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Benefitting You!
June, 2011 |
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Upcoming Events | |
Please join us at our next
Human Resource Roundtable Breakfast on September 14, 2011 from 8:00 a.m. - 10:00 a.m.
Alan Spierer
Senior Vice President - Investments
UBS Financial Services, Inc.
discusses
"Preparing for New Fee Disclosure Requirement:
What You Need to Know When These Take Effect"
RSVP today by contacting Sally Glick at (973) 994-9494 or sally.glick@sobel-cpa.com.
Click here to view invitation. |
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| Greetings! |
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Ken Bagner
CPA, MST |
Welcome to our first issue of Benefitting You! After spending numerous hours talking with you - our clients and colleagues - from Human Resource Directors to Benefit Plan Administrators to CFOs, we came to the clear realization that, quite frankly, there are simply not enough resources specifically focused on delivering the information that is most critical for you.
With that in mind, we assembled an editorial advisory board comprised of professionals from various sectors who will assist the Sobel & Co. team to provide you with insights on current, relevant and useful topics.
As always, Sobel & Co. is committed to keeping our clients and the business community at the cutting edge, and this newsletter is no exception. In fact, the very name, Benefitting You, indicates that this is designed with you in mind.
We hope you will find the articles included here to be valuable, and that you will pass this along to others. You are always welcome to provide topics of interest that you would like covered in future issues.
I look forward to hearing from you and seeing you on September 14, 2011, at our next Human Resource Roundtable. (CPE will be available).
Enjoy!
Ken
Ken Bagner, CPA, MST
Member of the Firm
Director, Employee Benefit Plan Audit Practice
P.S. If you want to add anyone else to the e-newsletter mailing list, please just send their contact information to sally.glick@sobel-cpa.com and we will see that they are included going forward.
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Automatic Enrollment:
Is it an Option for Your Company's Benefit Plan? |
 Before you can determine if electing for Automatic Enrollment is a viable option for your company's benefit plan, it is important for you to have a clear understanding of both the benefits and the disadvantages of auto enrolling employees.
Defining "Automatic Enrollment"
As the name implies, Automatic Enrollment, as defined in the Pension Protection Plan (PPA) of 2006, simply provides that eligible participants will be automatically enrolled into your Company's Sponsored Benefit Plan. It should be noted that the IRS had issued guidance in this area even before enactment of PPA, but Plan Sponsors were hesitant to implement Automatic Enrollment because of the concern that it could be deemed to violate state laws which did not allow unauthorized salary reductions. The enactment of PPA put those fears to rest, relieving fiduciary responsibility for participant deferrals if they were invested in a qualified default investment option.
With Automatic Enrollment, the responsibility is on the company sponsoring the benefit plan to ensure that:
- Every eligible participant is provided with information from the Plan Sponsor that informs them of their right to elect out of being automatically enrolled into the Benefit Plan.
- Notice is given to the employees when automatic enrollment is originally established.
- Notice is also included in the annual notice given to participants which describes their rights in the Plan.
The keys to the successful implementation of automatic enrollment are that it is (1) communicated clearly to participants that they can elect NOT to contribute and (2) that eligible participants are given ample initial and annual notice describing their rights.
The Advantages of Automatic Enrollment
Companies that implement automatic enrollment for their benefit plans typically enjoy:
- A higher number of plan participants than those companies that do not utilize this process. This can be seen as a benefit for employees because it provides them with an easy and convenient way for saving for their future retirement.
- A convenient escalation option, if elected by the Plan Sponsor, for employee deferral increases. For example, a participant may start with a deduction of 6% of eligible wages, increasing annually up to 10%, which is the maximum allowed under the Pension Protection Act of 2006.
- Relief for the fiduciary of liability if an employee does not make an investment election.
- The convenience of having the due date for discrimination testing extended from 2 1/2 months after the Plan's year-end to 6 months with an eligible automatic contribution agreement defined by the Pension Protection Act (PPA).
The Disadvantages of Automatic Enrollment
While there are obvious conveniences under automatic enrollment, there are also items to consider.
These include obstacles which may prove to be too great a burden for the Plan Administrator, such as:
- The distribution of accounts to terminated employees, which can pose a substantial burden for companies that experience high employee turnover.
- The burden of ensuring that plan participants are automatically enrolled on time in accordance with the Plan Document (if this is not done, employers will have to make a corrective contribution for the time they were supposed to be enrolled).
- The need for a plan audit will occur if automatic enrollment encourages a higher number of plan participants, resulting in over 120 plan participants at the beginning of the plan year.
- The need to have your Plan Document and Summary Plan Description amended to reflect the change in plan provisions. (While this should be relatively easy if the Plan utilizes a prototype document, the costs will be high if the Plan is custom designed).
Conclusion
Each company needs to individually weigh the pros and cons that will occur by implementing the process of automatic enrollment. For some, the administrative burdens will far outweigh the convenience brought by automatic enrollment. For others, the benefit to employees and the boost in participants may be more important than the resulting challenges.
If you would like to discuss the impact automatic enrollment will have on your company, please call Ken Bagner or Alan Rosenzweig at (973) 994-9494.
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From a Human Resource Perspective...... |
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Molly Lockwood
HR Director |
Human Resource Directors, whether working in large, mid-sized or small companies, typically face the challenge of finding ways to provide employees with unique benefits at little or no additional expense to the company. In today's economic climate it is more important than ever to demonstrate the company's commitment to its employees, but in a cost effective fashion.
Along with the traditional benefits, such as health insurance, savings and retirement  plans, holiday and vacation pay and other 'expected' perks, some of the amenities that can contribute to a collegial atmosphere while building employee loyalty include the following: - Reduced fees at local health clubs. With an emphasis on good health, you can contact the health clubs in your area and negotiate discounts. If you are too small, ask your health care provider to help out. They often have connections and can assist you with this.
- Employee banking programs. Invite the branch managers from neighborhood banks to make a presentation to your staff and offer them special programs, such as free checking.
- Establish a weight loss program. Along with membership in a health club, you can begin a program such as Weight Watchers at Work. This is a great convenience as employees can weigh in at the office and avoid the trip to a local Weight Watcher's facility. Along the same lines you can start a walking club and have people walk during their lunch hour. This builds team work and helps everyone lose a few pounds!
- Distribute Plum Benefits. This is a program that offers monthly deep discounts to theatrical performances.
- Build alliances with local retailers and restaurants. Ask the business owners in your area if they would like to create an employee discount program for your employees. There are other national chains that are also proud of their employee discount programs - such as Brooks Brothers and Jos. A. Banks, 1-800-Flowers and ProFlowers, to name a few.
- Car rental discounts. Most companies, such as Hertz and Avis, have established corporate discount programs that you can take advantage of for your employees.
- Concierge services. You can arrange dry cleaning and laundry pick up at your office with a local provider, taking the burden off employees to try to drop off and pick up their clothing within the hours of operation. You can also ask your property manager if they have any other similar connections. Perhaps you can have someone who does shoe shine and repairs visit the office twice monthly. There are other services that you may be able to arrange for your employees to alleviate some of their stress.
- Cell phone providers, like Verizon, may offer employee discounts if you have established a corporate account with them.
While not every company will find every amenity appropriate for their employees, their size or their geographic marketplace, just having a list of options can be helpful when you are trying to find ways for showing your employees how much you value them! |
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How Can We Guard Against a Repeat of 2008?
Stephen C. Craffen BE, MBA, MS, CFA, ChFC, CLU, CDFA |
 | | Stephen C. Craffen |
Asset allocation is based on a concept called Modern Portfolio Theory (MPT); a Nobel Prize winning theory developed by Dr. Harry Markowitz for his PhD thesis in the 1950's. Dr. Markowitz's theory uses statistics to measure risk and aid in the design of portfolios by modeling how assets move in relation to one another using a statistic called "correlation." A couple of examples make it easy to understand. If two assets are perfectly correlated, i.e. they move in sync, then their correlation equals 1; if they move in opposite directions then the correlation is -1. If they move partially together or partially in an opposite fashion then the correlation ranges between 1 and -1. Dr. Markowitz used mathematical constructs to devise what he called "efficient" portfolios. Statistics like standard deviation (a measure of volatility) and correlation are used to combine assets whose price movements are not in sync; creating combinations that had lower risk than the individual components themselves. For any given desired return you could combine different assets with the risk of the portfolio having a minimum amount, making the portfolio "efficient." This enabled enlightened portfolio managers to understand how asset classes interact with one another so that the "right" ones could be combined in the "right" amounts to create portfolios with reduced risk. Real Estate, commodities, and international bonds and stock are asset classes that improve diversification since they "zig" while other assets (domestic stock, domestic bonds, etc.) "zag." This seemed to work well until 2008 when nearly every asset class dropped significantly; dramatically illustrating the fatal flaw in Markowitz's theory. Statistics used to model risk do not really work well during widespread and far-reaching events like a worldwide financial crises. Assets that are not normally correlated with one another are correlated in times of crises, and diversification fails. Large stocks fell 37% in 2008 and diversified portfolios dropped 25-30% instead of only 15-20% as expected. The difference is significant, because: If you invest $1.00 and you lose 50% of the investment's value it is now worth $.50, so you need to earn 100% to recover your original investment. A well diversified portfolio that instead loses 25% of its value requires 33% return to recover. This is an important concept: Not losing as much is more important than not winning as much! What if you could devise a portfolio that only captures 40% of the markets downside? Such a great investment may not capture all the market's upside, but let's see what happens if this hypothetical portfolio does manage to go up 70% as much as the market in good times. How would your net worth grow?
 (Based on an original investment of $1,000, Blue line is the S&P 500, Red line is the hypothetical investment) The results are stunning! Using the history of returns for the S&P 500 from 1926 to 2010 your net worth would be nearly 20 times higher than if you were invested solely in the S&P 500. Lessons have been learned from the events of 2008 and smart advisors are responding by increasing their allocations to some of the asset classes and investment strategies that lost less including, hedge fund like strategies (now widely available through mutual funds) like: market neutral, equity long/short, convertible arbitrage, and merger arbitrage. New strategies that capture and profit from increases in market volatility which is nearly always associated with market declines are becoming available and are being used by more sophisticated portfolio managers. Those strategies may incorporate VIX (volatility index) futures or they may trade off weekly S&P 500 volatility vs. daily volatility. They are too complex to cover here but will be the subject for future columns.
So three important points have been made:
- In 2008 asset classes that traditionally have improved portfolio diversification did not help.
- It is critical that portfolio volatility and downside capture be reduced in order to improve performance since not losing is so important.
- Hedge fund like strategies and some new strategies now becoming available may help reduce downside capture in the future and help preserve wealth.
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