Transcript 2011 IMCA Annual Conference

What The Next Few Years
Hold for 401(k) Plans
and Retirement Savings
and What It Means for
Advisors and Their Clients
Marcia S. Wagner, Esq.
THE
WAGNER LAW GROUP
A PROFESSIONAL CORPORATION
Introduction
 Impending Retirement Plan Crisis.
– Social Security.
– Employer-Sponsored Plans.
– Private Savings.
 Current Private Pension System.
– Half of workers have no plan.
– Plans have low saving rates and hidden costs.
– Fewer than half of workers will have adequate retirement income.
 Role of Policymakers.
1.Increasing Savings
2.Protecting Returns
3.Decumulation Planning
4.Tax Reform
Increasing Savings Thru Automatic Features
 Existing tools to overcome employee inertia
• Auto-Enrollment
• Auto-Escalation
 Plan Sponsor and Advisor Initiatives
• Re-Enrollment
• Re-Allocation
Administration Initiatives to Increase Retirement
Savings Through IRAs
 Administration pushing automatic IRAs featuring:
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3% default contribution rate
Choice of traditional pre-tax IRA or after-tax Roth
Multiple alternatives for selecting IRA provider
Government designated default investments
 MyRA Initiative
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Starter program does not require legislative authorization
Contributions to Roth accounts
Permits small investments ($25 / $5)
Low rate of return from Treasury bonds
Maximum $15,000 balance
Summing Up
 Push for auto investments expected to continue.
 Auto IRA legislation unlikely in current form.
 But some reform can be expected in future.
– Retirement needs of aging middle class will force lawmakers
to act.
– $5,000 cap on Auto IRA contributions would not discourage
formation of qualified plans.
– Auto IRAs would help close retirement gap
1.Increasing Savings
2.Protecting Returns
3.Decumulation Planning
4.Tax Reform
Introduction
 Policymakers focusing on protection for
investment returns.
 Regulatory Agenda
– Improving fee transparency.
– Broadening “fiduciary” definition.
Fee Transparency
 Policymakers want plans to get fair price for services.
 Plan Sponsor-Level Disclosure Regs.
– Effective July 1, 2012.
– Providers must disclose direct & indirect (“hidden”) compensation.
 Participant-Level Disclosure Regs.
– Effective August 30, 2012 (for calendar year plans).
– Compare investment options and provide quarterly fee disclosures.
 Disclosures expected to drive down fees.
Proposal to Expand Fiduciary Definition
 ERISA’s Functional Fiduciary Definition.
– Fiduciary status contingent on offering investment advice under 5-factor test
– Advice is fiduciary only if it is a primary basis for plan decisions and given on
regular basis
– Ellis v. Rycenga Homes
 DOL’s Initial Proposal
– Advice is fiduciary if it may be considered for plan decision
– One-time, casual advice may trigger fiduciary status
– Re-proposed definition pending
 Effect of Expanded Definition.
– Fiduciaries may not receive variable fees
– Plan expense accounts – levelize fee arrangements
◦ 2013 DOL opinion approves typical expense account
Summing Up
 Administration has launched initiatives
– Fee disclosures for plan sponsors and participants
– Pushing boundaries of fiduciary status
 Pressure on Fees
– Interest in levelized fee arrangements
– Downward pressure on 401(k) pricing
1.Increasing Savings
2.Protecting Returns
3.Decumulation Planning
4.Tax Reform
Administration’s Goals
 Help retirees take plan distributions without outliving them.
– Motivate retirees to annuitize accounts.
– Retirement paycheck for life.
 Encourage plan sponsors to voluntarily offer annuity options.
– Permit longevity annuities.
– Remove regulatory hurdles.
– Facilitate default annuities.
– Promote education and disclosures.
Removing Regulatory Obstacles to Plan Annuities
 IRS proposal would relax required minimum distribution (RMD) rules for plans
– RMD rules mandate start at age 70 ½ but longevity annuities provide income stream
for later in life
 Proposed Regulations.
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Exception from RMD rules for longevity annuity investments
Investment capped at $100,000 or 25% of account
Must start no later than age 85
 Rollovers to DB Plans - Rev. Rul. 2012-4.
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401(k) accounts may be rolled over and converted to DB plan annuity benefits.
Provides favorable annuity rates for participants
 Relief for DC Plans With Deferred Annuities - Rev. Rul. 2012-3
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401(k) plans typically exempt from onerous death benefit rules
Ruling confirms that 401(k) plans with deferred annuities can still avoid them
Default Annuities
 Should annuity option be default for plan?
 Possible Approach: Amend QDIA Rules
– Permit annuity option to qualify as QDIA.
– Critics argue annuities not appropriate for all.
– Default annuity investments not easily reversed.
 Possible Approach: 2-Year Trial Period
– Retirees receive annuity during trial period (unless opt out).
Education and Disclosures for Participants
 GAO Recommendations
– Update DOL’s “investment education” guidance to cover
decumulation
– But DOL is concerned about conflicts
– Guidance likely to restrict sales pitches
 Lifetime Income Disclosure Act
– Plan to show account balances converted into guaranteed
monthly amount
– Encourages participants to think about retirement paycheck
for life
DOL Proposal for Lifetime Income Disclosures
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Advance Notice of Proposed Rulemaking
 Lifetime income illustration in participant statements .
 Must provide estimated income streams based on
(1) current account and (2) projected account at NRA.
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Safe Harbor for Projected Account
 Assume 7% investment return.
 Assume current contribution level, with 3% increase.
 Use 3% discount rate to convert to current dollars.
Lifetime Income Illustration
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Illustration for 50-Year Old Participant
Account
Balance
Current Account (2014)
$125,000.00
Projected Amount (2029)
$500,000.00
Projected Account (Current Dollars) $321,000.00
● Required Disclosures/Disclaimers
- Explanation of assumptions
- Estimates are not benefit guarantees
Estimated Monthly
Lifetime Payment
$ 700.00
$1,800.00
Summing UP
 Consensus emerging on lifetime income options.
– Proposal for longevity annuities to be finalized in near future.
– Recent IRS annuity rulings are plan-friendly.
– Guidance on decumulation education expected from DOL
 Practical impact on participants would be shown by implementation of
regulations to be proposed regarding lifetime income disclosures
– Debate on use of annuities as QDIA likely to follow
1.Increasing Savings
2.Protecting Returns
3.Decumulation Planning
4.Tax Reform
Tax Cost of Retirement Plans
 Impact of retirement plans on federal deficit
– DC / 401(k)
• $61 billion (2015)
• $414 billion (2015 – 2019)
‒ DB
• $42 billion (2015)
• 235 billion (2015 – 2019)
 Tax reform
 Pension system reform
Tax Reform
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2014 Plan limitations that can be reduced to limit deficit:
– Annual additions from all sources - $52,000
– Elective deferrals - $17,500
– Plan sponsor deduction - 25% participant compensation
– Compensation limit to determine benefits/contributions - $260,000
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Proposed Tax Reform Act of 2014
− Freezes DC limits until 2024
‒ $63.4 billion revenue gain over 10 years
‒ Additional $144 billion from treating half of 401(k) deferrals as Roth
Tax Reform (continued)
 National Commission on Fiscal Responsibility.
• 20/20 Cap: limits contributions to lesser of $20,000 or 20% compensation
• Maximum contribution: $20,000
 Brookings Institution
• Tax all employer and employee contributions
• Contribution limits would not change
• Flat rate refundable tax credit deposited to retirement savings account
Administration Tax Reform Proposals
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Obama FY 2015 proposed $3.2 million cap on aggregate
lifetime contributions
− Cap to vary based on age.
− Double tax if prohibited amount not withdrawn.
Obama proposal limiting tax deductions for plan contributions
• 11.6% tax on employer & employee plan contributions
• High earners only
• Basis adjustment for extra tax
Pension System Reform – Federal Level
USA Retirement Funds
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USA Retirement Funds proposed by Sen. Tom Harkin in January 2014
Harkin “report” in July 2012 proposes new retirement system
- Automatic/universal enrollment required by employers with no plan
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Regular stream of income starting at retirement age
No lump sum withdrawals
Financed by employee payroll contributions & government credits
Privately managed investment by new entities: USA Retirement Funds
Limited employer involvement and no fiduciary responsibility
Unspecified level of required employer contributions.
Employees can increase/decrease contributions or opt out.
Pension System Reform – Federal Level
SAFE Retirement Act
 SAFE Retirement Act - 2013 proposal by Sen. Orrin Hatch
– Starter 401(k) Plans
 Up to $8,000 participant contributions annually
 Reduced administration and no discrimination testing
 Auto deferrals from 3% to 5%
– Government sponsors may adopt SAFE Retirement Plan
 Annual purchase of fixed annuities for participants
 Insurers to be selected by bidding process
 Improve funding and security but pays smaller benefits
– Restores jurisdiction over prohibited transactions to IRS
Pension System Reform:
State-Sponsored Initiatives
 Secure Plan Proposal by National Conference on Public
Employee Retirement Systems
• State sponsored cash balance plans for private-sector
° 6% annual credits
° Minimum 3% interest credits
° Employer fiduciary responsibility
• Participation voluntary but withdrawal liability assessed on
terminating employers
• Seeks to benefit from economies of scale
• Funding shortfall would be state responsibility
Pension System Reform: State-Sponsored
Initiatives (continued)
 California Secure Choice Retirement Savings Program
− Mandatory payroll deduction auto-IRA program
° Auto enrollment at 3% unless employee opts out
° Required for enterprises with 5 or more workers if no current plan
° State chooses investment managers
° Guaranteed rate of return
− Signed by governor but implementation subject to IRS and DOL approval
 Other State Initiatives
− Massachusetts enactment of defined contribution multiple employer plan
for non-profits
− At least 11 other states said to be considering plans for private-sector
employees.
Summing Up
 Significant Transformation of Private Retirement System Possible.
 Tax Reform
• Reducing tax incentives will shrink system
• Lower contributions result at all income levels if tax exclusions cut
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Obama proposal for general limit on benefit from tax exclusions.
°Does not focus directly on 401(k) contributions
° Provides political cover
° Same effect on contributions as direct cutback on excludible amount
Summing Up (continued)
− Proposed Systemic Changes intended to create access for low-wage employees
• Government would replace private employers in system
°Mandated benefits
°Guaranteed benefits and/or investment results
°Creation of new interest group to lobby for expansion of benefits
°Government influence in choosing investment managers or control of
investments could drive many out of the retirement industry.
• State-level programs may cause breakdown in uniformity of pension laws,
effective since enactment of ERISA
− Inflection Point regarding the types of retirement schemes nation wants / needs
• Interesting Times ……
Marcia S. Wagner, Esq.
THE
WAGNER LAW GROUP
A PROFESSIONAL CORPORATION
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
[email protected]
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