Compliance March 4, 2013

Tax Reforms to Loom Over 401(k)s in 2013

As government looks for budget solutions, defined contribution tax breaks fall in the crosshairs.
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LAS VEGAS—The tax advantages of defined contribution plans, estimated to defer tax revenues by $50 billion to $60 billion a year, will be one of Congress’ sticking points in the coming year. That was the prognostication of the keynote address “From the Hill to the Summit” session of the National Association of Plan Advisors/American Association of Pension Providers and Actuaries (NAPA/ASPPA) 401(k) Summit conference here Sunday.

“Facing difficult tradeoffs—between cutting food stamps or Medicaid, versus cutting 401(k) tax advantages—will come up over and over and over,” said Brian H. Graff, chief executive of ASPPA. “There just isn’t enough money there [in the U.S. budget]. For the White House and Congress, it is not about policy. They are looking for money, and we have been the unfortunate piggy bank of many initiatives. We have to keep the drumbeat for the ‘Save My 401(k)’ campaign going.”

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That is why Congress needs to hear about the importance of tax break incentives on the nation’s retirement savings pool from retirement plan advisers, said a high-level Congressional staffer who appeared on the panel, but who asked not to be named. “Congress needs to hear from people on the ground on how policy affects everyday people,” the staffer said.

The issue will come to a head by April 15, when Congress must pass a new budget or face the penalty of withheld pay for members of Congress, the staffer said. The House of Representatives, controlled by a Republican majority, is looking to create $1 trillion in new revenue through budget cuts and the elimination of tax cuts, he said. The Senate, with a majority of Democrats, is seeking only budget cuts, he said.

“When the debt ceiling expires at the end of May, we don’t know what the House of Representatives will want,” Graff said. “The real question will be whether there will be a balance of cuts and tax reform. The House Ways and Means Committee is dead set on tax reform. The House wants to eliminate deductions and lower tax rates. Are we in that mix? We are different. We are a deferral—not a deduction. And we have the non-discrimination test.”

 

(Cont’d…)

But as Congress views the problem, the Congressional staffer said, “it is a mathematical problem,” not a question of resolving the nation’s retirement crisis. “The money has to come from somewhere.” Graff added that the areas most in danger of being cut are mortgage deductions, charitable donations and qualified retirement plans. “We are not out of the woods,” Graff said. Congress is “looking for revenue—and we are part of that conversation.”

It is up to the retirement plan adviser community to educate Congress on the fact that the tax benefits of qualified plans do not flow only to higher-income individuals but to the broader worker base, the Congressional staffer said.

Another pressing issue on the legislative front is an expanded definition of what it means to be a fiduciary, the two general session speakers said. “The Department of Labor’s (DOL) focus is more on compensation and perceived abuses,” Graff said. The problem with the proposal is that it “would mandate how people do business and preclude them from having different business models,” he said.

The DOL’s intent, however, the Congressional staffer said, is to make transparent the fees paid to fiduciaries, while eliminating conflicts of interest and ensuring that advice is reliable. However, it is possible that the government will back off the new fiduciary definition, the staffer said.

“At the end of the day, if the new fiduciary rule precludes certain business models or rollovers into individual retirement accounts (IRAs), DOL could drop the rule,” the staffer said.

The third pressing issue in Washington that could impact the retirement industry in 2013 is a proposal by Senator Tom Harkin (D-Iowa) to include mandatory retirement income provisions in defined contribution plans, the speakers said. “The retirement income product would shift longevity risk to a larger group of people,” the staffer said. Along with this, Harkin wants to work on three measures:

 

  • Improve Social Security
  • Continue to work on strengthening 401(k)s
  • Rebuild traditional pensions

 

“These ideas express a lack of satisfaction in the current system,” Graff said. “There are concerns about access and coverage, and creating a lifetime income that would effectively provide a paycheck for life.”

 

 

Products March 4, 2013

Putnam Launches Health Cost Estimator

Putnam Investments is helping 401(k) participants gauge how much income they will need for health care costs in retirement.
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The Putnam Health Cost Estimator provides 401(k) plan participants with a personalized estimate of what portion of their expected future monthly income will be needed to cover health care costs in retirement. The estimator includes itemized insight on medical, dental and pharmaceutical expenses, at different age points.

The projections will be generated from individual participant data and cost models using proprietary, actuarial-based guidelines and expressed as monthly costs, providing participants with a digestible format that lays the groundwork for action steps to address potential savings shortfalls.

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“Context is critical, but simplicity is also very, very important,” Stephen Jenks, director of DC product and marketing, Putnam Investments, told PLANADVISER.

The Health Cost Estimator is an enhancement to the Lifetime Income Analysis Tool, rolled out by Putnam in 2010 (see “Putnam Introduces Retirement Income Calculator”). The Analysis Tool is designed to help 401(k) participants project how much income their current retirement savings may generate in retirement compared with what they may need, and offer actionable steps.

The health care enhancement provides:

 

  •  An estimation of personalized health care costs, including insurance premiums and out-of-pocket expenses, that reflect preexisting health conditions and future retirement location (by state). The Health Cost Estimator can personalize health care cost estimates by allowing users to input various health states including being a tobacco smoker, or having high blood pressure, type 2 diabetes, high cholesterol, cardiovascular disease and cancer, Jenks explained.
  •  Actionable methods to help close possible savings gaps, including increasing contribution rate, postponing retirement, and/or changing investment mix; and,
  •  Projected health care cost for year-one of retirement, but also the percentage of income that may go to health care in that year, as well as guidance on health care costs at different ages during retirement.

The Health Cost Estimator was tested in a pilot program with 30 plans and found that, of the participants using it, 90% made a savings increase—average deferral rates moved from 8% to double digits, Jenks said.

The health care enhancement is valuable to both the participant and the plan sponsor, explained Ed Murphy, head of defined contribution, Putnam Investments. Plan sponsors are concerned that one in four employees say they will have to continue working after 65 because of finances, because this creates extra insurance costs—double the cost of employees ages 45 to 50, Murphy said.

With the Lifetime Income Analysis Tool, coupled with the Health Cost Estimator enhancement, the hope is that employees will engage with it early and save enough to retire. But just offering a retirement income tool to employees is not enough: They must also be encouraged to use it.

Murphy suggests engaging employees during open enrollment meetings. Putnam, for example, distributes iPads at its meetings and walks employees through the Lifetime Income Analysis Tool. “If you can introduce them to the Web in the beginning, then I think you’re in a good position to get them to come back,” Murphy said.

In addition, when participants log into their accounts, the Lifetime Income Analysis Tool, with the Health Cost Estimator, is displayed on the home page. Participants have a short attention span, Jenks said, so retirement income tools must be front and center.

In the future, Jenks said Putnam would like to add long-term care information to its Health Cost Estimator.

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