Data & Research May 23, 2011

Whitepaper Claims Emotional Barriers Blocking Pursuit of Advice

A new white paper assets that emotional responses are keeping those in and near retirement from accessing professional investment help.  
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According to “Understanding the Accidental Investor: Baby Boomers on Retirement”, a whitepaper by advice provider and registered investment advisory firm Financial Engines, those retirement investors are uncertain about the future, fearful of poverty, not confident in their investing abilities, and distrustful of unscrupulous financial services and insurance firms. 

Regardless of the primary emotion, the white paper – based on over 300 interviews and surveys that Financial Engines conducted between 2008 and 2011 – reported that these emotions frequently created barriers that prevented participants from accessing professional help. Many participants that expressed those emotions simply avoided thinking about retirement altogether.  Participants that made statements that reflected a fear of poverty frequently engaged in what Financial Engines termed “magical thinking” – telling themselves that everything would work out in the end.

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Finally, those that were distrustful of financial services or unconfident about finances frequently turned to family and friends for advice, regardless of their qualifications or experience. 

Future “Tense?”

More than half of participants interviewed expressed some form of uncertainty in what the future may bring;

Nearly half had a fear of poverty in retirement;

Nearly half were distrustful of the motivations or qualifications of financial services and insurance firms; and

More than a third of near-retirees and retirees said that they did not feel confident or knowledgeable when it came to making important financial decisions. 

In addition to highlighting the emotions and corresponding behaviors of near-retirees and retirees, Financial Engines identified five common needs that, if met, could potentially help participants overcome these strong emotional barriers. Those needs include:

Help from an Adviser. Many participants said that they wanted to work with a financial professional they could trust to help them create a plan and decide on the appropriate course of action. At the same time many said that they found it difficult to know who to trust with their life savings, according to the report.

Sponsor Evaluation. According to Financial Engines’ white paper, participants said that having their employer select and monitor independent retirement income providers made them more likely to accept professional retirement help.

Fee Transparency. Finally, many participants demanded clear and easily understood fees. They said that they would not act unless they fully understood the fees associated with a given product or service.

Flexibility. Given the uncertainty of retirement, participants expressed a need to have flexibility and control over their retirement investments. According to the white paper, participants had a high reluctance to be locked into an investment vehicle—especially early in retirement when uncertainties are at their highest.

Safety. Due to fear of significant losses right before or in retirement, many participants wanted investments that lowered investment risk or that could provide a steady and reliable source of income over time, and potentially for life. Many participants desired both, according to the report, and many of the participants also wanted flexibility.

Copies of the “Understanding the Accidental Investor: Baby Boomers on Retirement” white paper are available for download free of charge at http://www.financialengines.com.

 

Compliance May 20, 2011

457(f) Plan Guidance Expected in 2011

Drinker Biddle says the IRS is getting ready to issue long-anticipated regulations governing Internal Revenue Code Section 457(f) plans.
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In an alert sent out by the law firm to its clients, Drinker Biddle said that during a Webcast on April 11th, the National Association of Government Defined Contribution Administrators (NAGDCA) said the regulations are in the “clearance” process at the IRS and Treasury Department and could be published by the time of NAGDCA’s 2011 annual conference this September.  

Several of the expected provisions, which are designed to synchronize 457(f) requirements with those of Code Section 409A, include: 

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  • Post-severance “non-compete” clauses will not create a “substantial risk of forfeiture” of 457(f) benefits, and accordingly, will not operate to defer taxation of previously-vested amounts; 
  • Severance arrangements will only be considered “bona fide” severance pay plans, which are exempt from Code Section 457 requirements, to the extent they (i) are payable only upon involuntary severance from employment, (ii) limit distributions to two times the lesser of the employee’s annual compensation or the Code Section 401(a)(17) compensation limit that applies to qualified retirement plans ($245,000 in 2011), and (iii) require distributions to be completed by the end of the second taxable year following the year in which the employee separated from service. These requirements mirror those of an “involuntary separation pay plan” that is exempt from 409A; 
  • Elective deferrals of salary are not permitted to be made to a 457(f) plan. Because employees have a current right to receive salary, the IRS’ position is that a deferral of such amounts would only reasonably occur where an employee seeks to avoid taxation by exposing it to a purported “substantial risk of forfeiture” that does not, in fact, exist. As an alternative, the IRS may permit elective salary deferrals only if they are “matched” by the employer, or if the present value of the amounts, if deferred, otherwise significantly exceeds the present value of the salary; and 
  • Further extensions of vesting periods made subsequent to an employee’s initial election (so-called “rolling vesting”) will be disregarded and, therefore, will not further defer the taxation of vested 457(f) deferred compensation. 

In the alert, Cheryl Press, Senior Counsel in the IRS Office of Chief Counsel, said the comments indicate that the regulations will include some manner of “grandfathering” or transitional relief for existing 457(f) accounts, the law firm said. Additional issues to be addressed in the regulations, include: 

  • Unused, accrued vacation and sick leave pay cannot be transferred to a 457(f) plan. Such amounts may be cashed out, or in some cases, contributed to a 401(k) or 403(b) plan; and 
  • The present value of a participant’s 457(f) account balances may be determined on an annual, as opposed to daily, basis. 

The law firm explained that 457(f) plans are nonqualified deferred compensation plans that may be sponsored by tax-exempt and governmental entities and provide for greater tax deferral opportunities than are available under 457(b) plans (which generally limit deferrals to $16,500 annually, plus certain catch-up contributions).   

According to Drinker Biddle, in anticipation of the regulations’ release, some 457(f) plan sponsors have already amended their plans to comply with the guidance provided in Notice 2007-62 (see "IRS Indicates Guidance Coming on 457 Plans").  

Plans that have already been amended may, in some cases, require additional amendments to reflect regulatory provisions that were not previously described in Notice 2007-62. The extent to which 457(f) plan document provisions and practices will need to be changed will also depend on the extent of the “grandfathering” or other transitional relief, if any, that is provided for existing accounts in the regulations.

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