Louis Stanasolovich

Monday, 22 July 2002 09:55

Structure strategies

2nd in a 2-part series

As discussed last month, the annual business structure review is the most effective way to continue working toward your goals and get the best possible tax advantages for your business. This month, I’ll look at the last two most common business structures, general partnerships and Limited Liability Companies (LLC).

The main benefit for general partnerships is simplicity. However, general partnerships, which are easily established for any business, may not always be the best choice even though there are tax advantages. Partners do not pay federal taxes at the partnership level. Instead, income and expenses are divided among the partners according to their ownership percentage. Each partner pays taxes on his or her share of the partnership profits (whether distributed or not) based on his or her individual tax rate.

In this respect, general partnerships offer considerable flexibility in allocating economic benefits among partners. The disadvantage with general partnerships concerns liability. The partners in a general partnership are personally liable for any losses the business incurs.

Even worse is the fact that, if a partnership gets in financial trouble or has a liability lawsuit placed against it, one partner who is wealthier than the others can be liable for amounts greater than his ownership percentage of the business. In other words, creditors or plaintiffs will come after the partner with the money.

Limited Liability Companies (LLCs), which are hybrids of corporations and partnerships that attempt to combine the most favorable characteristics of each, share the same tax benefits as general partnerships. However, LLCs protect their members from personal liability for business debts and liability lawsuits. Only the members’ investments are at risk.

Given this clear advantage of liability, protection and favorable taxation, the question is, why don’t more business owners register their businesses as LLCs rather than general partnerships? One answer is the complexity. Each state has different laws concerning the formation of LLCs. Some even allow partners in general partnerships to have limited liability protection if they register as a “partnership having limited liability” or Limited Partnership.

However, LLCs do benefit families with many businesses. Multiple family businesses can consolidate under one LLC, allowing family members to share equitably in both growth and income from all of the assets. Also, any member of an LLC can be involved in management without fear of personal liability. This is appealing for many senior family members in a business.

In addition, LLCs offer certain tax benefits other than those already mentioned. To a limited extent, losses generated from the business can be passed through to the personal returns of the members.

LLCs also offer entrepreneurs who own real estate a way to avoid probate. Since an interest in an LLC is considered personal property, forming a business as an LLC provides a way to “convert” the real property (i.e. real estate) into personal property, which avoids probate laws in the state where the real property lies.

There are, however, some disadvantages to LLCs. In addition to lack of uniformity in state laws, certain nontaxable fringe benefits, such as medical benefits, cafeteria plan benefits, meals, lodging, etc., are considered income for the members because they are not employees. Businesses currently formed as corporations cannot be converted to LLCs without taxable liquidations.

Also, if the owner retains too much control, the income and/or assets could be considered a part of his estate. Louis P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a fee-only Securities and Exchange Commission registered investment advisory firm located in the North Hills that provides asset management and comprehensive financial planning services to individuals and businesses. Reach him at (412) 635-9210. The firm’s Web site is www.legend-financial.com.

Monday, 22 July 2002 09:53

Happiness in the fringes

Here’s the myth: Small businesses can’t afford to offer employee benefits. Here’s the truth: Small businesses can’t afford to not offer employee benefits. Here’s why.

First, business owners today must offer more than a salary to attract the most qualified people. Benefits are ranked as important as salary.

Second, studies have shown that a strong benefits package can increase employee productivity and company growth. A survey of 1,000 employees across the country conducted recently by Aon Consulting of North Carolina revealed that employees who have valued benefits are less likely to miss work or quit, were more satisfied with their jobs and had a higher commitment to their company’s goals.

Third, offering certain benefits can reduce the employer’s payroll taxes as well as the employees’ personal taxes.

The first two employer reasons are self-explanatory. Happy employees stay and work hard. The third reason merits some explanation.

Business owners can avoid payroll taxes on the portion of compensation shifted from salary to fringe benefits. Such benefits include group-term life insurance (up to $50,000), medical insurance, parking, employee discounts, and noncash holiday gifts. Employees who receive these benefits in lieu of salary decrease their taxable income.

Other benefits that can save business owners money include cafeteria plans; dependent care through cafeteria plans; health insurance premiums paid through a Section 125 plan; employer-provided adoption assistance through cafeteria plans; and medical savings accounts.

Through cafeteria plans, employees can defer part of their salary to pay for qualified unreimbursed medical, dependent care and adoption expenses. They can also use it to pay for certain insurance premium contributions before personal taxes are calculated from their paychecks.

Employees don’t pay Social Security taxes on this deferred amount. For business owners, this means paying less in taxes on Social Security matching funds and earning interest on unclaimed contributions employees deposit in the plan.

Unfortunately, many business owners run afoul of the laws. The trick is to avoid some of the most common mistakes when offering benefits. The biggest mistake is leaving employees out of the plan. The general rule of thumb is that, if one employee gets a tax-advantaged benefit, the same benefit must be extended to everyone. The key is to obtain competent advice by securing the services of an employee benefits consulting firm.

Other mistakes business owners make are:

  • Absorbing the entire cost of employee benefits. Employees are allowed to contribute a percentage toward the cost of insuring dependents and, in most cases, will willingly do so.

  • Covering nonemployees. Business owners must be truthful with their insurers if they want to cover employees’ relatives or friends.

  • Sloppy paperwork. Make sure the person enrolling employees and processing paperwork is knowledgeable and not so overworked that details are missed.

  • Not telling employees what their benefits cost. When kept informed, employees are more appreciative of their benefits.

  • Giving unwanted benefits. It’s only a benefit if it is valued.

Business owners should be creative when offering benefits. Employee memberships at a discount store such as Sam’s Club are always appreciated. Or how about a discounted group rate at a local day care facility, which would help employees with young children.

The bottom line for business owners is that strong companies, regardless of size, have qualified people working for them. To attract this caliber of employees and keep them happy and productive, employers must give them what they want.

Louis P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a fee-only Securities and Exchange Commission registered investment advisory firm located in the North Hills that provides asset management and comprehensive financial planning services to individuals and businesses. He can be contacted at (412) 635-9210. The firm’s Web site is located at www.legend-financial.com.

Monday, 22 July 2002 09:52

Cash-balance blues

Defined benefit retirement plans cost employers a sizable amount of money to fund, especially for older employees nearing retirement age. Enter a new hybrid, a plan growing in popularity called a cash-balance plan. It’s designed to save employers significant sums of money, but the cost still may be high.

Cash-balance plans allow employers to set up employee savings accounts at a certain balance and contribute a percentage of their yearly pay, usually 4 percent, plus 5 percent interest. Sounds simple enough, but it doesn’t take long for problems to surface.

First, cash-balance plans may have a serious adverse effect on older employees’ pensions. Their defined benefit pension balance cash values could be cut anywhere from 20 percent to 50 percent. In a traditional defined benefit pension plan, which many larger companies offer, an employee’s benefit increases dramatically as he or she nears retirement, because contribution amounts are generally determined by multiplying the number of years of service with the employee’s highest final average pay.

Consequently, many employees earn half or more of their pension during the last five to 10 years on the job. When these older employees are switched to a cash-balance plan, they receive a starting balance in their account, which could be significantly less than the lump-sum balance in their defined benefit pension plan accounts. They will not earn additional pension benefits until their new cash balance accounts reach what their old balances were in their traditional plans.

Is this legal? Yes, since the employees don’t lose that old balance and can receive it if they quit. They just won’t earn any more toward their pensions until their old balances are achieved. This is known as plateauing. In other words, there isn’t any progress made.

Many companies that have switched over to cash-balance plans have met resistance from older employees. To “soften the blow,” some companies have instituted a grandfather clause allowing older employees who meet certain age and years-of-service requirements to stay in their traditional plans.

Some employers have chosen another option, giving older employees a larger annual pay credit. For instance, a worker in his 20s may receive 2 percent, while a worker in his 50s may receive 8 percent.

In addition to creating poor employee relations, another problem with cash-balance plans is that the IRS has never approved of some aspects of these plans. Employers adopting them therefore could find themselves in trouble with the IRS and be forced to spend more money repairing the problem.

Who benefits from a cash-balance plan? Employers? Perhaps, if the IRS doesn’t find a problem with their plans. Employers can save a significant amount of money on pension funding. How about younger employees? On the surface, that appears to be the case.

Many employees in their 20s and 30s don’t stay in jobs long enough to see a pension benefit. Many younger employees believe that, through a cash-balance plan, they can earn thousands of dollars toward retirement and take the money with them when they start a new job.

The problem is that many cash-balance plans have a five-year vesting period before an employee can receive a full benefit.

Louis P. Stanasolovich, CFP, named one of the best financial advisers in America the last three years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only Securities and Exchange Commission registered investment advisory firm in the North Hills. Reach him at (412) 635-9210. The firm’s Web site is www.legend-financial.com.

Monday, 22 July 2002 09:45

Have you had your annual check-up?

With a new year and new century well under way, it’s time to take a new look at how you’re doing business. Evaluating your business at least once a year is a must.

Looking at your company’s finances is a good place to start. By forecasting revenues and creating a cash-flow projection spreadsheet, you can identify changes or problem areas with your business strategy and generate a more accurate cash-flow projection. This should be done at least annually, if not semi-annually or even quarterly.

If your business is going to need financing, researching options must start early. Many sources locally offer small business financing, ranging from credit lines and loans from banks to equity investments from individual investors. Organizations such as SCORE and the Small Business Administration (SBA) can help you find financing, and SCORE has a workbook, “How to Secure Financing,” which can be obtained by calling (800) 634-0245.

Tracking income and expenses on a weekly basis will help you stay within your budget. Computer accounting programs and certain debit cards, such as a Business Check card, help you organize receipts, reconcile purchases and monitor expenditures. Organization is a necessity, not a luxury, and that includes organization of financial documents and statements.

Make sure your financial statements conform to Generally Accepted Accounting Principals (GAAP) and that all asset and liability accounts are fairly stated. This will help avoid unnecessary — and costly — accounting fees later.

Once you review your finances, re-evaluate your actions and decisions in conjunction with the business plan. This will help you understand if you are focused on short-term needs or long-term goals, reacquaint you with your business objectives and confirm where the business should be in three years.

Your time and energy should be focused on running the business. Other duties, such as accounting, payroll, human resources, manufacturing, information systems and marketing can be outsourced to save time and money. In addition, you should have a solid understanding of how much you want to grow. Too much growth too quickly is not always a good thing.

When evaluating your business, plan for the upcoming tax season. Look for tax deductions. A retirement plan, for instance, makes sense from a tax standpoint and will be popular with employees. Establish a pre-tax medical and dependent-care reimbursement plan for your employees that won’t cost lot to administer. These plans also will save you on payroll taxes.

Lastly, good employees are the key to business success, and getting them involved in strategic planning is an excellent way to keep your business moving forward. Have your employees draft a list of things they think the business will need to reach the next milestone, including resources, benefits, changes in operating procedures, and equipment.

Work with your staff to set financial and nonfinancial goals and objectives for the year. At the same time, re-evaluate your compensation packages to make sure they are still competitive.

And take the time to teach your employees to think “profitability.” That’s a lesson which will ultimately add to your company’s bottom line.

Louis P. Stanasolovich, named one of the best financial advisers in America for the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm located in the North Hills. Reach him at (412) 635-9210. The firm’s Web site is located at www.legend-financial.com.

Monday, 22 July 2002 09:42

When one owner dies

Business owners who have done their homework know the importance of buy-sell agreements.

When a buy-sell agreement is properly established, it protects the partners, owners and employees by ensuring the continuation of the business when one owner leaves or is unable to continue with the business. In short, buy-sell agreements detail how the departing owner’s shares will be bought out.

The problem with many buy-sell agreements, however, is that templates often are used to set up the paperwork, with little thought given to how the agreement can best serve that particular business. Here are some common mistakes to avoid in buy-sell agreements:

1. Failure to fund — In situations in which the business has two owners and each agrees to buy out the other’s part, problems occur when they don’t decide beforehand where the money will come from to purchase the other’s half. Few owners have the cash available to buy the other’s shares or interest, and banks may be reluctant to lend the remaining owner money at a time when the business is transitioning ownership.

One solution is to purchase a life insurance policy and/or disability buy-out policy on each partner or shareholder in the amount needed to buy out the other owner in the event of death or disability. But keep in mind that such policies create severe tax consequences if they’re not structured properly.

2. Deciding the purchase price — When a business is starting, this is an easy decision to make once the owners agree upon the value of the business. Problems arise, when a business is a few years old, in determining an acceptable valuation relative to both the Internal Revenue Service and the owner who is being bought out.

Serious disputes could arise if the business is not revalued annually. What if one owner leaves and takes customers with him? This could hurt the business, and perhaps the departing owner should receive a smaller price for his percentage of ownership.

One way to address the problem is to use a formula to value the business. However, the formula must be realistic, such as a multiple of one times the annual revenue or five times the average annual net profit of the last three years.

3. Owner equality — Sometimes a majority owner may not want owners with a smaller share buy him out. He may want a family member or key employee to have majority ownership. A standard buy-sell agreement can prevent this from happening. Also, two buy-sell agreements can be created to suit the needs of both the majority shareholder and owners with a smaller share.

4. Missing triggers — Almost all buy-sell agreements indicate that, in the event of the death or retirement of one owner, the buy-sell option is triggered. But what happens in the case of a disability, divorce or personal bankruptcy? In a divorce, the stock could be awarded to a spouse or, in the event of bankruptcy, to a creditor — which may not be desirable for the remaining owners. Another triggering event that should be considered is the firing of an owner with a smaller percentage ownership.

5. Refusing the right of first refusal — The right of first refusal states that the departing owner cannot sell his interest without first offering it to the remaining owners. This is a common provision, but if it’s not included in the agreement, the remaining owners may not have the opportunity to purchase the other’s share, and it may be sold to a new owner who may not have the same viewpoints as the remaining owners.

By tailoring an agreement to meet the particular needs of a business, these and other common buy-sell agreement problems can be anticipated and avoided.

Louis P. Stanasolovich, named one of the best financial advisers in America the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm in the North Hills of Pittsburgh. Reach him at (412) 635-9210. The firm’s Web site is www.legend-financial.com.

Monday, 22 July 2002 09:41

Dividing the dollar

You can use life insurance in many ways as a part of business planning, but any method will prove pointless without sufficient funding to pay the premiums.

Here’s a way to avoid that dilemma — and enjoy certain tax benefits. It’s called a split-dollar plan.

A split-dollar plan is an agreement that allows for payment of the insurance premiums, cash values and death benefits to be divided between two parties, one with an insurance need and the other with adequate funding to pay for it. Generally, a corporation is named as the primary funding party and a corporate employee is named as the insured.

A split-dollar plan also can involve family members, trustees or any two entities in a situation in which one has the money for premium payments and the other has an insurance need.

Two types

You can set up a split-dollar plan in two ways: collateral assignment or endorsement. The collateral assignment plan names the employee as the applicant and policy owner. The employer, who makes the premium payments, receives ownership interest in the policy as collateral.

The endorsement plan names the employer as the policy owner and gives the employer the rights to the portion of the policy’s cash value and death benefits that would be equal to the premiums paid. The employer would then endorse an ownership interest in the death benefit and cash value to the employee’s beneficiary.

This method is used by corporations that want to retain the utmost control over the policy or for policies that would eventually be corporately owned.

The advantages

Split-dollar plans can be used as fringe benefits to attract and retain key employees. Also, employers can choose to whom they offer split-dollar insurance. Besides receiving life insurance at an affordable rate, key employees also receive certain tax advantages, since the policy values grow tax deferred, the death benefits are generally received income tax free, and the employees’ taxes are based only on the economic benefit received annually from the plan, which is a fraction of the total premium payments.

Consider these other benefits:

  • Split-dollar plans can be used in estate planning when the estate’s value exceeds $675,000 (for 2000), which would make it large enough to incur federal estate taxes. In this situation, a split-dollar insurance plan can be used to reduce the out-of-pocket costs of the insured.

  • These plans can be used in a business continuation plan for a family-owned business because they enable each stockholder to purchase enough insurance on the other stockholder(s) at more affordable rates.

  • Split-dollar plans can be used to provide more insurance to key executives, who are limited by anti-discrimination rules on the amount of group term insurance they can have.

The bottom line on split dollar plans is that they offer a unique and cost-effective way for employers to provide low-cost insurance protection to shareholders or key employees while enjoying certain tax advantages during the life of the policy. Louis P. Stanasolovich, named as one of the best financial advisors in America the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm located in the North Hills of Pittsburgh. Legend provides asset management and comprehensive financial planning services to individuals and businesses. Reach him at (412) 635-9210. The firm’s Web address is www.legend-financial.com.

Monday, 22 July 2002 09:40

So you want to buy a franchise ...

Franchise opportunities are often an excellent option for would-be entrepreneurs who want to enter the marketplace with a proven business concept and marketing support.

But before buying into a franchise, it's important to carefully assess the opportunity.

The first step is to understand the franchiser's motivation. Franchisers look for opportunities to expand their business without committing new capital or taking on additional liability. They set the terms of the agreement and the amount of royalties they receive from the franchisee. Franchisers' long-term success is based on royalty growth; therefore, they are looking for people willing to dedicate the time and money needed to make their business a success.

The second step is knowing what to look for. Before buying a franchise, know the answers to these questions:

1. Does anything distinguish the franchise from the rest of the pack?

2. Is its product, marketing or name unique enough to make it worth the franchise fee?

3. Does the franchiser continually come up with new programs and products that add value to the system and increase its ongoing franchise royalty?

4. Is the industry in a growth cycle?

5. Is the business a passing fad?

If the franchise opportunity has passed the test so far, investigate deeper into the franchiser's business and financial status. Look carefully at the disclosure statements. All states accept and some require the Uniform Franchise Offering Circular (UFOC), which offers detailed information about a franchiser's financial and business practices. This document is essentially a prospectus for the franchise.

The disclosure statements should include information on the management team, including resumes; recent financial statements; a list of existing franchisees; a franchise agreement; training and support systems for franchisees; restrictions on equipment and supply sources; and other important items like the lease term, required trademark usage and franchiser options on default, and the expiration or termination of the franchise agreement.

Once the disclosure statement is reviewed carefully, franchisees should take a closer look at the franchise agreement, particularly in the following areas:

Franchisee obligations: The franchisee must understand what operating standards he or she is bound to, as well as other business procedures, like accounting systems.

Franchiser obligations: Is the franchiser obligated to help the franchisee find a site, design and construct a facility, supply financing or provide ongoing consultations during the term of agreement? And the potential franchisee should ask what fees are charged for these services.

Territory and trademarks: Is the allotted territory large enough to grow the business? How is the trademark protected legally, and are there federal or state registrations?

Agreement renewal and termination: Normal franchise agreements last five to 20 years. It's important for franchisees to ask how an agreement can be terminated and what the penalties are, if any.

Finally, the last -- and possibly the most important -- question any franchisee must know the answer to before signing the agreement is, "Is the franchise right for me?" Some soul-searching needs to be done on individual skills and abilities, including the abundance, or lack of, the key ingredient needed for success, entrepreneurial stamina.

B>Louis P. Stanasolovich, named as one of the best financial advisors in America the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm located in the North Hills. Reach him at (412) 635-9210. The firm's Web site is www.legend-financial.com.

Monday, 22 July 2002 09:33

Business casualty 101

Every business, whether the owner owns the facility or not, should have comprehensive property, casualty and liability insurance.

However, before you contact an insurance agent or purchase a policy, you need to understand basic coverage terminology and what can be included on a policy. Here are business coverage examples that should be discussed with the agent during the initial meeting.

Extra-expense coverage

With this coverage, your business is reimbursed if you need temporary headquarters or have to rent equipment while the main office is undergoing reconstruction or renovation. Many business policies only offer $1,000 of extra-expense coverage. Still, this is a must if a your business's profit margins are thin and you can't continue to operate. Many businesses with inadequate coverage end up filing bankruptcy.

Valuable records coverage

If you suffer a fire or a flood, many things would be destroyed, including important paperwork or computer software. But if your business has valuable records coverage, the insurance company pays the cost of reconstructing those records. Read the contract carefully, as valuable records coverage may only cover paper records or computer software.

While this coverage is valuable, proper planning to avoid the problem is even better. Scanning technology is cheap, and important papers can be scanned into the computer system, which should be backed up daily. Back-ups should be stored off site or in a fireproof/waterproof safe.

Improvements and betterments coverage

This reimburses you for a portion of the cost of improvements you have made to a leased office.

Waiver-of-subrogation coverage

This eliminates the fear of lawsuits for the landlord and the tenant. A waiver of subrogation is an agreement between the landlord and the tenant that says that, regardless of fault, the insurance companies for both will pay their own claims and not sue the responsible party. This provision is standard in most policies but should include the agreement between the landlord and tenant to not sue over damages.

Use and occupancy coverage

There are two kinds of use and occupancy insurance coverage. The first requires the insurance company to reimburse your business for actual loss of profits. The second requires it to pay a certain amount for each day, week, or month that your business is down, regardless of whether you have lost profits.

Sometimes comprehensive property, casualty, and liability insurance can be included on one combined policy purchased from one carrier. Before deciding on a policy, however, discuss in detail with your agent each feature, the risks, the cost of higher coverage and the savings of higher deductibles.

As with any other documentation regarding your business or its operations, re-examine your policies every three years, requesting quotes from different agents. Louis P. Stanasolovich, named one of the best financial advisers in America the last four years by Worth magazine, is founder, president and CEO of Legend Financial Advisors Inc., a fee-only financial advisory firm located in the North Hills. Reach him at (412) 635-9210. The firm's Web address is www.legend-financial.com.

Monday, 08 December 2003 10:30

A tale of two hedges

The hottest topic in investing today is undoubtedly hedge funds. Exciting and enigmatic, hedge funds have become the buzz of nearly every investment symposium or trade show the world over.

But why all the fuss? Is it because of sub-par equity returns in the past three years? Or the purportedly superior risk/reward profiles boasted by hedge funds? Or perhaps their limited access?

Whatever the cause, hedge funds have earned permanent placement in the financial vocabulary of most investors. The world of investments is often surrounded by a stock-of-the-week mentality, a short-term mindset. Yet hedge funds are not just a fad. In fact, a diversified group of hedge strategies has historically produced equity-like returns but with less market risk.

While the benefits of hedge strategies may no longer be in question, investors still have difficulty implementing them in their portfolios.

Typically, a hedge fund in a limited partnership format requires investors to be accredited. This means the individual investor must have $1 million net worth or earn an annual salary of more than $200,000.

This is not the profile of the average investor, so how does the average investor use hedge tactics in his or her portfolio? Perhaps more important, if investors find a means of doing so, are they giving up performance to the accredited elite?

I contend that the most suitable alternative to limited partnership hedge funds is a mutual fund, but not your run-of-the-mill mutual fund. Just like their hedge fund limited partnership cousins, these funds employ strategies such as global macro (a hedge fund name for tactical asset allocation) market neutral, long/short equity, announced merger arbitrage and convertible arbitrage, to name a few.

Many of the most talented portfolio managers have begun a migration toward the hedge funds (limited partnership format) arena. This will put a premium on talented mutual fund mangers who can implement these hedge type strategies. However, they do exist and, in fact, many of these same managers run both types of funds.

By and large, nonaccredited investors are better off with these mutual hedge funds in their portfolio than without. I believe that investors can use these hedge-like mutual funds to reduce their portfolio risk and increase their long-term performance. Louis P. Stanasolovich, is president of Legend Financial Advisors Inc. Reach him at (412) 635-9210 or www.legend-financial.com.

Friday, 20 December 2002 09:58

Who's a fiduciary?

Bad securities markets leave retirement plan participants questioning the people in charge. Lawsuits are filed, and employers who are fiduciaries are targets.

Fiduciaries come in two forms: a person who controls the management of a plan or its assets, and a firm that is paid to give investment advice.

Individuals can be fiduciaries for limited purposes and perform other, nonfiduciary duties regarding the same retirement plan. Those who simply follow directions or guidelines are not fiduciaries.

Fiduciaries must be named in the plan's documents so that participants or other interested parties, like the IRS, know who is responsible. An employer can designate itself as a fiduciary, but plan documents should specify a standing committee or the job title of a person who will carry out the fiduciary responsibilities.

Generally, anyone who provides investment advice to employers or plan participants or who selects securities for a fee is considered a fiduciary. Employers that sponsor plans are fiduciaries because they can fire service providers and select investment managers and/or consultants. Administrators who make plan management decisions are also fiduciaries.

When hiring a fiduciary, consider:

* Qualifications with respect to education, credentials, licensing and registrations, and relevant experience

* Compensation issues

* Services

* Frequency of monitoring and reporting performance

* Bonding and professional liability insurance coverage

* The scope of organizational resources

Businesses have the responsibility to review a fiduciary's performance at least annually. Fiduciary duties include:

* Acting in the exclusive interest of plan participants and controlling expenses

* Making decisions that a prudent person familiar with retirement plans would

* Diversifying investments

* Preventing co-fiduciaries from committing breaches, and rectifying the actions of others

* Holding plan assets within U.S. jurisdiction

* Bonding in the amount of 10 percent of funds handled, up to a $500,000 maximum

* Acting according to the terms of plan documents unless the documents are in conflict with ERISA.

* Avoiding prohibited transactions

ERISA permits civil actions to be brought by a participant, beneficiary or other fiduciary against a fiduciary for breach of duty. Fiduciaries are personally liable for any losses to the plan resulting from breach of duty, even if they are unaware of a violation.

Fiduciaries can also be held liable for failing to act in the plan's best interest or failing to take reasonable steps to correct another fiduciary's breach of duty.

Fiduciaries have a great deal of responsibilities, and penalties are severe. Employers must act responsibly when dealing with any retirement plan. Louis P. Stanasolovich, CFP, is CEO and president of Legend Financial Advisors Inc., a fee-only registered investment advisory firm. He can be reached at (412) 625-9210 or at www.legend-financial.com.

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