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SponsorNews - February 2016

Five Items that Impact the Amount Your 401(k) Participants Need to Retire

August 27, 2014 by Robert C. Lawton

How much do your 401(k) plan participants need to accumulate in their accounts in order to retire without making significant lifestyle adjustments? Here are some estimates from the experts:

  • 8 times final pay at age 67 – Fidelity
  • 8 times final pay – USA Today
  • 9.4 times final pay at age 67 – Aon Hewitt
  • 10 times final pay – Frontline Special on PBS
  • 11 times final pay at age 65 – Aon Hewitt
  • 12 times final pay – T. Rowe Price
  • 13.5 times final pay at age 63 – Aon Hewitt
  • 18 times final pay – EBRI
  • 20 to 25 times final pay at age 65 – many financial advisors
  • 25 times final pay – to ensure an annual withdrawal rate of 4%

With such a wide range of opinions, it can be hard for participants to know what to aim for. Consider discussing the following factors during your employee education sessions to help them locate their appropriate target:

  1. Lifestyle. The amount an individual needs in retirement is highly dependent upon the lifestyle that he/she intends to lead. It has become common to retire and not adjust standards of living. This expectation results in a higher final balance target.
  2. Health and healthcare. Those employees who struggle with health issues now will likely struggle to an even greater extent in retirement. If healthcare expenses are expected to be high, a higher final balance should be targeted.
  3. Longevity. Does long life run in their family? If so, suggest targeting a higher final balance.
  4. Long-term care. Coupled with longevity is concern about the need for long-term care. Even if nursing home care is not necessary, assisted living or in-home care expenses will likely be incurred by all of us. If this is a concern, participants should target a higher balance.
  5. Lack of family. Some individuals never had children and some may have moved away from their families and lost touch. If an individual can expect to be all by himself/herself, targeting a higher balance is probably wise.

How are most participants doing? Recent studies have found that 50% of workers are not on track to save enough to retire without reducing their standard of living. A study by Vanguard published in Time Magazine indicates that workers should save at least 12% to 15% of their income each year. It is likely that most of your participants are not saving anything near this amount.

Communicate these facts in your next employee education session so that your participants can make adjustments as soon as possible.


Target-Date Funds Decoded

Kenneth Hoffman, managing director, partner, HighTower’s HSW Advisors

Aug 27, 2014 --- Target-date funds (TDFs) have been the fastest growing area of the mutual fund industry over the last decade. ---

They are a special category of balanced or asset allocation mutual funds in which the asset mix in a fund’s portfolio is automatically adjusted according to a specific time frame—from a position of higher risk to one of lower risk as the participant ages or nears retirement.

TDFs (also known as lifecycle, age-based, asset allocation, or target-maturity funds) have higher equity allocations for younger clients, with the equity allocation declining as the participant nears retirement. This is based on the need to grow assets until retirement and then increase current income post retirement. The allocation to stocks versus bonds, referred to as the “glide path”, adjusts automatically over time. The ratio of the two asset classes at retirement is referred to as the “landing point.”

TDFs satisfy so many needs within retirement plans that they have become exceedingly popular investment structures for numerous reasons:

  • They are simple. If, for example, you are 39 years old and plan to retire at age 65, you have 26 years to retirement. It is easy to choose the 2040 target date fund series and have the fund manager adjust the asset allocation over time.
  • Their structure is convenient. Broad data indicates that participants rarely examine their asset allocations or spend the time to fully understand the rationale of how to set their own allocation. A target-date fund does it for them. This investment structure diversifies the participant’s assets with one click of a mouse.
  • The participant receives professional management not only within the fund but also in the asset allocation decisions within the specific target-date series.
  • Generally, there are no additional fees for the asset allocation overlay.
  • TDFs have become the most widely used solution to having a QDIA (qualified default investment alternative) within a plan. Having a QDIA with a target-date series satisfies the Internal Revenue Service (IRS) regulation, effective December 24, 2007, for a safe-harbor plan under the Employee Retirement Income Security Act (ERISA) sections 404(c)(5) and 514(e)(3).

On the other hand, there are many drawbacks that must be taken into consideration when investing in target-date funds:

  • The concept of “set and forget” is naive and can mislead investors.
  • This investment structure does not guarantee that a defined contribution (DC) plan participant will achieve certain asset levels for retirement.
  • Depending on factors such as asset allocation, age and financial markets the participant may never accumulate enough money to fund their retirement.
  • Proprietary funds under the guidance of the TDF manager can pose a conflict. Generally, most fund families offer only their own funds in their target-date series, but this is beginning to change.

All TDFs are not created the same way. Each has its own guidelines, and it takes work to understand the nuances between target-date fund families. Retirement plan advisers and sponsors should understand that there can be enormous structural differences between them. Major differences between various target-date series can include:

  • The number of mutual funds within the TDF series;
  • How often funds are changed;
  • The timing of fund changes;
  • The investment strategy, style and approach of the fund managers;
  • The combination of active and passive (index) funds;
  • The managers’ differing views about risk tolerances for retirees;
  • The asset allocation over the life of the TDF; and
  • The equity allocation at the landing point.

The variations between target-date fund families in how they manage the funds’ glide paths as well as the points raised above can be significant.

The glide paths for 13 different fund families, including seven of the largest TDF series, are depicted in the graph below. The data is graphed with the number of years to retirement (or post-retirement) along the X (horizontal) axis and the percentage allocated to equities along the Y (vertical) axis.

As retirement approaches, the allocation to equities declines for each fund family. However, the initial allocations are different, the changes in allocations are different and the ending equity allocation is different for almost every fund series.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.

The Best Solution for Uncashed Checks

August 26, 2014 ( - Uncashed checks are a real and growing problem faced by retirement plan sponsors. Anecdotally, the industry believes this issue to be in the neighborhood of billions of dollars.

Uncashed checks can also cause a problem for plan recordkeepers or other service providers if a plan is audited, as the rules under the Employee Retirement Income Security Act (ERISA) call for plan sponsors to do their best to make sure participants receive these funds. Failure to do so can result in hefty fines, and even lawsuits. Additionally, uncashed checks can raise issues with the Internal Revenue Service (IRS) and other agencies regarding taxes, escheatment and unclaimed property. However, there is an effective solution: automatic rollover IRAs.

Causes of Uncashed Checks

Most uncashed checks are the result of plan participants not realizing they have money owed to them. This is compounded by difficulties encountered by plan sponsors and plan service providers in maintaining records and communications with participants, many of whom change jobs frequently.

According to the Bureau of Labor Statistics’ Employee Tenure Summary, the median number of years wage and salary workers stayed with an employer was only 4.6 years as of January 2012. This number was even lower for younger workers, as employees ages 25 to 34 stayed with an employer for a median number of 3.2 years.

Many employers automatically enroll their employees in retirement benefit programs which also contributes to the incidence of uncashed checks. This means even greater numbers of workers may have retirement benefits but not be aware of their rights or responsibilities. Even if a worker is aware of these benefits, they may not be aware that a distribution check has been sent because the IRS does not require that a worker request a distribution before checks can be mailed for balances less than $1,000.

Problems Associated with Uncashed Checks

The most important issue is uncashed checks are classified as plan assets until claimed by plan participants; plan sponsors retain fiduciary liability for these plan assets. This is vital for two reasons: First, it makes it clear that uncashed checks are considered plan assets under ERISA and by the Department of Labor (DOL). Second, it shows that plan sponsors are prohibited from handling these assets in such a way as to benefit themselves.

Yet, while unclaimed plan assets cannot be used to benefit plan sponsors, they often increase plan costs. The administration of these assets costs money, and as long as they remain unclaimed, the plans or plan sponsors are responsible for maintaining the assets and paying the administrative expenses. Additionally, the DOL stated escheatment should not be an option for plan sponsors except as a possible solution if individual retirement accounts (IRAs) are not chosen by a plan sponsor for non-responsive participants in plans that are to be terminated.

Further, the IRS has specific procedures in place for plan sponsors regarding reporting and withholding. In the case of uncashed checks, these rules can become complicated, especially in cases where funds are restored to an employee’s retirement account, which requires withholding also to be restored. Also, if distribution amounts are returned to a participant’s account, changes will have to be made to the relevant tax forms used to document the original distributions.

The IRS asks that plan sponsors issue an updated Form 1099-R as quickly as possible if corrections need to be made regarding distribution and withholding on the original form. The DOL has also made it clear that plan sponsors have a responsibility to enact provisions in plan documents and service agreements that provide guidance about how to handle uncashed checks, as well as specific procedures and timeframes intended to return funds back to a plan as quickly as possible. Plan sponsors that fail to resolve the issues of uncashed checks can also find themselves being fined by the DOL, or facing lawsuits from plan participants who are unhappy with how their retirement benefits were handled.

Automatic Rollover IRAs Are the Best Solution

According to the DOL, if an uncashed check is unclaimed by a plan participant, the funds remain plan assets. However, when applicable, these funds can be rolled into an IRA in the name of the participant or their beneficiary.

The DOL says plan sponsors “will be deemed to have satisfied [their] fiduciary responsibilities in connection with automatic rollovers of certain mandatory distributions to individual retirement plans” if the requirements set forth in the rules are satisfied.

This means plan sponsors that consider participants to be missing or non-responsive can take advantage of automatic rollover IRAs if a participant’s balance is $5,000 or less and they meet the DOL’s safe harbor requirements including:

  • The rollover amount cannot be more than $5,000, unless from a terminating defined contribution plan;
  • The account balance must be rolled over to an entity authorized by the IRS to act as an IRA custodian, such as a trust company, bank, credit union or registered mutual fund;
  • The rolled over money must be invested in a product that meets requirements relating to preserving principal and providing a reasonable rate of return and liquidity;
  • The fees and expenses for the IRA cannot be more than the fees and expenses the IRA provider charges for similar, non-automatic rollover IRAs; and
  • The participant must have the power to enforce the terms of the IRA.

Pursuant to authorized rollover procedures, the IRA custodians will open an IRA in the name of the plan participant and invest the funds in investments that are intended to minimize risk, preserve the principal, maintain liquidity and give a reasonable rate of return.

By utilizing automatic rollover IRAs, plan sponsors will have been deemed to have met their fiduciary responsibilities, freeing them from the ongoing fiduciary and administrative burden of uncashed checks/unclaimed plan assets.

Qualifying Longevity Annuity Contract (QLAC) is Here

In order to increase retirement security in the hope that individuals will be able to maintain a regular stream of income throughout their advanced years, the final QLAC regulations were issued on July 1, 2014, effective July 2, 2014. The QLAC is a straight life annuity that would begin payout at an advanced age, such as age 80 or 85.

The amount used to purchase the QLAC is excluded from required minimum distributions until the annuitant of income begins (ages 80 to 85). Once the annuity begins payout's, the amounts paid from the annuity would satisfy the RMD of the annuity asset.

QLAC's may be offered for defined contribution (DC) plans, non-Roth individual retirement accounts (IRAs), 403(b) plans, and 457(b) plans. The QLAC is not a variable annuity, though the benefit can be adjusted for cost-of-living increases.

As is often the case, the final regulations are largely consistent with the proposed regulations. Some of the changes in the final regulations are:

  • Increased maximum permitted investment. The limit on the amount a participant may use to buy a QLAC is the lesser of 25% of the participant’s account balance or $125,000 (up from $100,000 in the proposed regulation). Thus, if the participant has an account balance greater than $500,000, the $125,000 limit would be less than the 25% limit. Cost-of-living adjustments will be made in increments of $10,000.
  • Allowing “return of premium” death benefit. A longevity annuity in a plan or IRA can provide that, if the purchasing retiree dies before (or after) the age when the annuity begins, the premiums the participant paid that have not yet distributed as annuity payments will be returned to the participant's account. This option will provide peace of mind to individuals as their QLAC will either be paid to the participant or to his or her heirs. (The proposed regulations had permitted a life annuity payable to a designated beneficiary after the annuity owner’s death, but not this type of “return of premium” upon death.)
  • Correction for exceeding the annuity premium limits. The final rules permit individuals who inadvertently exceed the 25% or $125,000 limits on premium payments to correct the excess during a one-year window.
  • Added flexibility in issuing QLACs. The proposed regulations provided that a contract is not a QLAC unless it states, when issued, that it is intended to be one. The final rules facilitate the issuance of longevity annuities by allowing the alternatives of including such a statement in an insurance certificate, rider, or endorsement relating to a contract. A transition rule permits contracts to be issued prior to January 1, 2016 without the language in the contract, provided the participant is notified in writing that the contract is intended to be a QLAC and a rider that contains QLAC language is issued by January 1, 2016.
  • QLAC annual reports. The insurance company that issues the QLAC will file an annual report to the IRS and the participant, similar to the Form 5498. The IRS has yet to develop this form.
  • Plan requirements. A QLAC must be an annuity purchased by the plan. The plan can distribute the QLAC to the participant, although the QLAC can be provided from within the DC plan. The plan administrator has no responsibility for the QLAC once it is distributed from the plan.


Roth Post-Tax Versus Traditional Pre-Tax Retirement Savings

Posted on July 24, 2014 by MandMarblestone Group llc

Few things are more debatable then tax theory combined with investment theory and, when you throw in retirement accumulation theory, one is more likely to get broad consensus on political or religious issues. Still, some facts are facts, and they should serve as a starting point for any discussion on the advantages of Roth post-tax retirement plan savings versus traditional pre-tax savings.

Traditional ERISA-style retirement concepts are built on the theory of tax-advantaged contributions and investment growth, with taxation upon withdrawal. The tax-advantaged contributions take the form of individual IRA contributions, deferred compensation (typically 401(k) or 403(b) contributions) or company contributions that are tax deductible to one’s employer. Once contributed to the IRA or qualified plan, they enjoy tax deferred investment results, hopefully positive, until which time taxable distributions occur. The distributions are taxable in the calendar year they are received.

In the 1990’s, Senator Bill Roth came up with the idea of a non-tax-advantaged contribution, tax-deferred investment results, and non-taxable distributions. In 1998, Roth IRAs were made available. In 2006, Roth 401(k) and 403(b) contributions were added. Finally, rules for the option to convert traditional IRA and qualified plans accumulations to Roth accumulations were gradually phased in.

So, this is great, but what the heck does it mean? Let’s start with a simple mathematical test to see which is better. So, a participant makes a $10,000 traditional 401(k) deferral in a particular year. The participant is fortunate enough to receive a flat level rate of return of 7% for ten years. At year ten, the $19,672 accumulation is withdrawn; income tax of $5,902 (30%) is paid, resulting in a net payment to the participant of $13,770 (let’s assume the participant is now at least 59 ½, so that the excise tax on premature distributions is inapplicable). So let’s do the same thing with the Roth. The participant has $10,000, and after paying $3,000 in income taxes (30%) makes a $7,000 Roth 401(k) deferral. Again, the participant is fortunate enough to achieve an absolutely flat level rate of return of 7% for ten years and then withdraws the net accumulation tax-free, $13,770 (again we must assume the participant is over 59 1/2 to qualify for Roth treatment). Hmmm, that’s the exact same result.

But just as in politics and religion, the devil is in the detail. First, one might be in very different tax rates in the contribution year and the distribution years. The income accumulation will likely not be a flat steady rate, but will vary significantly from year to year. The time horizon may be more or less than a fixed period of time, and withdrawals may occur after significant or not so significant investment returns. The law on the taxation of the accumulations (beyond a change in tax rates) could be modified, although it is generally thought preferential tax treatment is unlikely to be retroactively rescinded.

With all of these variables, it’s difficult to clearly determine which approach is best. But it is easy to draw a conclusion that the flexibility to contribute and withdraw on a pre-tax or post-tax basis depending upon one’s tax rate is the key advantage. That makes for the general conclusion of this discussion, that it is advantageous to have tax-diversified accumulations. This offers the most flexibility with distributions, as one has the choice to receive tax-free or taxable distributions in any given year, taking the current tax rate into consideration.

So, once the case is made for tax-diversified accumulations, the next question is how to get it diversified. Unless one is 20 years old, it is quite likely that one’s accumulations are mostly traditional pre-tax accumulations. In order to diversify to Roth accumulations, one may start making Roth 401(k)/403(b) deferral contributions, Roth IRA contributions, or converting existing balances in qualified plans or IRAs. The conditions for converting traditional accumulations have broadened in recent years, making them basically universally available. Obviously, a conversion will trigger a significant tax liability in a particular year, so this is a very personal decision one must make with one’s accountant. Once significant parts of one’s accumulation have been diversified into traditional pre-tax and Roth accumulations, the investment philosophy of these different accumulations is the next logical consideration, but certainly less important then the taxation considerations.

So, at the end of the day, we can agree on a basic concept that tax-diversified accumulations are a critical advantage of the Roth savings approach. That is pretty much indisputable, much like democracy is pretty much the best political system and there is probably some kind of God or something like that out there. It’s the fine details after this basic truism that differentiates and personalizes retirement savings approaches.

Of course, if you have any questions about your current retirement accumulations, strategies for increased accumulations, or guidance in Roth conversions, please contact the MandMarblestone Group.

- Ken Schneider, Service Team Leader