CONGRESS What Do They Have In Store For Our 401(k) And 403(b) Plans? Richard S. Sych, F.S.A. President and Consulting Actuary April 2013

Transcription

1 CONGRESS What Do They Have In Store For Our 401(k) And 403(b) Plans? Richard S. Sych, F.S.A. President and Consulting Actuary April 2013

2 Agenda Why All The Fuss? What s On The Table? What s Next? What Do I Do? Please Ask Questions At Any Time 2

3 Why All The Fuss? Driven by the need to address a deficit and growing debt Focus on this fiscal issue will limit other legislation Most anything will be on the table One school of thought is to increase effective tax rates Limit deductions Limit credits 3

4 Why All The Fuss? 401(k) and 403(b) plans are on the table Most are anticipating likely changes Will probably see more debate over retirement security Baby boomers retiring Adequacy of current systems Employer and employee roles Lifetime income products for 401(k) and 403(b) plans 4

5 Why All The Fuss? Long Term Budget Outlook 5

6 Why All The Fuss? Federal Debt 6

7 Why All The Fuss? Estimated OASDI Income and Cost in CPI-indexed 2012 Dollars Based on Intermediate Assumptions (in billions, from 2012 OASDI Trustees Report) 7

8 What s On The Table? 8

9 What s On The Table? The 20/20 Proposal: Total retirement plan contributions would be the lesser of 20% of pay or $20,000 Limit 401(k) and 403(b) employee pre-tax contributions to $14,850 Make IRA, 401(k) and 403(b) contributions Roth Allow Roth employer contributions Consolidation of 401(k), 403(b), 457(b) plans 9

10 What s On The Table? Tax deduction cap, all deductions and exclusions pooled together (including health care) Tax Deduction Limitation, high incomers ($250,000 married filing jointly) would pay some tax on employee and employer contributions to health and retirement plans Example: Exclusion could be limited to 28% resulting in 7% taxation for those taxpayers in the 35% bracket Possible taxation again when retirement funds are distributed 10

11 What s On The Table? Tax Credit, all tax exclusions and deductions for retirement savings would be replaced with a fixed percentage credit Example: Set credit at 28% means a tax payer in the 35% bracket would pay 7% tax Possible taxation again when retirement funds are distributed 11

12 What s On The Table? Raise Social Security retirement age Raise Medicare eligibility age Slow Social Security benefit increases (accruals or CPI) Eliminate taxable wage limit (10 year phase out) More PBGC premium increases GAO likes risk-based premium structure 12

13 What s Next Looking to ease rules for plan sponsors Consolidate participant notices Facilitate electronic delivery of required disclosures Forfeitures could be used to fund safe harbor contributions (some clarity) Exempt small benefits from minimum required distribution rules Increase savings rates in retirement plans Increase coverage in retirement plans Promote lifetime income options 13

14 What s Next Sen. Harkin proposal for Universal Savings System Employers not offering auto-enrollment with employer contributions must auto-enroll employees in privately-run USA Retirement Fund Employer has no fiduciary responsibility Employer responsible for enrollment, payroll deductions and modest contribution 14

15 What s Next USA Retirement Fund Privately run, licensed and regulated retirement plan Overseen by Board of Trustees with employees, retirees and employer representatives Trustees would be plan fiduciaries Benefits paid as a lifetime annuity with survivor benefits Allow participants to move money from fund to fund 15

16 What s Next Lifetime income options from IRS proposed regulations and rulings Basically four parts that are being addressed Partial annuities (defined benefit plans) Longevity annuities Purchase annuities from the defined benefit program Clarify the option of a deferred annuity 16

17 What s Next Making it easier to offer the option of partial annuities Perceived as an all or nothing perception (annuity or lump sum) Best solution may be a combination of both Current regulations require the use specific assumptions 17

18 What s Next Making it easier to offer the option of partial annuities (cont.) Solution is to streamline the calculation of partial annuities Simpler method should make plans more willing to offer partial annuities Avoid the all or nothing perception 18

19 What s Next Making it easier to offer the option of longevity annuities Longevity annuity is an income stream that begins at an advanced age Annuities can provide a cost-effective solution for retirees Regulatory barriers include a change to required minimum distributions (age 70.5) rules Proposed regulations allow for longevity annuities that cost no more than 25% of the account balance and begin as late as age 85. Required minimum distribution rules are disregarded 19

20 What s Next Making it easier to offer the option of longevity annuities (cont.) Example: Bill is age 65 and has $200,000 in his account. Bill can use $50,000 to purchase a deferred annuity that begins at age 85. This would purchase an annuity that pays about $50,000 per year for life using today s interest rates. The remaining $150,000 is available to Bill. Bill knows that the $150,000 must last 20 years (or longer). 20

21 What s Next Clarifying how participants can purchase annuities from their employer s defined benefit program Alternative to offering lifetime income options in 401(k) or 403(b) plans Annuities under defined benefit plan are low cost Uncertainty with current rules Ruling clarifies how rules apply 21

22 What s Next Clarifying how participants can purchase annuities from their employer s defined benefit program (cont.) Defined benefit plan must convert the rollover amount to an annuity that is fair Fair defined as at least actuarially equivalent based on specified assumptions Same assumptions are used to convert annuity benefits to lump sums 22

23 What s Next Clarifying how participants can be offered the option of a deferred annuity Uncertainty as to how plan qualification rules would apply to deferred annuities Rules require that an employee obtain written notarized consent of the spouse Not clear how requirement applies to lifetime income that begins in the future 23

24 What s Next Clarifying how participants can be offered the option of a deferred annuity (cont.) Ruling clarifies how and when spousal consent provisions apply Describes various arrangements permitting employees to defer annuities to a later date Insurance company issuing the annuity would assure compliance with the spousal consent rules 24

25 What Do I Do? Arrange for an update meeting with your professional advisors Monitor s or other communications from any professional organizations (i.e., CBIA, SHRM, etc.) Reach out to your professional advisors Call or me Richard Sych rsych@hhconsultants.com 25

26 Questions 26