The year 2014 closes with a number of federal-level retirement-income actions in the bag. Following are four that may hold particular interest for advisors as implementation gets under way next year.
The myRA Retirement Account. Debuted by President Barack Obama in January 2014, this is a starter retirement savings program for low to mid-income workers. It allows employees to save up to a maximum of $15,000 over 30 years by investing after-tax dollars in Treasury securities via payroll deduction at participating employers. Now in its pilot phase, this program is essentially a Roth individual retirement account (IRA) program for the workplace. Manager is Dallas-based Comerica Bank. The security is “a new nonmarketable, electronic retirement savings bond,” according to a Department of Treasury (DOT) announcement in December. The bonds will be issued to and held by the designated custodian, on behalf of participants.
Heads up: Insurance and financial advisors won’t be selling the bonds or the program, but their small-business clients will likely ask for insight into myRA once full implementation begins.
QLACs. The acronym stands for qualifying longevity annuity contracts. In July, the Treasury Department issued regulations that allow the value of such contracts to be excluded from the required minimum distribution (RMD) calculations that qualified retirement plan owners—such as those having 401(k)s and IRAs — must start performing annually at age 70.5. The annual RMDs are based on a person’s qualified plan value, but if the person has purchased a QLAC, the RMD is based on the plan value minus the premium paid for the QLAC. That will help reduce taxes paid on the RMD withdrawals.
Heads up: A QLAC is a type of deferred income annuity (DIA) that starts paying a guaranteed income stream as late as age 85. A DIA must have special characteristics to qualify as a QLAC, including that the premium can equal no more than 25 percent of a person’s qualified account balance, up to a $125,000 maximum. Carriers are working on developing QLAC products right now and at least one QLAC has already surfaced. Agents and advisors may soon find themselves discussing this option with individual IRA owners a well as with 401(k) plan sponsors who may be interested is adding that an option to the company plan.
Target date funds with annuities. In October, Treasury and the Internal Revenue Service (IRS) released guidance (Notice 2014-66) that enables plan sponsors to include DIAs in target date funds that are qualified default investment alternatives (QDIAs). The QDIAs are default investments in defined contribution plans like 401(k)s that meet specified government standards. Plan sponsors can direct contributions made by 401(k) participants who are automatically enrolled in a plan to these options.
Heads up: The use of DIAs as a QDIA is voluntary. That means some plan sponsors may choose not to offer the option. However, others will. When that happens, workers will be provided with information and education about the option. This will ultimately increase awareness about annuities in general, and about planning for guaranteed retirement income in particular. That awareness should help agents and advisors address retirement income issues with clients. Annuity carriers are working on developing DIAs for the QDIA environment right now, so they will likely be receiving market and product updates soon.
Multiemployer defined benefit (DB) pension plan change. The $1.1 trillion spending bill (H.R. 83 now Public Law No: 113-235) includes significant changes to laws affecting multiemployer DB plans. The major change is that plan trustees can now cut (“suspend”) the pension benefits of retirees if their multiemployer pension plan is endangered. Such plans typically provide retirement benefits on behalf of several employers, which are often small businesses in the same or similar industry. Many of these plans have become severely underfunded in recent years. To help shore up the plans, lawmakers inserted the benefit cut provisions into the spending bill during last minute negotiations. (See DIVISION O--MULTIEMPLOYER PENSION REFORM of H.R. 83 for details).
Heads up: Since there are approximately 10 million participants in multiemployer pension plans, some agents and advisors may have retired clients who one day experience such a cut. If so, the clients and families may need help with restructuring assets.
The four developments mentioned above have met with both praise and scorn from various segments of the public and the insurance and financial services industry. As 2015 gets under way, retirement professionals may encounter some of both as they seek to help clients understand and make decisions. Advisors will have their hands full, since they will also need to keep up with developments associated with implementation and interpretation surrounding these changes.
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