Compliance December 5, 2014

DOL Planning RFI on 408(b)(2) Disclosure Effectiveness

The Department of Labor wants to request new industry input and create focus groups about the effectiveness of retirement plan service provider fee disclosure requirements.
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The Department of Labor (DOL) has submitted an Employee Benefits Security Administration (EBSA) sponsored information collection request proposal titled, ‘‘Focus Groups for Evaluating the Effectiveness of Employee Retirement Income Security Act Section 408(b)(2) Disclosure Requirements,’’ to the Office of Management and Budget (OMB) for review and approval required before circulation.

Public comments to OMB on the information collection request are invited, the DOL notes in an announcement in the Federal Register. The OMB will consider all written comments received on or before January 5, 2015. The information collection request seeks authority for focus groups to be used for evaluating the effectiveness of Employee Retirement Income Security Act (ERISA) section 408(b)(2) disclosure requirements.

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As noted by the DOL, ERISA requires a plan fiduciary, when selecting and monitoring service providers and plan investments, to act prudently and solely in the interest of plan participants and beneficiaries. A responsible plan fiduciary must also ensure that any arrangement with a service provider is reasonable and that only reasonable compensation is paid for services. Fundamental to the ability of fiduciaries to discharge these obligations is obtaining information sufficient to enable them to make informed decisions about an employee benefit plan’s services, the costs of such services, and the quality of the service providers.

The DOL says a new information collection effort is needed to explore current practices and effects of a final regulation published in the Federal Register on February 3, 2012, which implemented ERISA Section 408(b)(2), and to gather information about the need for a guide, summary, or similar tool to help a responsible plan fiduciary navigate through and understand the disclosures. (See “Details About the Proposed 408(b)(2) Fee Guide.”)

The EBSA intends to use information collected from the focus groups: (1) To assess responsible plan fiduciaries’ experience in receiving the disclosures the 408(b)(2) regulations require; (2) to assess the effectiveness of the disclosures in helping plan fiduciaries make decisions; (3) to determine how well plan fiduciaries understand the disclosures, especially in the small plan marketplace (100 participants or less); and (4) to evaluate whether, and how, a guide, summary, or similar tool would help a fiduciary understand the disclosures.

Further, the focus group results will be used to inform and support a notice of final rulemaking for the guide requirement. As noted by the DOL, a federal agency generally cannot conduct or sponsor a collection of information, and the public is generally not required to respond to an information collection, unless it is approved by the OMB under the Paperwork Reduction Act of 1995 and displays a currently valid OMB Control Number.

For its part, the OMB says it is particularly interested in comments that:

  • Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
  • Evaluate the accuracy of the agency’s estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
  • Enhance the quality, utility, and clarity of the information to be collected; and
  • Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses.

A copy of the full information collection request with applicable supporting documentation, including a description of the likely respondents, proposed frequency of response, and estimated total burden, may be obtained free of charge from the www.RegInfo.gov website.

Industry members are encouraged to submit comments about this request by mail or courier to the following address: Office of Information and Regulatory Affairs, Attn: OMB Desk Officer for DOL–EBSA, Office of Management and Budget, Room 10235, 725 17th Street NW., Washington, D.C., 20503.

Comments can be also be delivered by fax to 202-395-5806, or by email to OIRA_submission@omb.eop.gov.

Commenters are encouraged, but not required, to send a courtesy copy of any comments by mail or courier to the U.S. Department of Labor-OASAM, Office of the Chief Information Officer, Attn: Departmental Information Compliance, Management Program, Room N1301, 200 Constitution Avenue N.W., Washington, DC 20210.

In order to help ensure appropriate consideration, comments should mention OMB ICR Reference Number 201408–1210–004.

Data & Research December 5, 2014

Wait to take RMDs, or Add a Roth IRA?

Take three couples entering retirement with the same asset base but very different strategies for making the money last. Think you can predict the winner?
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People are presented with many different strategies to minimize taxes in retirement, Lena Rizkallah, a retirement strategist at J.P. Morgan Asset Management, said in a recent webcast, “The retirement Tax Cliff:  Maximize Retirement Income While Managing Taxes.” For example, the Roth individual retirement account (IRA) has become an important tool to balance the need to use assets and limit taxes to whatever extent possible, she contends, pointing out that tax rates are likely to fluctuate depending on the source and total amount of income retirees draw in a given year.

The use of Roth accounts, structured as IRAs or 401(k)s, is gaining steam, Rizkallah says. “The rules have changed, making it easier for employers to implement them,” she says. Deferrals average around 4% to 5%. Similar to Roth IRAs, Roth 401(k)s accept after-tax contributions, but these accounts have no required minimum distributions (RMDs).

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Leveraging tax deferral strategies has changed retirement planning, Rizkallah feels, and the old rule of thumb, in which the retiree withdraws first from taxable assets and then from tax-deferred accounts may not be the best strategy. In fact, there may be advantages to tapping retirement assets earlier than age 70½, using a Roth conversion to help minimize taxes in retirement.

To clearly illustrate how the traditional approach of taking withdrawals at the required minimum age of 70½ compares with a more proactive one—in which the investor takes early withdrawals from tax-qualified accounts, and invests some of the assets into a Roth IRA—Rizkallah describes three hypothetical married couples.

All three couples are the same age, all retiring at age 60, with a $1 million portfolio, split equally between a taxable account and an IRA or 401(k). Their holdings were allocated identically—30/70 in equities to fixed income—and they received an identical 5.2% estimated annual return.

All began to claim Social Security benefits at age 66 as maximum wage earners; all had an initial spending need of $75,000 and all drew from their taxable assets first. All died at exactly age 95, giving them all 30 years of retirement (and taxation) to plan for.

Withdrawal Strategies

The variables came at the withdrawal stage of the retirement accounts. First, imagine a couple named Diana and Hector Gomez. The Gomezes tapped their taxable assets first, then waited until they were 70½ to begin taking the required minimum distributions. Using the traditional approach, according to Rizkallah, the marginal tax rate jumps to 15% at age 70½.

The next case study is a couple named Henrietta and Henry Henrickson. Between the ages of 60 and 69, they withdraw from the tax-deferred account within the existing tax rate, and make contributions to a taxable account, an approach that allows their tax rate to stay consistent throughout retirement.

Last, Gabriella and Giancarlo Zarelli tap their retirement assets and make Roth IRA conversions with the excess withdrawals, a strategy that keeps their tax rate at 10% throughout most of retirement.

At the end, the Zarellis wound up paying the lowest taxes ($53,000) and the Gomezes the highest ($293,000). The Henricksons didn’t do much better for taxes ($241,000). The Gomezes also wound up with the lowest ending wealth in their portfolio, at $1,573,387, and the Zarellis had the highest dollar figure ($1,907,073). The Henricksons ended up with $1,589,777.

Key conclusions of the JP Morgan Asset Management’s analysis are:

  • Clients will continue using tax deferral as a main source of retirement saving;
  • Tax planning is key as retirees navigate the complex tax codes;
  • Even median-income retirees may face a marginal tax rate jump when they begin RMDs at age 70½;
  • A Roth conversion can help significantly reduce taxes and provide estate planning benefits; and
  • A proactive approach to retirement income can help clients to better diversify assets and provide a smooth tax experience in retirement.

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