Making retirement planning automatic

Government pushing for greater use of annuities

May 5, 2014 @ 12:51 pm

By Gregory Crawford

Retirement planning, annuities, auto-IRA, auto 401(k), defined contribution, defined benefit
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Anything automatic — enrollment, contributions and even allocations in retirement plans — is gaining steam with policymakers as they seek to improve Americans’ savings rates.

“We are looking at the power of inertia,” said Marcia S. Wagner of The Wagner Law Group. “Automatic is becoming the nomenclature in the retirement industry.”

Speaking at the Investment Management Consultants Association’s annual meeting in Boston on Monday, Ms. Wagner said the Obama administration is also pushing automatic individual retirement accounts that feature a 3% default contribution rate, a choice between a pre-tax IRA or an after-tax Roth IRA, multiple alternatives for selecting an IRA provider and government-designated default investments.

While current auto-IRA proposals are unlikely to become law, reform is likely as lawmakers grapple with an aging middle class that is largely unprepared for retirement.

Automatic features, she said, “help us deal with the first problem — getting people in this country to save more.”

The next problem is protecting returns and to address this issue, policymakers have been pushing for greater fee disclosure in retirement accounts on both the plan sponsor level and the participant level.

“Fee transparency is meant to enable the plan sponsor and plan participants to be responsible consumers,” Ms. Wagner said, adding that increased fee disclosures have had Washington’s desired effect of pressuring fees because competitors in the business now are seeing the fees one another charges.

The other avenue the government has traveled to protect returns is ratcheting up the definition of fiduciary. The Labor Department has been struggling to create a refined definition of fiduciary after its first proposal was roundly criticized as being too loose and wide-ranging.

“If anyone might consider what you had to say [with regard to retirement planning], you’re a fiduciary,” Ms. Wagner said, adding that under the DOL’s initial proposal, even one-time, casual advice could push an adviser into a fiduciary status.

“I do think a new proposal for who is a fiduciary from the DOL is coming,” she said, adding that the timing remained uncertain. “What you need to know is that the definition is evolving and there is harmonization between and amongst the DOL, the [Securities and Exchange Commission] and [the Financial Industry Regulatory Authority Inc].”

The third problem under the government’s microscope is retirement income distribution, or decumulation, and the main effort is around the use of annuities.

“The government is trying to get people to think about annuities,” Ms. Wagner said, adding that policymakers are “eliminating the regulatory underbrush that is inhibiting [the addition] of annuities on 401(k) lineups.”

She said the “annuity of the day” that policymakers appear to favor is the longevity annuity, one that doesn’t begin to pay benefits until well into the insured’s retirement.

One idea at the Internal Revenue Service is to eliminate the required minimum distribution for participants with qualified longevity annuities, she said.

An area of focus for the DOL involves including information about how an annuity would look on participants’ retirement account statements.

Ms. Wagner said the department, in an advanced notice of proposed rule making, has floated the idea of requiring a lifetime income illustration in participant statements that would assume a 7% investment return, a 3% annual contribution increase and a 3% discount rate to convert the totals to current dollars.

She gave the example of a 50-year-old participant with a $125,000 account. The estimated monthly lifetime payment would be $700. Based on the return and contribution assumptions, the account would reach $500,000 by 2029, when the participant is 65. Under current dollars, the account would be worth $321,000, leaving an estimated monthly lifetime payment of $1,800.

Because of the potential for misunderstanding the numbers and the assumptions, this proposal could lead to a slew of lawsuits, she said.

“You’re going to see the beginning of massive lawsuits if this becomes law,” Ms. Wagner said.

Either way, she added, “we’re going to see massive evolution in this area.”

Finally, Ms. Wagner said that retirement — and retirement savings &mdash’ is a focus of tax reformers and pointed to Office of Management and Budget estimates that the defined-contribution/401(k) market will contribute $61 billion to the federal deficit in fiscal 2015 and the defined-benefit market will contribute $42 billion.

“That’s a big target,” she said.

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