Data & Research March 20, 2013

Advisers Eye Lump-Sum DB Payouts

Separated defined benefit (DB) plan participants have been on the rise since 2004—a sweet spot for advisers targeting lump-sum distributions, research found.
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“The number of separated participants in private DB plans totaled more than 12.4 million at the end of 2011, up from 10 million in 2004,” said Kevin Chisholm, associate director at Cerulli Associates in Boston.

 

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According to Chisolm, the number of lump-sum distributions taken over the past year has increased steadily, and Cerulli expects that number to continue rising. “It is likely plan participants will select a lump sum, rather than a monthly payout,” Chisolm said.

 

Lump-sum distributions put a significant amount of assets in motion, Chisolm pointed out. When a DB participant leaves the plan, the sponsor can offer lump sums that amount to larger payouts, creating a new pool of prospects for financial advisers or providers of individual retirement accounts (IRAs). Advisers whose current clients accept the one-time payment could see an infusion of cash, Chisolm said.

 

Cerulli’s report frames lump-sum distributions as an opportunity for advisers and IRA providers to develop marketing plans to reach separated participants in private DB plans, as lump-sum offers are more prevalent. It is important to note that these participants are not retired, but separated—and they are likely to also be contributing to a defined contribution (DC) plan that will yield additional rollover dollars in the future.

 

The first quarter 2013 issue of The Cerulli Edge-Retirement Edition is dedicated to DB plans and takes a close look at DB plan participants and lump-sum distribution trends, including de-risking. The report examines major challenges to increasing financial planning engagements and factors that could have an impact on 401(k) plan participants delaying retirement.


More information, including how to purchase a copy, is here.

Compliance March 20, 2013

Bill Aims to Thwart Retirement Plan Leakage

Two senators introduced legislation that would give individuals who take a loan from their retirement accounts more time to repay after leaving a job.
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The Shrinking Emergency Account Losses (SEAL) Act, sponsored by Senators Bill Nelson (D-Florida) and Mike Enzi (R-Wyoming), would give workers who leave their jobs up until they file their federal taxes to repay money they have taken out of their company’s retirement plan. Under current law, workers have 60 days to repay any loans or withdrawals following their separation, to avoid paying tax penalties.  

The lawmakers’ bill would also allow employees to continue to contribute to their 401(k) plans during the six months following a hardship withdrawal. Letting workers fund their accounts after a withdrawal would allow them to receive a company’s matching contributions.  

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“We need to give folks more incentives to continue saving for their retirement,” said Nelson, who chairs the U.S. Senate Special Committee on Aging. “Giving them extra time to restore money owed to their 401(k)s is one way we can help cut down on lost retirement savings.”  

Brian H. Graff, executive director and chief executive of The American Society of Pension Professionals and Actuaries (ASPPA), issued a statement in support of the legislation. “The power of [an employee’s] compounding retirement savings is weakened when the individual takes a hardship withdrawal from retirement savings or does not repay a loan from a 401(k) plan because it came due when employment was terminated. We are mindful that some employees have serious immediate financial needs. Therefore, we believe it is important to minimize the harm that comes from accessing retirement funds for nonretirement purposes. The SEAL Act would be an important step toward addressing this problem,” Graff said.  

“The SEAL Act proposes simple changes that will lessen the loss of retirement savings when an employee terminates employment with an outstanding loan balance and reduce the long-term impact of hardship withdrawals. Specifically, the bill extends the period that an individual retirement account (IRA) can accept repayment of outstanding loan balances as a rollover from a qualified retirement plan. The bill also includes a provision that would allow participants to continue to make elective contributions during the six months following a hardship withdrawal. These provisions are sensible improvements to current law that will allow many Americans to keep more of their retirement savings working for them,” he added.

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