Tag Archives: Kara Tedesco

Hurricane Irma victims: Hardship and loan relief available

Good news: the Internal Revenue Service (IRS) announced that 401(k) plans and similar defined contribution (DC) employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. Similar relief was provided to victims of Hurricane Harvey. Plans will be allowed to make loans and hardship distributions before they are formally amended to provide for these features. This relief applies to 401(a), 403(a), 403(b), and certain 457(b) plans. Defined benefit (DB) plans and money purchase plans cannot make hardship distributions unless they contain either employee contributions that are separately accounted for or rollover amounts.

Loans and hardship distributions will provide the financial resources needed to those suffering in the wake of the hurricanes. Announcement 2017-13 states that both current and former employees are able to take loans or hardship distributions if their principal residences on September 4, 2017, were located in the Florida counties identified for individual assistance by the Federal Emergency Management Agency (FEMA) because of the devastation caused by Hurricane Irma, or whose places of employment were located in one of these counties on that applicable date, or whose lineal ascendant or descendant, dependent, or spouse had principal residences or places of employment in these counties on that date.

Plans can ignore the reasons that normally apply to hardship distributions, thus allowing the funds to be used, for example, for food and shelter. If a qualified plan requires certain documentation before a distribution is made, the plan can relax this requirement and still be considered qualified. The amount available for a hardship distribution is still limited to the maximum amount available under the IRS Code. In addition, there are no post-distribution contribution restrictions required as there normally are in plans, if the distribution is being made for hurricane relief. Employees still have to pay income taxes on hardship distributions and may have to pay the 10% early penalty tax. Loans, if not repaid, but rather defaulted, become taxable income to the participant.

There is a window of time in which employees can take advantage of this relief. The distributions must be taken from a qualified plan on or after September 4, 2017, but no later than January 31, 2018. Employers need to amend their retirement plans to provide for loans or hardship distributions generally by December 31, 2018.

Why this relief is important does not need debating, but the significant impact it may have on retirement plans and employee retirement accounts remains to be seen. It is challenging for employees to save money and, with an unforeseeable emergency in front of them, employees will turn to where they have most if not all of their savings. Employees may also stop saving for the future indefinitely because of their need for current income to survive now. All of this can’t help but compromise their future retirements.

Should 401(k) sponsors continue offering employer stock?

There are several valuable reasons why companies include employer stock in 401(k) plans. However, increased risk of litigation has caused many employers to reconsider the decision to offer employer stock as an investment option. In her article “Employer stock in a 401(k) plan,” Milliman’s Kara Tedesco outlines initiatives for plan sponsors to consider when deciding to maintain or discontinue their employer stock offering.

Final fiduciary rules: Frustrations and the unknown

Tedesco-KaraOn June 8, 2016, the U.S. Department of Labor (DOL) final fiduciary rules became effective, but these new rules are not actually applicable until April 10, 2017. The final rules outline what advisers, financial institutions, and employers need to do to adhere to them. Daunting? Yes. Impossible? Maybe, but some believe the fiduciary rules have been a long time coming. The new rules require advisers and financial institutions to comply with and uphold the fiduciary standards surrounding ERISA when advising clients for a fee. This is significant, as it has the potential to impact how some advisers help their clients with retirement planning. Some advisers may decide to stop helping.

As participants become more and more responsible for their own retirement savings, employers are finding they need to turn to their retirement plan experts for help. A plan adviser who gives fiduciary advice receives compensation for the recommendation he or she makes, and usually the recommendation is based on the specific needs of the participant. The advice is given so that an action will be taken. The final rules clearly state this expert is a fiduciary and the recommendation made has to be in the best interest of the participant and not the pocketbook of the employer and or adviser.

Why is this so important? Because millions of participant dollars have been rolled into IRAs that have high fees and expenses associated with them. Participants don’t understand the fees, they don’t understand their investments, and often they lack the proper tools to help them make educated decisions. It bears asking the question, should an adviser make a recommendation to roll or transfer account balances to another plan or IRA, when a participant might be better off staying put? The answer could be yes, and employers may find that terminated employees are staying with them because it is a better financial decision.

How do advisers and employers feel about this? Many advisers are frustrated they will have to comply with the best interest contract exemption. It has several requirements, but it means advisers may need to modify or fine tune their current practices to satisfy the rules. Plan sponsors will have to take another look at their advisers and service providers and understand their fiduciary responsibilities. It’s important they confirm that any rollover assistance is administrative in nature and cannot be perceived as advice from non-fiduciary human resources (HR) staff or service providers. However, plan sponsors can now feel good knowing that the general education they offer to participants about plans and investments is acceptable; it does not mean they are providing investment advice or taking on additional fiduciary responsibility.

With all of this said, could the election results change, delay, or repeal the final fiduciary rules? There is speculation this could happen, which makes the financial services industry happy, but for those pushing for reform, very unhappy.

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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Retirement plan leakage and retirement readiness

Tedesco-KaraThe title alone proves opposites don’t always attract. “Leakage” means outflow and outflows in retirement plans are not easily controlled. Worse yet, the impact on a participant’s retirement readiness is a big problem. Where money goes once it leaves a retirement plan is a question with many answers, some of which lead to plan sponsors feeling concerned about plan design and the choices available to participants.

In defined contribution (DC) plans such as the 401(k), participants defer money from their paychecks into the plan. The employer may make matching or other employer contributions. Most 401(k) plans are designed to allow participants to access these deferrals, as well as their other vested monies, while actively working. This access occurs through loans, hardship withdrawals, and other in-service distributions. When participants take a loan, they pay themselves back over time. In some instances, however, a participant defaults on the loan, which automatically reduces the account balance. In the case of in-service distributions, once the money is paid to the participant, it does not come back into the plan, similarly reducing the participant account balance.

Of greater concern may be the preretirement withdrawal of an account balance upon termination of employment. Participants terminate employment for a myriad of reasons, such as to start a new career path. In a defined benefit (DB) plan, it is not uncommon to see a lump-sum window option offered to participants. Plan sponsors benefit from participants choosing the lump-sum window option just as they do when terminated participants take their money from 401(k) plans. The plan sponsor’s administrative costs associated with either type of plan are reduced.

The problem? Participant account balances that are cashed out and not rolled over to an IRA or another qualified retirement plan are subject to immediate income tax and potentially burdensome tax penalties, depending upon their age. But many participants don’t know what to do with the money and will often use it right away to satisfy an immediate financial need rather than save it for retirement. An even greater, more glaring problem is that the participant’s total projected retirement savings has been compromised. Does this mean that a participant will not achieve the suggested 70% to 80% income replacement rate? Most likely, the answer is yes, especially if the participant has no other savings outside the former retirement plan.

There is no clear answer to the leakage problem in plans. A good retirement plan design can greatly influence the behavior of its participants. It has to include and encourage regular employer and employee contributions to help build retirement accounts. Withdrawal provisions and loans in plans don’t signify poor plan design, but tighter administrative controls around the plan provisions, such as allowing only one in-service withdrawal per year, helps keep money in the plan. In addition, increased participant education has to remain a focus for employers, with a special emphasis on the benefits of taking a rollover instead of a lump-sum cash distribution.

What’s the additional guidance on in-plan Roth rollovers all about?

Tedesco-KaraOn December 11, 2013, the IRS issued additional guidance (Notice 2013-74) on in-plan Roth rollovers (also known as “conversions”). As background, the Small Business Jobs Act of 2010 (SBJA) allowed 401(k), 403(b), and governmental 457(b) retirement plans that permit Roth deferrals to offer participants (or their surviving spouses) an in-plan Roth conversion of distributable vested pretax accounts (e.g., because age 59-1/2 has been attained) into an after-tax Roth option within the same plan.

The American Taxpayer Relief Act of 2012 (ATRA) added a twist to the existing law by removing the requirement that the in-plan Roth rollover amount had to be eligible for distribution. Effective January 1, 2013, as long as the plan allows Roth elective deferrals and in-plan Roth rollovers under the expanded guidance, participants can take advantage of an in-plan Roth rollover of both vested distributable and otherwise non-distributable pretax amounts.

The additional IRS guidance clarifies the questions surrounding ATRA and in-plan Roth rollovers of otherwise non-distributable amounts. In-plan Roth rollovers are permitted within 401(k), 403(b), and governmental 457(b) plans, irrespective of any otherwise applicable in-service distribution restrictions based on contribution type or other conditions (such as age). The amount must be vested prior to rollover, must retain the same distribution restrictions that applied before the rollover, and, being a rollover, no mandatory or voluntary withholding applies even though the conversion is taxable in the year it occurs. Participants may want to increase their withholding on sources outside of the plan to pay for the taxes on the conversion of the pretax account.

Plans need to be amended to allow for in-plan Roth rollovers. The guidance states the plan amendment needs to be adopted by the later of the last day of the first plan year in which the amendment is effective, or December 31, 2014. A calendar year 401(k) or 457(b) governmental plan that began allowing in-plan Roth rollovers in 2013 or 2014 has to be amended by December 31, 2014. A yet-to-be determined extended amendment deadline applies to 403(b) plans (but not before 2015 according to the IRS).

The additional guidance also provides that the plan can limit the types of contributions eligible for in-plan Roth rollovers and the frequency of the rollovers, and it can be amended to discontinue allowing them. If a participant has never made a Roth contribution to the plan, but requests an in-plan Roth rollover, the rollover is considered a Roth contribution and starts the participant’s five-taxable-year holding period for converted amounts and related earnings to be ultimately distributed from the plan tax-free (subject to certain other conditions).

The additional guidance should help plan sponsors decide whether to allow for the expanded in-plan Roth rollovers. Now that there is increased potential for a participant to convert his or her vested pretax account to after-tax dollars and pay the associated taxes now to save on taxes in retirement, plan sponsors may want to consider adding this feature to their retirement plan.

For more perspective on this new guidance, click here.