Ahead of the Trends (Washington Update on Retirement Savings Initiatives)

Transcription

1 Ahead of the Trends (Washington Update on Retirement Savings Initiatives) _(02/13) Audience Information The following presentation is intended for use with financial advisors, plan sponsors, CPAs, attorneys, human resource professionals, business owners and executives. It is eligible for 1 hour of continuing education credit for certain designations, when coordinated through a Columbia Management representative. Designations include: > CFP > CPA > CIMA > CRPC > HRCI 1 Overview The retirement movers and shakers in Washington D.C. > Senate Committee on Health, Education, Labor & Pensions: Chaired by Senator Tom Harkin (D-IA); Senate committee with jurisdiction over pension laws > House Committee on Education and the Workforce: Chaired by Congressman John Kline (R-MN); House committee with jurisdiction over pension and retirement security for U.S. workers > Tax writing committees, including the House Ways and Means Committee, chaired by Representative Dave Camp (R-MI) and the Senate Finance Committee, chaired by Senator Max Baucus (D-MT) > Phyllis Borzi Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA) under the Department of Labor (DOL) > J. Mark Iwry Senior Advisor to U.S. Treasury Secretary and Deputy Assistant Secretary > Securities Exchange Commission: Chaired by Elisse Walter (with Mary Jo White as nominee), Created to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation 2 1

2 New Retirement Provisions Now in Effect 3 New Retirement Provisions in Effect As the result of a new law, several finalized regulations and increased attention by federal regulators, the following are in effect: >Pension funding stabilization >Increased Pension Benefit Guaranty Corporation (PBGC) premiums >Increased plan fee transparency >Increased DOL enforcement efforts >Qualified charitable IRA distributions >Medicare surtaxes 4 Funding Issues for Pension Plans The average funding level of pension plans sponsored by U.S. companies in the S&P 1500 is 74%. Mercer, July 3,

3 Pension Funding Stabilization The administration: > Modified the method for determining the interest rate used to calculate the actuarial value of benefits earned under the plan for funding purposes. Determine applicable interest rate range Adjust the otherwise applicable 24-month average interest rate to fall within the range > Extended the ability of employers to transfer excess pension assets to fund retiree health benefits and expand the provision to allow transfers for retiree life insurance. 6 The PBGC s Deficit In 2012, the PBGC's deficit increased to $34 billion up from $26 billion in PBCG 2012 Fiscal Year Annual Report, November Increased PBGC Premiums The administration implemented the following increases to PBGC premiums: Flat-rate Per participant > PBGC governance > Participant and plan sponsor advocate > Quality control procedures Single Multi-employer $35 for 2012, as indexed $9 for 2012, as indexed Increased to $42 for 2013, not indexed Increased to $12 for 2013, indexed Increased to $49 for 2014, not indexed $49 indexed for 2015 and beyond Variable-rate Per $1,000 of $9 for 2012, not indexed unfunded vested $9 for 2013, indexed benefit /number of $13 for 2014, indexed participants $18 for 2015, indexed Maximum limit N/A for 2012 $400 for 2013 Indexed for 2014 and beyond NA NA 8 3

4 Insufficient Information and Disclosures Associated with Target-Date Funds (TDFs) 64% of investors believe TDFs provide guaranteed income in retirement. Investor Testing of TDF Comprehension and Communication, Independent report for SEC, DOL/SEC Proposed Regulations and Guidance Ongoing work: > Joint DOL/SEC task force to Assess inconsistency of TDFs Investigate questionable selection and monitoring processes Issue investor guidance and regulations > Considerations TDFs continue to increase in popularity Implications for plan sponsors: Greater scrutiny of fiduciary responsibilities for prudent selection and monitoring DOL Issued investor alert in 05/2010 Issued proposed regulations in 11/2010, awaiting final Has promised guidance on a prudent selection process and final disclosure regulations in 2013 SEC issued proposed regulations in 06/2010, awaiting final > Proposed effective date: Following issuance of final regulations > Comments posted at (k) Fee Transparency Of those polled, 71% of 401(k) plan participants believe they do not pay any fees. AARP, 401(k) Participants Awareness and Understanding of Fees,

5 Plan Fee Disclosure Three sets of fee disclosure regulations: > Final DOL Reg b-2 > Final DOL Reg a-5 > Final DOL Reg (Form 5500, Schedule C) Who DOL Reg b-2 DOL Reg a-5 Form 5500, Schedule C Service provider gives information to plan sponsor of DB and DC plans Plan sponsor gives information to participants and beneficiaries of participant-directed DC plans Guidelines Disclose direct and indirect Disclose certain plan- and compensation of $1000 or more investment-related information Status Final regulations; effective July 1, 2012 Plan sponsor of DB, DC and welfare benefit plans gives information to IRS and DOL Report direct and indirect compensation of $5,000 or more paid to service provider Effective for plan years Effective for 2009 plan year beginning on or after filings 11/1/2011; transitional rule* delays initial disclosures and statements *Transitional Rule: Initial annual notices are required to be provided by the later of 60 days after the first day of the first plan year beginning on or after November 1, 2011; or 60 days after the effective date of the plan service provider disclosure rules (i.e., August 30, 2012 for calendar year plans). Initial quarterly statements are due no later than 45 days after the end of the quarter in which the initial annual disclosure is required (i.e., by November 14, 2012 for calendar year plans). 12 Limited Options to Secure Guaranteed Retirement Income 10% of sponsors have an in-plan annuity product and only 2% of those without an annuity product are very likely to add one in the coming year. 1 1 Aon Hewitt, 2013 Hot Topics in Retirement 13 Increase Access to Guaranteed Lifetime Income Options What is the administration exploring? > Coordinated effort by the White House, Treasury Department, and DOL to encourage plan sponsors to add lifetime income options to their DC plans > White House report, Supporting Retirement for American Families, 02/02/2012 > Proposed regulations (REG ): Qualified Longevity Annuity Contracts > Proposed regulations (REG ): Partial DB plan annuity distributions > Rev. Rul :QJSA and QPSA rules for deferred annuities > Rev. Rul : Rollover from DC to DB plan to obtain additional annuity > Pre-rule stage: DOL exploring "annuity equivalent" benefit statements and annuity selection criteria guidance 14 5

6 Growing Demand for Enforcement and Compliance Assistance For fiscal year 2012, the EBSA estimates monetary enforcement results of $1.1 billion for ERISA plans and will close 3,611 civil investigations. - EBSA Fiscal Year 2013 Budget 15 More Focus on Enforcement and Compliance Assistance DOL: > Employee Contributions Initiative > Contributory Plans Criminal Project (CPCP) > Rapid ERISA Action Team (REACT) > Consumer assistance web page > Consultant/advisor project IRS: > 401(k) compliance check questionnaire project > Single employer DB plans under PPA the data [will be used] to enhance our compliance strategies, improve voluntary compliance through education and outreach efforts and, where appropriate, expand enforcement activities. Monika Templeton, Director of Employee Plans Examinations, IRS, December Definition of Investment Advice Fiduciary Details of DOL s proposed regulations: > In 10/2010, the DOL issued proposed regulations that, when finalized, will define the circumstances under which financial advisors will be considered ERISA fiduciaries by reason of giving plan-level or participant-level investment advice for which they receive compensation. > Proposed to become effective 180 days after final rules published Public hearing held in February and March 2011; Public comment period extended an additional 15 days after the date the hearing transcript is published Would replace current five-part test with broader definition of fiduciary Comments requested on whether providing distribution and/or rollover recommendations could be a fiduciary act > Withdrawn by DOL on 09/19/2011 Reasoning: Need more time for input and reflection and consideration of impact on IRA market DOL intends to re-propose regulations in

7 Social Security and Medicare Number of Americans relying on: Social Security: 53 million Medicare: 47 million Medicaid: 53 million - Office of Retirement and Disability, and Kaiser Family Foundations, Social Security and Medicare Reform Numerous proposals but gridlock prevails > As of the end of 2012, policy makers had introduced 3 proposals to address the solvency of the Social Security trust fund. In 2011, there were 15 proposals. 1 > Some of the suggestions in the 2011 and 2012 proposals included: Increase full and early retirement ages Reduce benefits by adjusting the Primary Insurance Amount formula Supplement benefits with personal accounts Allow trust funds to borrow from the General Fund of the Treasury Modify cost of living adjustments to benefits Raise the wage base > Medicare Both parties agree must reduce federal spending on Medicare, but no consensus on how Effect of Medicare Surtaxes on Retirement Saving 20 7

8 Effect of Medicare surtaxes Hospital insurance (HI) portion of the payroll tax increases by 0.9% for individuals with wages/self employment income exceeding $200K (single), $250K (joint), $125K married filing separately Dual-income families need to monitor if one or both partners below threshold and adjust W-4 if necessary A 3.8% Medicare contribution tax on unearned investment income of certain high income individuals, estates, and trusts Earned income and taxable distributions from qualified retirement plans go into base for determining whether $200K (single) /$250K (joint) threshold is reached Need to factor in this new tax whenever there is a sale of a significant asset or distribution 21 Effect of Medicare surtaxes The new 3.8% tax applies to the lesser of: Modified Adjusted Gross Income That Exceeds Net Investment Income $200,000 for singles; $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately or Which is investment income (as defined below) reduced by those deductions properly allocable to the investment income Investment Income Investment Income includes Income from: But does not include: Interest Dividends Nonqualifed Annuities Royalties Rents Gain from the Sale/Disposition of certain property (Capital Gains) A trade or business that is considered a passive activity (under the passive loss rules) or is trading in financial instruments or commodities/related derivatives Qualified Retirement Plan Distributions IRAs, 401(k)s, pensions, etc. Tax-exempt Income Municipal bond interest Excluded gain on the sale of a principal residence Life insurance death benefits, etc. Self Employment income that is taken into account for SECA tax purposes Trade or business income other than income from a trade or business described in the final bullet on the left. However, income from the investment of working capital does not fall within this exception. 22 Effect of Medicare surtaxes Name and Martial Status Jane (single) MAGI 1 in 2013 $500,000 wages $0 investments $500,000 MAGI Net Investment Income $0 Amount Subject to 3.8% Tax Explanation of Amount Subject to 3.8% Tax $0 Lesser of $300,000* or $0 *MAGI over the $200,000 MAGI threshold for singles George (single) $0 wages $100,000 interest $100,000 MAGI $100,000 interest $0 Lesser of $0* or $100,000 * MAGI over the $200,000 MAGI threshold for singles Don & Mary $220,000 wages (married, filing $80,000 dividends $300,000 MAGI jointly) $80,000 dividends $50,000 Lesser of $50,000* or $80,000 *MAGI over the $250,000 MAGI threshold for marrieds, filing jointly 1 Modified Adjusted Gross Income is adjusted gross income as found on the final page of the individual s Form 1040 increased by certain foreign income exclusions. 23 8

9 American Taxpayer Relief Act of 2012 (ATRA) 24 Qualified Charitable Distributions ATRA reinstates tax-free IRA distributions through 2013 > Must be age 70 ½ or older > Can apply to IRA distributions through 2013 > Special rules for retroactive application for 2012 > Annual limit of $100,000 tax free > Distribution transferred to a qualified charity 25 Roth In-Plan Conversions Pre-ATRA, could only complete Roth in-plan conversion if: > The plan offered a designated Roth contribution feature > The plan allowed for in-plan conversions > The participant met a distribution triggering event freeing plan assets for conversion (e.g., attaining age 59½) > ATRA allows (but does not require) plan sponsors to amend their plans to remove distribution trigger requirement 26 9

10 Capital Gains Tax Increase and NUA ATRA changes > Adds a 39.6% income tax bracket > Adjusts the dollar figures for the various tax brackets > Increases the long-term capital gains tax rate for the highest tax bracket to 20% > Investors still may be able to realize significant tax savings as a result of using an NUA tax strategy > Participants who may be eligible to use the NUA tax strategy should to discuss their options with their tax and/or legal advisors before taking action 27 Retirement Proposals 28 Flat Rate Refundable Credit The average reductions in 401(k) accounts at Social Security normal retirement age would range from a low of 11.2% to a high of 24.2% Employee Benefits Research Institute s projected impact of flat tax proposal Issue Brief #364, November

11 20/20 Proposal > Limit the sum of employer and worker annual contributions to the lower of $20,000 or 20% of income > Current: Per participant contributions limited to 100% of income up to $50,000 The proposed cap would most affect the highest-income workers; but it also would cause a very big reduction in projected retirement accumulations for the lowest-income workers. Employee Benefits Research Institute s projected impact of 20/20 proposal Notes, July What s Next? Possible additional reforms: > Plan consolidation > IRA simplification > Stretch IRAs > Automatic IRAs/Retirement USA funds 31 Important Disclosures This material is for educational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Management does not provide tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Material prepared by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Management. Securities products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC. The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates