Retirement reform a likely target for Obama's second term
Source: https://www.benefitspro.com
By Andy Stonehouse
If you think that the retirement industry suddenly fell off the radar with the end of the first round of fiscal cliff fixes, think again - substantial reform, courtesy of the second-term Obama administration, is likely on the way.
That's the belief of Marcia Wagner, a prominent ERISA attorney serving as keynote at this year's sixth annual Profit-Driven Strategies in the DCIO Market, organized by Financial Research Associates - held this week in Wagner's base of operations, Boston.
Wagner contends that the allure of taxes deferred by America's retirement plans continues to be too strong to politicians - some $70 billion a year, and as much as $361 million over a four-year period - meaning that tangible reform efforts are certainly a possibility.
And with today's news of the retirement of Sen. Tom Harkin, chairman of the Senate pensions and education committee, Wagner says she suspects a harder push on his part to gain support for his own proposal creating a nationalized retirement system, an Americanized rendition of plans found in Western European nations.
Wagner says that in an era where "the power of inertia" helps guide an otherwise shell-shocked and financially confused participant public, the most likely change will probably be an Obama-led move to mandatory, automatic IRAs for most American workers.
Under that slightly revolutionary plan, companies with at least 10 employees would be required to establish a deferral rate of 3 percent into IRA plans (a post-tax Roth IRA would be the default but pre-tax traditional IRAs would be available as a second choice). Workers as young as 18 would be included in the plan.
"People tend to associate this idea with a left-wing, Democratic policy, but it's actually a joint product from think tanks that goes back to John McCain's run for president," Wagner noted.
She also concedes that the changes would not only be burdensome and present a challenge to the private sector, but could also be deemed unconstitutional - as well as a further intrusion by government, in the eyes of many Americans.
In the meantime, as U.S. workers continue to look for ways to more simply and safely invest for their retirement, Wagner says that a recent spate of class-action suits have also opened up the floodgates for the possibility of participants litigating their way into other retirement world changes - requiring plan sponsors to be especially cautious when considering how to protect and grow their investments.
Plan sponsors, she admits, are caught between a rock and a hard place: they want to render useful advice to participants, but their advisors who receive variable fees also want to avoid being caught up in prohibited transactions. A move to computerized planning models, she suggests, could offer a slight level of fiduciary safety.
Wagner says the industry also needs to begin to deal with the growing requirements for decumulation planning, with changes including the use of deferred annuities, better methods of rollover to DB plans and even some relief of RMD rules as likely topics in the coming years.
Tax the rich – and limit retirement contributions? It doesn’t add up
Source: https://eba.benefitnews.com
By: Aaron Friedman
Tax the rich! Raise their rates! Limit their deductions! That seems to be the populist mantra. It’s perpetuated in the press, and there’s some indication that the general public seems to support the idea. Now middle class workers with higher than average incomes seem to be caught up in discussions defining those that are “rich.”
As this applies to tax-exempt organizations, we’re talking about hospital administrators, educators, executive directors of local community and other charitable organizations – people who generally earn a better than average income, yet by no stretch of the imagination do their incomes compare to Warren Buffett’s. And when it comes to the impact on their employers’ retirement plans, shouldn’t the tax structure support retirement readiness for those who have dedicated their careers to giving back to their communities?
For example, current conventional belief supports that people should be saving 11-15% of their pay, including matching contributions, every year throughout their working careers in order to save enough to be retirement ready. Assuming a 3% match, and therefore an average of a 12% annual savings need, anyone earning less than approximately $146,000 annually should be fine. (12% of $146,000 is approximately the $17,500 annual limit.)
However, what about the person making $250,000 per year? Contributing a maximum of $17,500 only equates to 7% of pay. When the match is included it’s still short of the target necessary for retirement readiness — yet as the numbers show, these limitations currently in place put these people at a disadvantage for retirement savings. In addition, one of the alternatives under consideration is limiting qualified plan contributions even further.
Fortunately, there is something that can be done. Private (non-governmental) tax-exempt organizations can maintain a deferred compensation plan under section 457 of the internal revenue code. These 457 plans allow for additional benefits for a select group of management or highly compensated individuals, over and above the limitations in their 403(b) or 401(k) plan.
457 plans are an excellent tool for tax-exempt organizations to be able to recruit, retain, reward and retire key personnel. In other words, they help meet the goals of the organization (which in turn, serves their communities) while empowering key employees to meet their financial goals.
Last summer, Sen. Tom Harkin released a report called “The Retirement Crisis and a Plan to Solve It.” One premise of the report is that there is inadequate savings for Baby Boomers and Gen Xers to pay for basic expenses in retirement. The report footnotes studies that show this ”retirement income gap” is between $4.3 and $6.6 trillion, but as we see above, there is already pressure in regular tax rules that make it difficult for higher-than-average income people to achieve retirement readiness.
As Congress continues the tax debate, it’s important that we consider what’s good for the long term, and helping all plan participants achieve retirement readiness should be of paramount importance. Tax reform and retirement policy should not be at odds.
Senior Worries
A new report by the Employee Benefit Research Institute (EBRI) finds that a retired couple aged 65 might need $387,000 to cover medical expenses for the remainder of their lives. With Medicare covering only 59 percent of health care costs for seniors, retirees should expect to pay an even larger share in the future because of looming Medicare cutbacks and reductions to employer-sponsored retiree benefits, the EBRI report said.
What do cars and retirement plans have in common?
I think it’s a safe bet to say we’ve all paid a lot more attention to retirement plan fees in the wake of the new Department of Labor disclosure requirements. This is true for 401(k)/403(b) plans and beyond. Fortunately (or unfortunately) we can’t avoid the topic!
It’s likely no one pays more attention than the plan fiduciary. After all it’s their job to work with the service provider and financial professional to make sure the fees paid by the plan are “reasonable.” But what exactly does “reasonable” mean?
While vague terms like this can seem to add to a plan fiduciary’s challenge, it’s actually pretty simple to understand. “Reasonable” doesn’t mean as low as possible. “Reasonable” means fees should be based on the services received in return.
To help gauge this, consider the services needed to help meet plan goals and objectives. Services for 401(k)/403(b) plans range from simple to highly complex. Simple, or low touch service from a service provider, should generally correlate with lower fees. More complex arrangements probably come with higher fees. But fees are just one part of the equation, and low cost isn’t always the best choice.
So … what does all this have to do with cars?
Start by thinking about what services may be appropriate to receive for a given fee. For comparison purposes, it’s actually a lot like buying a new car. Are you content with an economy model knowing it has the basic functions? Or, is it important to you to have all the conveniences available on the market and you’ll pay a premium to get them?
The financial professional can help determine which model best meets the needs of the plan, the plan sponsor and their participants:
1. The economy (low touch)
You’ve got everything you need to keep an annuity or mutual fund account running, but few bells and whistles. Typically includes:
- Processing plan contributions, transfers and distributions
- Generating automated reporting to the plan sponsor, including Form 5500 preparation
- Meeting with the plan sponsor to conduct a periodic review, and providing additional phone support to answer administrative questions
- Providing cookie cutter participant communications aimed toward saving and distribution, with additional support often offered through an 800 number
2. The mid-sized sedan (moderate touch)
A step up from the economy, your mid-sized sedan offers some conveniences generally for a little bit more money.
Typically includes everything the economy does, plus:
- Additional personalized plan sponsor meetings and support tailored to the needs of the plan sponsor
- More extensive participant education resources, including help with planning (but no individualized approach)
- Phone support available to help with questions beyond administrative and processing
3. The luxury model (high touch)
This model comes with all the bells and whistles, generally at the highest price.
Typically includes everything listed above, plus:
- Detailed plan design consulting tailored to the needs of the plan sponsor and participants
- Detailed plan analysis, including plan utilization reports and progress reports to help ensure objectives are being met.
- Individualized participant support with a focus on becoming more “retirement ready”
- More extensive administrative support, including audit preparation
Making sense of it all
It’s important that the plan fiduciary and financial professional work together to determine which model best helps meet the plan needs, whether the model is functioning to their satisfaction (e.g., are the services being provided competently?), and if the fees are reasonable in light of the model and functionality.
The car model analogy provides a simple framework to help start that conversation.
In addition, this checklist can help serve as a guide for how to establish a documented monitoring process to fit the specific needs of a plan.
Older Americans eye safer investment goals
Source: ebn.benefitnews.com
By: Margarida Correia
Americans 55 and older have taken the 2008 financial crisis as “wake-up call” and are looking for less risky investment strategies. In a study released by AIG Life and Retirement last week, the 55-and-older set said they are far more likely to favor “financial peace of mind” over the pursuit of potentially higher but riskier returns.
“Americans are rightfully concerned about retirement and more careful in their investment strategies,” says Jay Wintrob, president and CEO of AIG Life and Retirement.
More than half of the 3,426 Americans surveyed (54%) were worried about their personal financial situation, saying they felt less financially secure than they did a year ago. The majority (61%) said their top financial priority was saving enough to have peace of mind. Only 14% said their top priority was accumulating as much wealth as possible.
Americans in this age group plan to be decidedly more cautious in their response to the recent economic and financial market uncertainty, according to the survey. Nearly one-third (32%) said they plan to look for ways to protect existing assets. Very few (4%) said they plan to invest more aggressively to make up for lost time.
“In a new era of flux and uncertainty, Americans are rebounding from a difficult period and showing their resilience by turning toward greater expense control and more responsible retirement planning,” says Ken Dychtwald, CEO of Age Wave, a firm that studies population aging.
The survey was conducted online by Harris Interactive on behalf of AIG Life and Retirement and Age Wave.
3(21) Fiduciaries More Popular Among Plan Sponsors
By: Paula Aven Gladych
Source: BenefitsPro.com
Plan sponsors are increasingly looking for investment advisors who can shoulder some of the fiduciary burden related to offering employee retirement plans. More frequently they are turning to companies that offer fiduciary coverage under section 3(21)(A) of the Employee Retirement Income Security Act.
“There’s definitely an uptick in having an independent entity sign off as a fiduciary along with the plan sponsor,” said Chris Reagan, managing director and practice leader for Mesirow Financial’s Retirement Plan Advisory Group. The number of plan sponsors interested in such an advisor has increased as the number of class action lawsuits filed by plan participants against their retirement plans has risen, he added.
In February 2008, the U.S. Supreme Court ruled in LaRue v. De Wolff, Boberg & Associates, Inc. that plan participants may take action against plan sponsors. Many lawsuits followed, which has scared many advisors away from becoming fiduciaries, he said.
“If you are a plan sponsor and a fiduciary to the plan, you have a duty to act in the best interest of your participants,” Reagan said. “You need to be a prudent expert. If you are not, you need to go out and find that expertise. In today’s environment, a 3(21) investment fiduciary is another expert that a plan sponsor can lay off or share some responsibility and liability with.”
Under the Employee Retirement and Investment Security Act, section 3(21)(A) states that a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or he has any discretionary authority or discretionary responsibility in the administration of such plan.
“Not everyone in the marketplace will serve as a fiduciary. Some only act as a broker and won’t sign on as a fiduciary,” Reagan said. Most plan sponsors prefer 3(21) fiduciaries over 3(38) fiduciaries, he said. The difference between the two is that a 3(38) investment advisor “has discretion so they can act without really informing the plan sponsor. The plan sponsor has charged them with the duty to oversee the plan, whereas a 3(21) does not have discretion. They make recommendations but refer to the committee for final decisions,” he said.
Mesirow Financial acts as a 3(21) fiduciary for plan sponsors. “As a registered investment advisor and a fiduciary, we need to act in the best interest of a plan and its participants. Typically, we negotiate a fee upfront with our clients. We don’t work on a commission basis. We are not paid on product. It doesn’t matter to us who chooses what. It is all the same to us. What provider they are with, doesn’t matter. As long as we are working for the plan sponsor we are acting in the best interest of the plan,” Reagan said.
Transamerica Retirement Services announced in late October that it was partnering with the Investment Strategies group at Mesirow Financial to offer a new ERISA Section 3(21) fiduciary service to help retirement plan advisors and sponsors mitigate investment fiduciary risk.
As part of this service, Mesirow Financial is providing plan-level investment advice related to the selection and monitoring of the plan’s investment lineup. The company will act as an investment fiduciary to the plan along with the plan sponsor, who maintains ultimate control over the plan’s investment menu.
“We offered it both at the request of our plan sponsor clients and the schematic and trend in the industry to have somebody other than a plan sponsor to act as a fiduciary alongside plan sponsors,” said Jason Crane, senior vice president and national sales director for Transamerica Retirement Services. “Many of our distribution partners, our broker/dealer partners, allow their brokers to act in a fiduciary capacity. Many of our historic partners have chosen not to allow their advisors to act in a fiduciary capacity. In this instance, it acts as protection for our plan sponsors.”
Until the U.S. Department of Labor re-proposes its definition of “fiduciary” in 2012, many advisors are taking a wait-and-see attitude, Crane said. The partnership with Mesirow Financial is a “great offering for our clients who will not work in that capacity. [Mesirow] will review our portfolios and distill them down to an elite list. Those funds are scrubbed through Mesirow’s due diligence process.”
He added that the nice thing about the 3(21) service is that “Mesirow will defend any and all claims within its fiduciary duty.”
Transamerica’s financial advisors who have chosen not to act in a fiduciary capacity will remain “key contacts to our clients. They can help clients to mitigate their fiduciary risk without taking on a stated fiduciary capacity themselves. Our financial advisors can recommend a fund lineup using Mesirow’s elite list or they can suggest that a plan sponsor adopt one of three prefabricated portfolios constructed by Mesirow Financial based on the plan’s demographics,” Crane said. As long as a portfolio is constructed of Mesirow’s elite funds, the plan sponsor will get that additional fiduciary mitigation.
A July 2011 report by Diversified Investment Advisors predicted that by 2015, “advisors will no longer be in a position to receive compensation unless they assume ERISA Section 3(21) fiduciary responsibilities. This differs from the current regulatory framework, which allows plan sponsors to choose from other models, including broker/dealer, consultant and advisor models.”
The report, “Prescience 2015: Expert Opinions on the Future of Retirement Plans,” stated that the “need for ongoing holistic service from a third party is leading many plan sponsors to opt for a professional retirement plan advisor that services plans on a fee or retainer basis.”
Joe Masterson, Diversified senior vice president, said in a statement: “The emergence and organization of professional retirement plan advisors will have a profound impact on our business over the next five years. These professionals are dedicated to the retirement plans business, and therefore are well-suited to understanding plan compliance, designing appropriate fund arrays, positively impacting plan design and helping participants achieve funded retirements.”
David Wray, president of the Plan Sponsor Council of America, said that new rules regarding who is and isn’t a fiduciary will “clarify that the people helping shoulder the burden are actually doing it.” Most plan sponsors believe they have been getting that level of commitment from their advisors, he said. “Some plan sponsors would like to hire someone and actually have them make investment decisions for them and some want them to advise them on helping them make the decisions, but in both cases, the person helping the plan sponsor should be a fiduciary.”
Wray added that, “it’s best to have an advisor have their priority be the benefit of the participants rather than the interest of their employer.”
Younger workers fear rising health care costs
By Donald Jay Korn
Source: eba.benefitnews.com
Workers in Generations X, Y and beyond may be decades from retirement but they already have multiple concerns about their future finances.
In a Harris Interactive online survey for T. Rowe Price, more than half of respondents listed seven different retirement worries:
1. Health care costs (76%).
2. Rising taxes (67%).
3. Viability of Social Security (63%).
4. Inflation (61%).
5. Long-term care (58%).
6. Outliving their savings (52%).
7. Housing values (52%).
“Investors are concerned about rising health care costs, and they should be,” says Stuart Ritter, senior financial planner with T. Rowe Price. “According to the Employee Benefits Research Institute, health care costs are the second-biggest expense for those aged 65 and older, behind housing, and it’s the only spending category that steadily increases with age.”
To raise the necessary cash, working longer may or may not be an option, but saving and investing more is often indicated. “One of the perennial lessons younger investors can learn from current retirees is to save at least 15% of their earnings and begin as early as possible,” Ritter stated. “The ones who do are the ones more likely to enjoy the retirement flexibility and lifestyle that financial independence can provide.”
Donald Jay Korn writes for Financial Planning, a SourceMedia publication.
One-Third Of U.S. Women Have Not Completed Basic Retirement Planning
Source: Insurance Broadcasting
Despite being more concerned about the potential risks they face in retirement than men, a new study by LIMRA found that fewer women had completed any of the basic retirement planning activities (determining expenses and income, calculating assets, etc.). Thirty-two percent of women said they had done no retirement planning. (chart)
"We know from earlier studies that working women, on average, have accumulated 40 percent less than men for retirement, which was confirmed again in this study," said Cecilia Shiner, senior analyst, LIMRA retirement research. "Even though 6 in 10 women are concerned they aren't saving enough to last throughout their retirement, we see few women taking steps to mitigate for this risk."
LIMRA found that women were less engaged in retirement and investment activities - only a third of women said they were actively involved in monitoring and managing their retirement savings, compared with nearly half of men (46 percent). Two-thirds of women were not confident that they would be able to live their chosen retirement lifestyle, yet only 26 percent of women spend time investigating financial products that could help them.
"The knowledge gap between men and women continues to be an issue - just 33 percent of women felt they were knowledgeable about financial products and services, compared with 55 percent of men," noted Shiner. "Our research shows that when consumers feel more knowledgeable about financial products, they are more likely to be engaged. Advisors and companies should be developing new strategies to educate women and increase their engagement level."
Looking at women who said they were knowledgeable about financial products and services, nearly twice as many (60%) were actively involved in monitoring and managing their retirement savings, and more than half of these women were confident that they would be able to achieve the retirement lifestyle they want.
"Engaging and educating women should be a top priority of our industry," said Alison Salka, LIMRA corporate vice president and director of Retirement Research."There are approximately 16.6 million women within 10 years of retirement (age 55 to 70 and not yet retired). Our research reveals that many of them are financially unprepared for retirement and because of their lack of knowledge and understanding of our products and services, are not taking the steps to reduce the risk that they run out of money in retirement."
LIMRA, a worldwide research, consulting and professional development organization, is the trusted source of industry knowledge, helping more than 850 insurance and financial services companies in 73 countries increase their marketing and distribution effectiveness. Visit LIMRA at www.limra.com.
Catherine Theroux | Director | Public Relations | LIMRA | 300 Day Hill Road | Windsor, CT 06095
IRS Raises 401(k) Contribution Limit
On Thursday October 18, 2012 the Internal Revenue Service(IRS) announced that effective January 1, 2013 employees will be able to contribute an additional $500 a year into their 401(k)s, tax free.
The tax-free contribution limit for retirement plans will increase to $17,500 for 2013, up from $17,000 this year. This will be the second in a row that the IRS has increased the limit by $500 as a result of the rising inflation rate.
The catch-up contribution limit-the additional amount of tax-free money employees over 50 are allowed to contribute to their retirement plan- remains unchanged at $5,500 on top of the initial $17,500.
Limits for Defined Contribution Plans
Individual Limitation-
The limit on contributions made on behalf of an individual to a defined contribution plan will be increased from $50,000 to $51,000. Application of this limit will remain the lesser of 100% of pay or $51,000.
401(k) Deferrals-
The dollar limitation on employee deferrals in 401(k) plans is increased from $17,000 to $17,500. 401(k) limits are based on the calendar year regardless of plan year end.
Catch-Up Contributions-
Catch-up contribution for participants 50 years or older remains unchanged at $5,500. This is also a calendar year limit regardless of plan the year end.
Defined Benefit Plan Limits-
Effective January 1, 2013, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $200,0000 to $205,000.
Annual Compensation Limits-
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $250,000 to $255,000.
Key Employees-
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of a key employee in a top-heavy plan remains at $165,000.
Highly Compensated Employees-
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains at $115,000.
The impact of this is that employees who earn in excess of $115,000 in the plan year that begins in 2012 will be considered highly compensated for the plan year beginning in 2013 and an employee who earns in excess of $115,000 in 2013 will be considered highly compensated employees in 2014.
These limits are applicable to calendar year plans.
A prescription for healthier retirement savings through wellness
Source: https://www.benefitspro.com
BY TIM MINARD
For years, most people looked at their physical health and their financial situation as two very different issues. But that’s changing. Today, the overwhelming majority of American workers recognize the link between health and wealth. Our recent survey found 84 percent of workers see physical health as an investment in their financial future.
Employers are also beginning to see employee wellness as an investment in the financial condition of the business. Healthier employees can lead to a healthier bottom line due to increased productivity, decreased absenteeism and—most significantly—reduced healthcare costs for the business.
There is another side benefit from wellness in the workplace that is gaining attention. Wellness programs may just be what the doctor ordered to boost retirement savings. Employees with fewer health problems logically would potentially have more money available to save for retirement. And down the road, healthier retirees could potentially spend less of their nest egg on medical expenses.
Because it is getting harder to separate health from ultimate wealth at the employer and employee level, discussions about benefits will likely focus more and more on the idea of total wellness. No matter what kind of benefits you sell, having a good understanding of the intersection between wellness benefits and retirement plans helps position you as being on the leading edge of this burgeoning trend.
Fortunately, the body of research proving the connection between physical and financial wellness and the positive impact on both employee and employer is growing.
Here’s a closer look at some compelling proof points that demonstrate the overall benefits of a total wellness approach:
Financial benefits to employees
- The short- and long-term costs of chronic diseases. Diabetes, for instance, has a known cost. The American Diabetes Association says for every dollar a healthy person spends on healthcare, a diabetic employee will spend $2.30. Obesity is also known to raise medical costs by 41 percent and boost prescription drug costs by 80 percent. In fact, the U.S. Centers for Disease Control says almost 10 percent of U.S. medical costs are attributed to obesity.
- Wellness programs reduce health risks. A brand new study conducted by Principal Wellness Company of 12,000 adults, found that participants in comprehensive workplace wellness programs achieve a significant reduction in health risks in as little as 18 months. For individuals participating in one-on-one health coaching, more than one in three (34 percent) moved from a high risk status to a lower risk category. This shift significantly decreases their likelihood to develop diabetes, heart attack or stroke. The percent of participants considered low-risk increased by more than 11 percent.
- How wellness can help employees free up funds for additional savings. By spending less on healthcare today, employees have more money to set aside for retirement. Take, for example, the case of someone who smokes 10 cigarettes a day. Using the calculator at www.smokefree.gov, if he quits and diverts what he had been spending on cigarettes ($5.73 a pack) to a retirement account, that savings would amount to an estimated $12,773 in additional retirement savings over the course of 10 years.
- Ways improved health can help to reduce healthcare expenses duringretirement. Those reduced costs can help make retirees’ savings last longer. That’s a huge benefit in light of the Employee Benefit Research Council’s estimate that a typical, moderately healthy retired couple will need to have saved over $250,000 just to address unreimbursed healthcare expenses (and premiums) throughout an average retirement.
Financial benefits to employers
- For every dollar an employer spends on a wellness program, its medical costs are improved by approximately $3.27 — and another $2.73 in savings is realized in lower absenteeism costs, according to the Health Management Research Center at the University of Michigan.
- Healthier employees can also lead to soft cost savings, such as higher-energy employees and increased levels of engagement in their jobs.
There is one other way that wellness programs can help retirement programs. The wellness folks have learned that when it comes to motivating participation, incentives work.
It’s not surprising that the number of employers offering wellness programs continues to increase. The Society for Human Resources reports that in 2012 just over 60 percent of American workers have access to wellness programs that also offer incentives if they participate.
A new white paper, Wellness = Retirement Savings, offers insights into how wellness programs and retirement plans can work together and can help you be prepared for the inevitable total wellness discussion.