Groups Urge IRS to Streamline Pre-Approved Plans

The American Society of Pension Professionals & Actuaries (ASPPA) and the National Tax Sheltered Accounts Association (NTSAA) requested changes to pre-approved plan programs.

In a statement from Craig P. Hoffman, general counsel and director of Regulatory Affairs of ASPPA to the Internal Revenue Service (IRS), the groups requested that the Master & Prototype (M&P) and Volume Submitter (VS) components of the pre-approved plan program be combined into a single program and recommended certain modifications to the defined benefit and 403(b) pre-approved plan programs.  

The IRS currently maintains a program for the ‘pre-approval’ of plans qualified under sections 401, 403(a) and 403(b) of the Internal Revenue Code. ASPPA requested the modification of substantive and procedural distinctions between certain terms within the pre-approved plans program under sections 401 and 403(a), and ASPPA and NTSAA together requested modifications to the defined benefit and 403(b) pre-approved plan programs.  

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“To streamline the pre-approved plan procedures for plans qualified under sections 401 and 403(a), ASPPA recommends that the IRS eliminate the procedural and substantive distinctions between the M&P and VS programs by incorporating the best current features of both programs into a single pre-approved plan program,” Hoffman stated. “ASPPA’s experience indicates that most employers adopting and maintaining qualified retirement plans are chiefly concerned with whether the plan is pre-approved by the IRS. The distinctions between M&P and VS are irrelevant to them and create confusion. As a preliminary recommendation, ASPPA suggests eliminating the terms ‘master and prototype plan’ and ‘volume submitter plan’ under the relevant revenue procedures and instead use ‘pre-approved plan’ or a similar term.

“In response to changing realities in the plan environment concerning defined benefit plans, ASPPA and NTSAA recommend that cash balance provisions now be included as options within a pre-approved defined benefit plan. Most of the existing cash balance plans are based on provisions that are consistently and repeatedly used, often already using pre-approved defined benefit plan language (with the exception of the limited cash balance-specific provisions).  

“In addition, to streamline IRS processes regarding 403(b) plans, ASPPA and NTSAA recommend that the IRS extend the 403(b) plan submission deadline from April 30, 2014, to January 31, 2015, to allow time for new plans to be fully established, as well as enable the IRS and practitioners to analyze and resolve issues with the LRMs that have already been identified and more that may be identified as the drafting process begins.”  

Hoffman concluded with, “We believe adoption of these recommendations will result in a reduction in administrative costs for both the IRS and practitioners, all to the benefit of plan participants and plan professionals alike.”  

The groups’ letter about pre-approved defined benefit and 403(b) plans is here 

ASPPA’s letter about combining M&P and VS pre-approved plans programs is here

Participants Need a Retirement Income Plan

Whether employees will have enough income in retirement is the hot topic of the industry.

But, while retirement plan providers and plan sponsors are offering information, calculators and retirement income products, this is not enough. Individuals need a process for converting their resources into income in retirement, contended Bryan Hodgens, SVP and director of sales at Wells Fargo, speaking at the 42nd Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Management of the University of South Carolina, and co-sponsored by PLANSPONSOR.   

Hodgens suggested six steps in the process for participants: 

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

1. Estimate duration of retirement assets; 

2. Identify retirement risks and ways to manage risk; 

3. Identify distribution, tax and estate issues and opportunities; 

4. Identify options for filling the gaps; 

5. Convert resources into income; and  

6. Throughout retirement, evaluate and maintain or update the plan. 

Participants need help understanding how their investment allocation should be different in the distribution phase than it was in the accumulation phase. Diversified income planning includes stable income, growing income and guaranteed income, Hodgens said. Stable income could include government, corporate or municipal bonds and/or certificates of deposit. Growing income could include dividend-paying stocks, mutual funds and closed-end funds. Guaranteed income could include fixed and index annuities, immediate annuities, variable annuities and Social Security.

There are several approaches to income distribution: 

  • A systematic withdrawal plan, whereby a participant takes a certain percentage of assets from accounts periodically, is easy to understand and calculate for participants, but it is subject to “sequence of return” risk—the percentage withdrawn may be acceptable in an up market, but may be too much in a down market, Hodgens noted. 
  • An “income-only” approach to distribution, whereby the participant lives off the interest and dividends from his portfolio is also subject to “sequence of return” risk, as well as inflation risk.  
  • A bucket approach, whereby a participant establishes phases for income distribution, could include a 10-year phase for using short-term investments for income, a second 10-year phase for using income and growth investments for income, and a third phase using guaranteed income. 

Annuities are one way to address retirement risks and close retirement savings gaps, according to Hodgens. He mentioned that the downsides of an annuity are a lack of liquidity and higher expenses. However, Hodgens believes retirement income products will only get better in the years to come.  

Hodgens noted that many providers are beginning to take a more holistic approach to retirement income and include planning services as well as products and tools. Planning early and being realistic is important for participants, he concluded.

«