Compliance March 26, 2018

SBCA Urges Congress to Modify Portion of RESA

Senators have reintroduced the Retirement Enhancement and Savings Act, and the Small Business Council of America has a concern about one section of the bill.

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Senators Orrin Hatch, D-Utah, and Ron Wyden, D-Oregon, have reintroduced the Retirement Enhancement and Savings Act (RESA).

RESA includes a proposal for pooled employer plans (PEPs), or open multiple employer plans (MEPs). It would treat them as one plan under the Employee Retirement Income Security Act (ERISA) and take care of the “one bad apple” rule to prevent one participating employer from disqualifying the whole plan.

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It also includes a proposal to require lifetime income estimates at least annually on participants’ retirement plan statements; a fiduciary safe harbor for the selection of lifetime income providers for retirement plans; limits on stretch individual retirement accounts (IRAs) that allow beneficiaries to take out retirement plan assets over their lifetime; a proposal to allow more time for participants who terminate with an outstanding loan to rollover the loan and pay it off without it being a deemed distribution; as well as other proposals that would affect nondiscrimination rules, the automatic enrollment safe harbor default rate and the treatment of 403(b) custodial accounts upon plan termination.

However, the Small Business Council of America (SBCA) sent a letter to members of Congress to express the group’s concerns about Section 501 of RESA. This section “would basically require that all funds in defined contribution plans and IRAs over $450,000 at the time of the owner’s death be brought into the income of most beneficiaries (other than spouses) within five years.  We are concerned that this dramatic change in the treatment of inherited plans will trigger the freezing or termination of hundreds of thousands of small business retirement plans,” says SBCA Chair Paula Calimafde.

The SBCA contends that, if the proposal becomes law, accountants and other advisers will tell their clients to not save any more in a retirement plan than what they are sure to use during their lifetimes.  The council says most small business owners regard the contributions they make for their staff as the price of being able to have a qualified plan to save in for their own retirement, and it fears that once they reach the advised amount of savings, small business owners will close or freeze their plans. For the employees, this will mean that they will not receive the retirement plan contributions (or the option to save in a plan) nor will they get the foregone contributions as additional salary.

The SBCA also says there are principles of fairness in play, particularly for older Americans who have saved in retirement plans for years and will be informed that the tax treatment available to their children has suddenly been drastically changed for the worse.

To lessen this unfairness, the SBCA urges Congress to, at a minimum, provide children with at least 20 years to remove funds from an inherited plan in order to be able to spread out the income taxation.
The Markets March 26, 2018

Pre-Retirees, Retirees Not Addressing Market Volatility in Portfolios

“It’s clear from our research that many retirees may be vulnerable to sudden market corrections and volatility, which can adversely impact savings,” Tina Wilson, head of Investment Solutions Innovation at MassMutual.

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Retirees and pre-retirees overwhelmingly express concerns about protecting retirement savings from stock market losses, yet many say their primary investment goal is to grow rather than to preserve assets, according to a new study from Massachusetts Mutual Life Insurance Co.

The MassMutual Retirement Savings Risk Study found 94% of pre-retirees and 92% of retirees “strongly agree” or “somewhat agree” that it is important to take steps to avoid major stock market losses right before retirement. One in two pre-retirees (49%) and one in three retirees (32%) are apprehensive about taking too much investment risk, the study finds.

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However, the study finds that many retirees and pre-retirees are more focused on growing rather than preserving their assets:

  • 59% of pre-retirees and 32% of retirees describe their primary investment strategy as focused on either “aggressive growth” or “moderate growth;”
  • 32% of pre-retirees and 49% of retirees characterize their investment mix as a balance between growing and preserving their savings;
  • Pre-retirees are most likely to predict that their investments will be focused primarily on preservation rather than growth when they retire, while retirees are less likely to actually adopt that strategy; and
  • Guaranteed income either through a pension or annuity makes a difference. Although they report similar risk tolerances, study respondents with a source of guaranteed income were more likely to focus on growing their assets just before and into retirement than those without guaranteed income.

Few retirees surveyed wish they had been more conservative just before retirement, noted Tina Wilson, head of investment solutions innovation, a sentiment that may have been colored by one of the longest bull markets on record. Fifty-eight percent of retirees say they would employ the same investment strategy just before retirement, and 35% say they would have invested either “much more” or “somewhat more” aggressively if they could alter past decisions, the study finds.

“It’s clear from our research that many retirees may be vulnerable to sudden market corrections and volatility, which can adversely impact savings,” Wilson says. “Because many retirees rely on their investments for income and have more limited time horizons to recoup investment losses, a significant market downturn could significantly reduce their income. Working with a financial adviser, attending educational sessions available at the workplace, and accessing web-based financial planning tools may be helpful.”

Financial advisers generally caution retirees and pre-retirees against taking too much investment risk. Study respondents who worked with an adviser (46% of pre-retirees; 57% of retirees) say their adviser recommends they change their investment strategy. Of that group, 73% of pre-retirees and 88% of retirees report that their advisor recommends that they invest more conservatively.

Could TDFs help?

According to Wislon, customized investments where a professional money manager automatically shifts assets to more conservative investments as an investor nears or lives in retirement may be helpful for some people. However, target-date fund (TDFs) were introduced in the early 1990s, long after many study respondents started saving for retirement, which may be one reason why the adoption of those strategies among these retirees and pre-retirees appears to be relatively low among study respondents.

For instance, 29% of pre-retirees and 20% of retirees indicate they currently invest in TDFs (or invested in TDFs at the time they retired). Twenty percent of both groups are unsure.

However, many respondents indicate that TDFs might be beneficial, especially if an investor lacks the discipline or time to adjust his or her investments. Sixty-six percent of pre-retirees and 44% of retirees agree that TDFs would help.

A majority of respondents (66% of pre-retirees; 53% of retirees) also agree that TDFs are easy to use, the study finds. But, a significant number (38% of pre-retirees; 45% of retirees) would prefer to manage their own money.

The Internet-based study was conducted in January 2018 on behalf of MassMutual by Greenwald & Associates and polled 801 retirees who have been retired for no more than 15 years and 804 pre-retirees within 15 years of retirement.

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