Compliance February 29, 2008

Insurance Providers Charged in 412(i) Scheme

A new lawsuit has accused a group of insurance companies, consultants, and lawyers of conspiring to sell illegal tax shelters to employers for 412(i) plans by misrepresenting the potential risks of the pension funding arrangements.
Reported by

The suit, filed by the Dallas law firm of Diamond McCarthy in the U.S. District Court for the Northern District of Texas, lists 17 plaintiffs and eight insurance company and consultant defendants. The defendants are charged with fraud and conspiracy and with misrepresenting to employers that the schemes would be found to be proper to fund a qualified defined benefit plan.

“Defendants knew or should have known that this arrangement would likely be deemed an abusive tax shelter by the IRS, but Defendants were financially incentivized by the prospect of reaping enormous premiums and commissions from the sale of these Insurance Policies,” the suit charges.

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The suit claims the arrangements have left the plaintiff employers the target of Internal Revenue Service (IRS) tax audits (or are likely to), which the suit claims has caused them “to incur substantial audit-related fees and expenses. In addition, these IRS audits have resulted (or will likely result) in significant tax liability for Plaintiffs, including disallowed deductions for the enormous premiums paid to Defendants, penalties, and interest.”

Insurance company defendants include:

  • Indianapolis Life Insurance Company,
  • Hartford Life and Annuity Insurance Company,
  • Pacific Life Insurance Company, and
  • American General Life Insurance Company.

Pension marking/consultant defendants include:

  • Economic Concepts, Inc.,
  • ECI Pension Services, LLC, and
  • Kenneth R. Hartstein, CEO of Economic Concepts and ECI.

St. Louis law firm Bryan Cave and partner Richard C. Smith are named in the suit as “related parties.”

The suit, which seeks class action status, asks for compensatory and punitive damages. A copy is available here.

The Treasury Department 412(i) regulations are available here.

Data & Research February 29, 2008

Another Survey Confirms Workers’ Lack of Retirement Confidence

Working Americans’ confidence in their ability to retire comfortably declined significantly in the past year, according to the Ninth Annual Transamerica Retirement Survey.
Reported by

According to a press release on the study results, only 59% of the full-time workers surveyed claim to be confident in a comfortable retirement, down from 75% a year ago. Sixty percent say they believe they could work until age 65 and still not have enough saved for retirement, up from 48%.

Less than half (48%) of the survey respondents agree they are building a large enough retirement nest egg, down from nearly two-thirds (65%) who said the same in the previous survey.

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Growing debt seems to be a factor in the declining confidence. The number of workers citing “paying off debt” as their greatest financial priority has increased to 32%, up from 18%, the release said. Workers whose top priority is “just getting by – covering basic living expenses’ has remained relatively the same at 17%, compared to 16% last year.

When posed with the question of what one factor was preventing them from saving more for retirement, “already stretched – need to cover basic living expenses,’ remained the most frequent response; however, the number who cited “too much debt – need to pay it off’ jumped to 25% from 16% last year. Seventy percent of this year’s respondents cited “excessive credit card debt’ – a significant jump from 48% last year.

Workers not only seem to be putting away less for their retirements, but the survey also found a noticeable jump in employees taking out a loan from their retirement plans. Nearly one in five (18%) said they took out a loan in 2007, up from only 11% in 2006. Nearly half (49%) of those who took out a loan said it was for paying off debt, compared to 27% in 2006.

On a positive note, Transamerica found that 401(k) plan participation rates are high, contribution rates are holding steady, and very few respondents have decreased or stopped their contributions. Additionally, 27% of this year’s respondents indicated that saving for retirement is their top priority (up from 23% last year).

This 9th Annual Transamerica Retirement Survey was conducted online within the United States by Harris Interactive on behalf of Transamerica Center for Retirement Studies between October 11 and November 21, 2007, among 2,011 full-time workers using the Harris online panel.

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