More retirement-related regulatory news for plan sponsors, including links to detailed information.
DOL posts lifetime income illustration and fact sheet
Workers participating in defined contribution (DC) plans, such as 401(k) or similar savings plans, are responsible for managing their retirement savings while employed and during their retirement years.
As described in an advance notice of proposed rule-making (ANPRM), the U.S. Department of Labor (DOL) is considering proposing a rule that pension benefit statements include the participant’s account balance as a single sum as well as an estimated lifetime income stream of level payments using both the participant’s current account balance and the projected account balance at retirement. For married participants, the statement also must include joint and survivor lifetime income payments.
Using assumptions described in the ANPRM (noted below), this calculator illustrates an annuitization approach to estimate the monthly lifetime income streams based on both the participant’s current account balance and on the projected value of the account balance at retirement. For both balances, the calculator develops two level lifetime payments: one for the life of the participant (with no benefits to any survivors) and the second for the joint lives of the participant and the spouse with a 50% survivor’s benefit for the spouse’s lifetime.
This calculator uses a simplified computation (e.g., annual contributions, mid-year retirement). Depending on the comments received in response to the ANPRM, the next version of the calculator may provide a more precise computation (e.g., monthly contributions, retirement in a specified month).
For a copy of the fact sheet, click here. For the calculator, click here.
DOL issues ANPRM on pension benefit statements
The U.S. Department of Labor (DOL) has issued an advanced notice of proposed rule-making (ANPRM) regarding the pension benefit statement requirements under section 105 of ERISA, as amended. The ANPRM describes certain rules the DOL is considering as part of the proposed regulations.
The rules being considered are limited to the pension benefit statements required of defined contribution (DC) plans. First, the DOL is considering a rule that would require a participant’s accrued benefits to be expressed on his pension benefit statement as an estimated lifetime stream of payments, in addition to being presented as an account balance. Second, the DOL also is considering a rule that would require a participant’s accrued benefits to be projected to his retirement date and then converted to and expressed as an estimated lifetime stream of payments. This ANPRM serves as a request for comments on specific language and concepts in advance of proposed regulations.
Comments are due on or before 60 days after publication in the Federal Register. The ANPRM was published on May 8, 2013.
Federal Reserve: Early withdrawals from retirement accounts during the great recession
Three economists at the U.S. Federal Reserve released a paper titled “Early Withdrawals from Retirement Accounts During the Great Recession,” which shows that for every dollar workers contributed to their pensions and individual retirement accounts in 2010, taxpayers younger than 55 took nearly half—45 cents—as a taxable distribution. Here is an excerpt:
“For families headed by someone younger than age 55, about 45 percent of total new contributions to retirement accounts in 2010 were offset by early withdrawals, but that number was 30 percent in 2004, and some of that increase is attributable to declining contributions. The analysis here of factors associated with early withdrawals in 2010 suggests that propensities to receive cash-outs or to take taxable withdrawals is higher for lower-income families, because lower-income families are much more likely to experience the sorts of shocks that lead to withdrawals and slightly more likely to take a withdrawal when they experience those shocks. These findings may help to explain why the observed cross-section distribution of retirement account balances—even within the covered population, and relative to contributions—is skewed towards higher income families.”
Read the entire paper here.
IRS PLR extending 60-day rollover period because of bank error
The Internal Revenue Service (IRS) has issued a private letter ruling (201319034) dealing with the 60-day rollover period.
The ruling concludes:
“The information and documentation submitted by Taxpayer A is consistent with the assertion that the failure to accomplish a timely rollover of Amount 1 was due to a mistake by Bank D. Therefore, pursuant to section 408(d)(3)(l) of the Code the Service hereby waives the 60-day rollover requirement with respect to the distribution of Amount 1 from IRA B.”
Read the entire private letter ruling (PLR) here.
SEC, FINRA issue investor alert on pension or settlement income streams
The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently issued an investor alert entitled “Pension or Settlement Income Streams – What You Need to Know before Buying or Selling Them.”
The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.
Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump sum amount, which will almost always be significantly lower than the present value of that future income stream.
The investor alert contains a checklist of questions to consider before selling away an income stream:
• Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pensions to someone else.
• Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream and compare this rate to alternatives such as a bank loan.
• What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional.
• Will the factoring company require life insurance? The factoring company may require you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout.
• What are the tax consequences? The lump sum payment you collect may be taxable.
For a copy of the investor alert, click here.
JCT summarizes tax reform proposals/Ways and Means working with retirement incentives
The U.S. Joint Committee on Taxation (JCT) issued a “Report to the House Committee on Ways and Means on Present Law and Suggestions for Reform Submitted to the Tax Reform Working Groups” (JCS-3-13). The 568-page document summarizes current law, key tax reform proposals, and formal submissions to the House of Representatives Ways and Means Committee working groups on tax reform. Among the tax incentives that are discussed, those dealing with the employer-sponsored retirement system are discussed specifically.
Download a copy of the report here.