Compliance May 31, 2011

ASPPA Finds “Faulty” Math in Retirement Debate

The American Society of Pension Professionals & Actuaries (ASPPA) says proposals to scale back or eliminate retirement savings tax incentives for 401(k) plans are based on misleading math.
Reported by

ASPPA analysis shows the real cost of retirement savings tax expenditures to be 55% to 75% lower than  government estimates, meaning that proposed cuts will not save nearly as much as advertised even as they jeopardize the future of 401(k)s and other retirement plans, the group said in a press release.  

When evaluating the cost of the tax deferrals associated with defined contribution plans such as 401(k) and Keogh plans, the Congressional Joint Committee on Taxation (JCT) and the Treasury Department’s Office of Tax Analysis (OTA) both use current cash-flow analysis. Since workers withdraw money from these plans only in retirement, the taxes paid show up outside the 10-year timeframe used in cash-flow analysis, and therefore are “scored” as lost revenue, rather than deferred revenue. These tax deferrals differ from tax credits or deductions, such as those for medical expenses or mortgage interest, since the taxes deferred ultimately are paid.   

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ASPPA said the faulty analysis dramatically exaggerates the real cost of the tax incentives for retirement plans. Using present-value analysis – which economists typically use for long-term analysis – economist Judy Xanthopoulos and tax attorney Mary M. Schmitt have calculated that present-value estimates of the five-year cost of retirement savings tax expenditure are 55% lower than those of the JCT and 75% lower than those of the OTA.   

“The federal government needs to put its fiscal house in order, but national solvency should not come at the expense of personal solvency. We should reduce neither the incentive workers have to save for their future nor incentives for companies to offer 401(k) plans to their employees,” said Putnam Investments President and Chief Executive Officer Robert L. Reynolds, in ASPPA’s statement.  

ASPPA’s report, “Retirement Savings and Tax Expenditure Estimates,” is here.
Data & Research May 31, 2011

Older Investors Dissatisfied with Traditional Advice Model

Older investors are unhappy with the traditional advice and guidance model, in which one pays for advice on investment selection, but receives planning advice as a "free" bonus.
Reported by

Research from Hearts and Wallets found that some investors would prefer to pay for personalized planning advice. The study, “Addressing the Elephant in Financial Services: Insights into How Older Investors Really Want to Receive, and Pay for, Investment and Personal Financial Advice,” found investors need help and want a reliable source to trust with their concerns.   

Investors say the industry is not meeting their needs regarding personal finance questions and investment advice, Hearts and Wallets reported. They were receptive to ideas of restructuring the current model, even if that resulted in additional fees. Possible changes included the separation of investment and personal finance advice, offering more choices in terms of à la carte service and flexible fees, and having advisers accept fiduciary status in order to legally ensure that their clients’ interests are placed over adviser interests.   

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“The financial services industry has a tremendous opportunity to enhance the model and vastly improve its ability to help investors meet their goals based on our concept tests,” Chris Brown, Hearts & Wallets principal. “If someone offered you free advice, how much trust would you have in that advice? Today, the industry has a very confusing fee structure. Investors want to know what they are paying for, and fee clarity is a major trust driver.”  

The study was conducted in April 2011 and surveyed nine focus groups, including “Pre-Retirees” (Americans who identify themselves as within five years of retirement and the household historical primary breadwinner stopping full-time work); “Late Career Investors” (Americans ages 50 to 65 who are not yet retired and the household primary breadwinner is not considering retirement within the next five years); and “Post-Retirees” (individuals who are currently retired).  

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