Marcia S. Wagner, Esq.

State & Federal Threats to the Private Retirement Plan System

0

Cutting back tax incentives Proposals for competing systems Impact of healthcare reform

2

Limiting Tax Cost of Retirement Plans

Impact of retirement plans on federal deficit◦DC/401(k)

• $61 billion (2015)

• $414 billion (2015 – 2019)

◦ DB

• $42 billion (2015) • 235 billion (2015 – 2019)

Tax reform Pension system reform

3

Limiting Contributions & Benefits

• 2014 Plan limitations that can be reduced to limit deficit:

◦ Annual additions from all sources - $52,000

◦ Elective deferrals - $17,500

◦ Plan sponsor deduction - 25% participant compensation

◦ Compensation limit to determine benefits/contributions - $260,000

• Proposed Tax Reform Act of 2014

− Freezes DC limits until 2024 ‒ $63.4 billion revenue gain over 10 years ‒ Additional $144 billion from treating half of 401(k) deferrals as Roth

4

Administration Proposal to Cap Lifetime ContributionsObama FY 2015 proposed $3.2 million

cap on aggregate lifetime contributionsCap to vary based on ageAnnual calculationsIntent: limit payouts to $210,000/yearDouble tax if prohibited amount not

withdrawn

5

Administration Proposal to Limit Value of Tax Deductions Obama proposal limiting tax deductions

for plan contributions◦Maximum tax rate: 39.6%◦Tax deduction for 401(k) contributions

limited to 28% ◦11.6% tax on employer & employee

plan contributions - High earners only - Basis adjustment for extra tax

6

Tax Reform ProposalsNational Commission on Fiscal Responsibility.

• 20/20 Cap: limits contributions to lesser of $20,000 or 20% compensation

• Maximum contribution: $20,000

Brookings Institution• Tax all employer and employee contributions• Contribution limits would not change• Flat rate refundable tax credit deposited to

retirement savings account

7

Consequences of Cutting Tax IncentivesEmployer Reaction◦Fewer new plans◦Termination of existing plans◦Reduced employer contributions

High Earners◦Diversion of retirement funds to insurance

and tax-exempt bondsLow Wage Workers◦Lower contributions

8

Summing UpTax Reform • Reducing tax incentives will shrink system • Lower contributions result at all income levels if tax exclusions reducedObama proposal for general limit on benefit from

tax exclusions • Does not focus directly on 401(k) contributions • Provides political cover • Same effect on contributions as direct cutback on excludible amountProposed Tax Reform Act of 2014

• Contains provision similar to Administration’s general limit

9

.

Cutting back tax incentivesProposals for competing systemsImpact of healthcare reform

10

Background Current private pension system◦ Half workers have no plan◦ Plans have low savings rates and hidden costs◦ Fewer than half of workforce will have adequate

retirement income Role of policymakers◦ Consensus on need for default mechanisms◦ Beyond auto-enrollment and auto-escalation:

Required contributions Pooling of assets Government control of investments Subsidized investment returns

11

Administration Initiatives to Increase Retirement Savings Through IRAsAdministration pushing automatic IRAs

featuring:◦3% default contribution rate◦Choice of traditional pre-tax IRA or after-

tax Roth◦Multiple alternatives for selecting IRA

provider◦Government designated default

investments

12

MyRA Initiative

MyRA Initiative◦Starter program does not require

legislative authorization◦Contributions to Roth accounts◦Permits small investments ($25 / $5)◦Low rate of return from Treasury bonds◦Maximum $15,000 balance

13

Pension System Reform - Federal LevelUSA Retirement Funds

• USA Retirement Funds proposed by Sen. Tom Harkin in 2014

Harkin “report” in July 2012 proposes new retirement system - Automatic/universal enrollment required by employers with no plan- Regular stream of income starting at retirement age- No lump sum withdrawals- Financed by employee payroll contributions & government credits- Privately managed investment by new entities: USA Retirement Funds- Limited employer involvement; no fiduciary responsibility

- Unspecified level of required employer contributions. - Employees can increase/decrease contributions or opt out.

14

Proposed Expansion of Federal Thrift Savings PlanFederal Thrift Savings Plan would be opened

to workers without private plan accessDisincentive created to establish private

employer plansQuestion whether administrative costs to be

passed on to participants, employers or taxpayers◦Enrollment◦Processing elections◦Fund transfers◦Accounting

15

Pension System Reform: State-Sponsored InitiativesSecure Plan Proposal by National Conference on

Public Employee Retirement Systems • State sponsored cash balance plans for private-sector

° 6% annual credits

° Minimum 3% interest credits

° Employer fiduciary responsibility

• Participation voluntary but withdrawal liability assessed on terminating employers

• Seeks to benefit from economies of scale

• Funding shortfall would be state responsibility

16

Pension System Reform: State-Sponsored Initiatives (continued)

California Secure Choice Retirement Savings Program − Mandatory payroll deduction auto-IRA program

° Auto enrollment at 3% unless employee opts out° Required for enterprises with 5 or more workers if no

current plan° State chooses investment managers° Guaranteed rate of return

− Signed by governor but implementation subject to IRS and DOL approval

 Other State Initiatives

− Massachusetts enactment of defined contribution multiple employer plan for non-profits − At least 11 other states said to be considering plans for private-sector employees.

17

Proposals from AcademiaGhilarducci proposal◦Eliminate all tax deductions and exclusions◦New retirement accounts to be funded with

5% contributions from employers/employees◦Pooled investments◦Government guarantees return equal to GDP◦Distributions limited to annuity beginning at

retirement

18

SPARK Institute USERSP Proposal Spark Institute Universal Small Employer Retirement Savings Program • Eligibility limited to employers with less than

100 employees • Pre-approved prototype • Auto-enrollment and auto-escalation of contribution levels • No discrimination testing • Contribution limits lower than 401(k) but higher than IRA • Investment options to meet specific criteria

○ Heavy reliance on QDIAs and TDFs ○ Employer duty to monitor

• Recordkeeping/5500 performed at provider level

19

SAFE Retirement ActSAFE Retirement Act - 2013 proposal by Sen.

Orrin HatchStarter 401(k) Plans

Up to $8,000 participant contributions annually Reduced administration and no discrimination

testing Auto deferrals from 3% to 15% Employer contributions not required Tax credit to encourage plan adoption No pooling of assets Form of payout controlled by participant

20

Summing UpProposed systemic changes intended to create

access for low wage employeesGovernment would replace private employers

in system°Mandated benefits

°Guaranteed benefits and/or investment results °Creation of new interest group to lobby for expansion of benefits State-level programs may cause breakdown in

uniformity of pension laws in effect since ERISA enactment

21

Summing Up (Continued)Government influence could drive many

advisers out of the retirement industry◦Control over choosing investment managers◦ Influence over allocation of investment

assets Increased possibility of asset misallocation

Funding of favored industries and regionsHeavy investment in government bonds MyRA example

Interesting times

22

. Cutting back tax incentives Proposals for competing systems Impact of healthcare reform

23

Impact of Healthcare ReformIndirect effects of health care law◦Employees◦Employers◦Plan service providers

24

Effect of PPACA on Employees Earlier plan distributions, because employees will not be

tied to their jobs in order to maintain health insurance◦ New investment and liquidity strategies needed

Older generation of workers to be replaced more quickly by younger less experienced employees◦ Lower salaries will result in smaller plan contributions

◦ Some industries could experience higher pay and larger contributions

◦ New generation will be less vested making plans less expensive

Low-paid workers will choose health insurance over 401(k) contributions◦ ADP/ACP problems and issues with discrimination testing may

result

25

Effect of PPACA on Employers

PPACA-mandated healthcare benefits likely to reduce level of employer support for 401(k) plans◦ Knock on effect of smaller match; smaller employee contributions◦ Shrinking employee contributions exacerbates discrimination

issues

PPACA disincentive to maintain 401(k) plan◦ $3000 per head penalty for unaffordable health insurance avoided if

cost of single-person coverage not in excess of 9.5% W-2 wages◦ 401(k) reduction of wages makes avoiding penalty harder

PPA 90-day rule for health plan availability can compromise overall plan administration◦ Delay greater than 90 days for entry into all benefit plans no

longer possible◦ May necessitate enrollment at different times

26

PPACA Effect on Retirement Industry

Increased competition in healthcare marketplace◦ Government-regulated exchanges

◦ Reduced brokers’ commissions

◦ Potential expansion of healthcare brokers into retirement plan industry

New legislatively-mandated retirement plan models◦ Reduces/eliminates role of employer

◦ Marketing focus redirected to employees

27

Marcia S. Wagner, Esq.

99 Summer Street, 13th FloorBoston, Massachusetts 02110

Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com

marcia@wagnerlawgroup.com

A0129360.PPTX

State & Federal Threats to the Private Retirement Plan System