and Facebook, my blog is finally up where you can read my two cents on retirement plans. In addition, a LinkedIn discussion group called Retirement Plan Tune-Up is also available to join, which also includes my two cents on the retirement plan industry.

Join me for food and inexpensive CE/CLE. Long Island chapter of Financial Executives International meeting on October 28th.

On Wednesday, October 20, 2010, I will be speaking at a meeting of the Long Islan

d chapter of Financial Executives International (FEI). This talk will be an Introduction to Retirement Plans and the Hidden Liabilities for Plan sponsors from 8 to 9:30 am at the King Kullen Training Center in Bethpage. This speech will qualify as CPE credit for accountants and CLE for attorneys (only for New York accountants and attorneys).

The fee for the meeting (breakfast included) will be $15 in advance/$20 at the door for FEI members, $20 in advance/$25 at the door for non-members. Please contact Deborah Charney at (516) 247 4434 or e-mail her.

A networking event like no other.

The Accountant/Attorney Networking Group Autumn reception, October 27, 2010.

Over the last couple of years, so many networking events fail to live to expectations and you wonder why you bothered to show up.

The networking events promoted by one of the groups I belong to, AANG, the Accountant/Attorney Networking Group are the events that are worth attending. So if you are interested in networking with the top Long Island based attorneys and accountants, please join us on Wednesday, October 27, 2010, between 6 to 9 pm at the Crest Hollow Country Club in Woodbury, New York. Details are here.

If attending, please let them know that Ary Rosenbaum invited you. Hope to see you on October 27.
.

The Rosenbaum Law Firm Review, October 2010, Vol. 1, No. 6

The Rosenbaum Law Firm P.C.
734 Franklin Avenue, Suite 302
Garden City, New York 11530
516-594-1557