Data & Research November 14, 2014

Retirement Savings Delays Quickly Add Up

Recent Insured Retirement Institute (IRI) research shows postponing retirement plan salary deferrals by five to 10 years can reduce total retirement income by more than 20%.
Reported by

IRI researchers found that a worker contributing 10% of income annually to a retirement plan beginning at age 35, rather than age 30, will receive 11% less in annuitized retirement income. Over the course of a 25-year retirement, the reduced income adds up to $62,000, according to the IRI. If saving for retirement is postponed to age 40, income will be reduced by 23%, totaling $127,000 over a 25-year retirement.

“There’s no lost and found for retirement savings,” says IRI President and CEO Cathy Weatherford. “When saving for retirement is delayed, the benefits of compounding interest are gone and can never be reclaimed.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Delaying retirement will only partially recover lost savings and may not even be feasible for some workers, Weatherford says. “And those who believe they can simply save a higher percentage later on will be in for sticker shock when they realize how much of their income will need to be dedicated to retirement savings to make up for lost time,” she adds. “Few workers can afford to contribute 25%, 35% or even more of their annual income to their retirement plans.”

Other key findings from the report, “It’s Time to Save for Retirement,” show a worker who starts to contribute to a retirement plan at age 35 would need to save 16.5% of annual income to have the same amount of retirement income at age 65 as a worker who started contributing 10% annually at age 30. If the worker delays contributing to the retirement plan until age 40, he or she would need to save more than 26% of income annually to achieve the same level of retirement income at age 65, the report finds.

Importantly, delaying retirement can grow savings substantially through additional annual contributions and investment earnings. A worker who begins saving 10% of income annually at age 30 can increase his or her retirement income by about 73% by delaying retirement and annuitizing at age 70, rather than age 65. A worker who contributed 10% of income annually to a retirement plan beginning at age 35—rather than age 30—would receive only 7.6% less in his or her annual retirement income at age 70, compared with the 11% reduction experienced if retirement began at age 65.

However, many workers are forced to retire earlier than hoped for or expected, the IRI report notes, so delaying retirement is not always an option.

The full report is available here.

Compliance November 13, 2014

Form 5500 Filings Can Reveal Prohibited Transactions

Retirement plan advisers should be on the lookout for prohibited transactions that may or should be revealed on the Form 5500 filing.
Reported by

They are relatively easy to avoid, but could trigger an investigation if they slip through. Schedule H of the form asks the plan sponsor if there were there any nonexempt transactions with any party-in-interest. Leaving the answer to this question blank could be a red flag, according to Linda Fisher, principal of Linda T. Fisher Form 5500 Consulting in Chicago, and answering it (but leaving out a dollar amount) is also a potential red flag.

Small plans are more susceptible, Fisher says. “They might have money invested in the real estate of the business, which is not supposed to be part of a plan’s assets,” she tells PLANADVISER. Owning an apartment building or storefront is fine, but who manages the property is another issue. The key is to look beneath answers on the form and information about investments. Someone needs to ask probing questions, which can be a challenge for small, one-person plans—especially if they are creative with their investments.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

For example, plan sponsors should consider who is managing those properties? If it’s the son of the plan sponsor, this is likely a prohibited transaction, Fisher points out. Small plans especially may not understand all the rules about what the plan can and cannot invest in legally, she says. Larger plans naturally have more resources and investment committees to perform due diligence to spot these issues.

Fisher says sometimes the plan sponsor doesn’t understand all the information the form asks for, and the smaller the plan, the larger the chance it can miss answering a question. She feels small-plan sponsors often legitimately have no idea how to navigate all parts of the form accurately, making guidance essential.

Fisher’s recommendation is for plan sponsors to find an Employee Retirement Income Security Act (ERISA) attorney who assists with setting up the plan correctly without getting into prohibited transaction issues— determining allowable and prohibited plan investments, and who can and cannot be involved in the investment.

 

Fisher notes that the preparer of the Form 5500 is usually not the plan sponsor, so the plan sponsor should spend more time on due diligence; for example, looking at trust statements for possible prohibited transactions. “Real estate is always a red flag,” she says. “Valuables other than cash that the plan may hold are often plan assets that should be looked into further.” Other investments to examine carefully in small plans could be jewelry or antiques. The auditor can spend hours digging deeper with the client to get as much information as possible about potential prohibited transactions.

Another situation to look out for is when money is not going into the plan the way it should, potentially signaling the misuse or stealing of plan assets. The plan sponsor should alert the auditor to this potential situation, Fisher says. The plan sponsor should consider any questionable transactions during the year to share with auditors when it’s time to fill out the form.

Fisher says plan sponsors should be aware of a new type of prohibited transaction related to providing service provider compensation. “If they refused to provide information about 12(b)1 fees or compensation, you’re supposed to report it on the Schedule G,” she says. It is used as a scare tactic for providers, and it seems to work quite well, according to Fisher. It’s possible that this scrutiny on fees could motivate more providers to use flat-fee arrangements or direct rather than indirect fees, she says, but there is no way to know how the industry will ultimately respond to this. For now, though, the fee information must be provided.

If a plan sponsor realizes it does in fact have a prohibited transaction, it must properly report the transaction on the proper form (Form 5330) and pay an excise tax. Fisher estimates the excise tax at 15% of the transaction. She says this should be done voluntarily by the plan sponsor; if found out by the government, the fees will be higher.

“The bottom line is, always have an ERISA attorney accessible to make sure your plan is in compliance, because you don’t want to risk those assets becoming disqualified,” Fisher says. 

«