The Internal Revenue Service (IRS) has expanded its
pre-approved plans program to include defined benefit plans with cash
balance plan features, and it is currently accepting prototype document
submissions.
James E. Turpin, president of The Turpin Consulting Group,
said he has seen one of the submitted prototype documents, and he shared a few
features with attendees of the American Retirement Association’s 2015 ASPPA
Annual Conference.
“If dealing with a uniform plan design, I haven’t seen any
problem with the prototype,” he said. However, he is concerned with an open box
for plan sponsors to input their plan’s interest crediting rate.
Interest crediting rates are highly regulated, and rates
outside of the IRS’ approved list cannot be used in cash balance plans. “If the
document doesn’t use a list of approved rates, with a box for the plan sponsor
to check beside the one it is using, I think it would be hard to depend on the
reliance of the IRS approval letter,” Turpin said.
He also noted some new rules included in the listing of
required modifications (LRM) for cash balance plans that plan sponsors will see
in the new documents. For example, interest credits on participants’ notional
accounts can be done quarterly, monthly, or more often.
Some cash balance plan sponsors, upon conversion from a
traditional defined benefit (DB) plan, established a beginning balance for the
cash balance plan that was based on the accrued benefit in the traditional DB
discounted for present value. This resulted in a period of time—called
“wear-away”—during which new accruals would not increase the benefit to which a
participant was already entitled. Turpin said no “wear-away” formulas are
allowed now.
Finally, Turpin noted that there is no requirement that plan
sponsors have to limit contribution credits to participants’ notional accounts
to the IRS 415 maximum annual addition limit.
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The National Association of Personal Financial Advisors (NAPFA)
recently polled about 100 of its member advisory firms, collecting the top
pieces of advice given to clients in different age ranges.
“We conducted this poll to raise consumer awareness about
the urgency of preparing for retirement and the importance of having a
comprehensive plan in place,” notes NAPFA CEO Geof Brown. “We encourage
consumers to act on these tips which advisers rank as the most important steps
to take. When it comes to retirement planning, consumers need to remember that
while the days are long, the years are short.”
For clients with 20 working years or more left before retirement,
NAPFA advisers first urge saving towards an emergency fund that could cover
three to six months of living expenses, “to avoid tapping into your 401(k) or
home equity in the event of an emergency.”
Beyond this, younger workers should find ways to boost earning
potential and benefits packages now, and should take full advantage of offered
benefits by contributing the maximum annual amount to the 401(k), “or at least
enough to receive a full employer match.”
Other tips for younger workers include:
Contribute money to a Roth Individual Retirement
Account (IRA) or other account to make sure you are saving in a tax-optimized
manner.
Coordinate your insurance needs with your
employer’s benefits package to be sure you have adequate coverage should you
become disabled (long-term disability), and evaluate the level of life insurance
you need.
Ensure you have a diversified investment
portfolio so that you are investing for growth, and create tax diversification
by allocating assets across taxable, tax-deferred and tax-free sources.
Consolidate multiple retirement accounts and/or
brokerage accounts you may have.
Make sure you have basic estate planning
documents in place (i.e. a will, power of attorney, possibly a revocable trust,
a living will, health care proxy, etc.)
Set a benchmark “magic number” for an adequate
retirement fund and establish a step-by-step plan for reaching your goal.
NEXT: 10 years out
With 10 years left before retirement, NAPFA advisers’ mantra
is “be tax efficient with your investments … for example, you should defer as
much of your salary as you can to your defined contribution plans.”
Workers in this age range should also have an emergency fund
but should be particularly mindful of their company’s financial situation, as employers are prone to reorganizations and layoffs over time, and older workers can be
vulnerable. This is also the age to “brainstorm any big ticket financial
commitments” that could arise down the road and wreck an otherwise effective
retirement plan, such as caring for a sick family member for an extended
period.
NAPFA shares these additional pieces of advice for those with
a decade of working life left:
Take a hard look at any major debts that you
have and develop a 10 year plan to eliminate them.
Reallocate your portfolio based on your earnings
timeline with a focus on performance, risk and expenses. Decide when—or if—you
should shift to a more conservative asset allocation.
Review what your tax obligations may be with
your current investments and use tax optimization strategies to benefit your
savings.
Review your estate documents to ensure the
language is still accurate. For example, are the named trustees and beneficiaries
still alive and capable?
Research when your stock-based compensation
might expire and what stock awards you can retain after retirement.
NEXT: When retirement
is on the horizon
With five or fewer years left before retirement, NAPFA
advisers commonly encourage clients to make a list of needs and wants, and “if
you do not have enough savings for all your needs, make a five-year plan to
increase your funds.”
This is the time to fine-tune the retirement income plan,
NAPFA advisers feel. This includes reviewing projected expenses, adding up reliable
and potential sources of income, and figuring out how the investment portfolio might
cover the gap.
NAPFA concludes with the following advice for those about to
retire:
Run tax projections periodically to ensure you
take advantage of opportunities the IRS provides, such as Roth IRA conversion
strategies.
Double check your reported Social Security
earnings and resolve any discrepancies now. Explore your Social Security
claiming options and make sure you understand the timing of applying for
benefits.
Ask your HR department about the relationship
between your current health insurance and Medicare, as well as what your
options are when you reach age 65. Get information about any pension or defined
contribution options and any other retiree benefits.
Continually monitor and analyze your asset
allocation to make sure it is the right one for you. Understand whether you
should move to a more conservative asset allocation or continue investing for
growth.
Research when stock-based compensation might
expire and what stock awards you can retain after retirement.
Make sure that all of your estate documents are
up-to-date. Verify that your named executors and proxies know your wishes and
are willing to act on them if needed.
Additional research and information on NAPFA is at www.napfa.org.