Products February 15, 2012

Understanding the New 403(b) Model Disclosure Form

 

One of the key reasons for the 403(b) Transparency Taskforce’s new 403(b) model disclosure form is so vendors can show plan sponsors that they offer more than just products, according to industry experts.

 

 

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Robert J. Toth Jr., Esq., Law Office of Robert J. Toth Jr., told attendees of the National Tax Sheltered Accounts Association’s (NTSAA) 403(b) Advisor Summit that plan sponsors will see the services vendors offer on the form. The U.S. Department of Labor (DoL) is requiring vendors to provide fee disclosure to sponsors of Employee Retirement Income Security Act (ERISA)-governed 403(b) plans (see “DoL Issues Final Rule on Fee Disclosure”); the Taskforce’s Model Disclosure Form is for sponsors of non-ERISA plans.  

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Debra A. Davis, ASPPA, said the form is just a suggestion for non-ERISA plans. The Taskforce used the DoL’s disclosure rules to establish what should be disclosed by non-ERISA plans.  

According to Davis, states and school districts are reconsidering their retirement plan offerings. Some are considering a statewide 403(b) plan, which will result in vendor consolidation. In addition, consultants are telling states to lower fees. Davis said the Model Disclosure Form shows lawmakers that states don’t have to move to a lower fee model; instead, they can inform participants and let them choose.  

If legislators required disclosures to non-ERISA plans, that would give authority to the Internal Revenue Service (IRS), which would look to the DoL regulations for ERISA plans as guidance. The form is a way for the non-ERISA industry to set a standard and regulate themselves before the government steps in, Davis said.  

Toth noted that some vendors will automatically provide disclosures to non-ERISA plans, either because they feel it is a best practice or because their system can’t differentiate between ERISA and non-ERISA plans.

Davis said the preference is to provide the information to participants before they make investment decisions. For one thing, participants should be informed of any contract surrender charges so they know what they are getting into.  

 

 

Robert J. Toth Jr., Esq., Law Office of Robert J. Toth Jr., told attendees of the National Tax Sheltered Accounts Association’s (NTSAA) 403(b) Advisor Summit that plan sponsors will see the services vendors offer on the form. The U.S. Department of Labor (DoL) is requiring vendors to provide fee disclosure to sponsors of Employee Retirement Income Security Act (ERISA)-governed 403(b) plans (see “DoL Issues Final Rule on Fee Disclosure”); the Taskforce’s Model Disclosure Form is for sponsors of non-ERISA plans.  

Debra A. Davis, ASPPA, said the form is just a suggestion for non-ERISA plans. The Taskforce used the DoL’s disclosure rules to establish what should be disclosed by non-ERISA plans.  

According to Davis, states and school districts are reconsidering their retirement plan offerings. Some are considering a statewide 403(b) plan, which will result in vendor consolidation. In addition, consultants are telling states to lower fees. Davis said the Model Disclosure Form shows lawmakers that states don’t have to move to a lower fee model; instead, they can inform participants and let them choose.  

If legislators required disclosures to non-ERISA plans, that would give authority to the Internal Revenue Service (IRS), which would look to the DoL regulations for ERISA plans as guidance. The form is a way for the non-ERISA industry to set a standard and regulate themselves before the government steps in, Davis said.  

Toth noted that some vendors will automatically provide disclosures to non-ERISA plans, either because they feel it is a best practice or because their system can’t differentiate between ERISA and non-ERISA plans.

Davis said the preference is to provide the information to participants before they make investment decisions. For one thing, participants should be informed of any contract surrender charges so they know what they are getting into.  

 

Compliance February 15, 2012

Obama Budget Limits Some Retirement Savings Tax Breaks

 

Initiatives in President Barack Obama’s budget proposal would impact retirement savings for some workers.

 

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It would limit the tax rate at which high-income taxpayers can reduce their tax liability to a maximum of 28%, affecting only married taxpayers filing a joint return with income greater than $250,000 and single taxpayers with income greater than $200,000, according to news reports. This limit would apply to all itemized deductions, foreign-excluded income, tax-exempt interest, employer-sponsored health insurance and retirement contributions. 

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Also in the budget is a provision that would eliminate required minimum distributions for people who are at least 70½ years old whose tax-deferred retirement plan balances do not exceed $75,000. 

In addition, the proposal provides a few more details on a recommendation to target military retirement benefits as a source of savings by establishing a commission to review them. According to the administration’s proposal, the Department of Defense would transmit—to a presidentially appointed commission—initial recommendations on how to change the military retirement system (see “DoD Panel Proposes Retirement Benefit Change for Troops“). The commission would hold hearings, make final recommendations and draft legislation to implement its recommendation.  

President Obama would again weigh in on the commission recommendations and send them to lawmakers. The proposal would also include “grandfathering provisions” for current retirees and active-duty members. 

President Obama’s 2013 budget calls for federal employees to contribute more to their pensions (see “2013 Budget Calls for Increase in FERS Pension Contributions“).

 

In a statement, Brian H. Graff, executive director/CEO of The American Society of Pension Professionals & Actuaries (ASPPA), said: “President Obama’s proposals to limit the tax benefit for retirement savings for families earning over $250,000 is a bad proposal based on bad math. Unlike other targeted tax incentives, the tax break for retirement savings is a deferral, not a permanent write-off.”

Graff continued, “Under the President’s budget, these taxpayers wouldn’t just lose a current tax break, they would actually be penalized for saving—paying taxes now and taxes later. This will discourage small-business owners from setting up or maintaining retirement savings plans for their employees. Workers that lose workplace retirement savings plans will be the ones that really pay for this misguided proposal. 

“Under current law, there is already a $250,000 cap on compensation that can be used to calculate contributions to 401(k) plans. The President’s proposal effectively doubles down on this limit for 401(k) plans, and takes an axe to the tax incentives that encourage small-business owners to offer these types of plans at work.”

 

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