summer 2013 The Pension Underfunding Threat Can the states resolve the looming crisis in their teacher retirement systems?
Retirement Income Strategies How Do I Move My Money? com•mit•ment noun (kə-’mit-mənt)
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11275.indd 1 3/19/13 10:33 AM Summer 2013
COVER STORY
18 The Pension Underfunding Threat What are states doing to resolve the looming crisis in their teacher retirement systems?
Steven Sullivan
Cover: Illustration by Robert Meganck
FEATURES 24 An Overview of 30 How Do I Move My Retirement Income Money? Strategies Navigating the minefield Guaranteed income of contract exchanges, products do best plan-to-plan transfers and when used as part of a rollovers. customized strategy. Michael Webb Steve Hanson and Richard Ford
www.403b-advisor.net 1 14
16 38
04 Editor’s Letter 12 Trend Spotting
N S Direct from the 403(b) Summit, half a How much do you know about the dozen ideas for you — totally free. ACA’s new rules affecting 501(c)(3) UM John Ortman hospitals? Kimberly Flett COL
06 Government Impact 14 sound thinking A trio of proposals in Washington Playing with Distance: would affect 403(b) and 457 plans. Meet “construal level theory.” Mark E. Griffin Art Markman
10 (b) Heard 16 value proposition This time it was Dad who was Why not add “estate planner” to your presented with an important lesson. toolbox? Chris DeGrassi clark kendall
S 34 best practices 46 grade points Audit concerns for 403(b) plan Conversion communication in a sponsors: Year 2. commoditized world.
NTME Steven P. Kjar and Emily Powers Sarah Simoneaux T R 38 sales nuggets 48 takeaway
E PA RMDs and a “Grandparents’ Delight” The IRS wants to know: How effective
D for the 21st Century. is the opportunity to participate? Frank Owen III Ellie Lowder
42 cheap technology A look at Lemon Wallet, FlipBoard, CreditKarma and JoliDrive. Yannis P. Koumantaros and Adam C. Pozek
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The Exclusive Magazine for 403(b) and 457 Investment Good Ideas, for Free Professionals Looking for some new ideas to add a little ‘oomph’ to your Published by presentation? Need to reinvigorate an approach that may be getting a bit stale? How about trying something completely different to give your practice a little President, NTSAA boost? Here are half a dozen ideas for you, David R. Blask,CPC, TGPC totally free of charge: • Now that school site visits are Executive Director, NTSAA essentially a relic of the past, use a Christopher M. DeGrassi retirement saving toolkit as a way to Editor get teachers out of the building to meet John Ortman with you. • Form your own “Director’s Circle” — a small group of experienced, elite advisors Art Director you know. Get together on a regular basis, maybe twice a year, to share best Tony Julien practices and new ideas in a collegial setting. • Think long term. For example, in 10 years, will 12b-1 fees exist? Will you still Graphic Designer get commissions? Then reverse-engineer your practice to envision the best way to Michelle Brown get from here to there — even if only as a thought experiment. They can be very helpful. Associate Editor Troy Cornett • Don’t run away after you close a sale. Help with the plan; answer questions; assist participants; follow up to make sure all applicable ERISA and Code requirements are Advertising Sales being met. Fred Ullman, [email protected] • Know who you’re talking to. Sixty-one percent of people saving for retirement are Jeff Hoffman, [email protected] more worried about running out of money than they are about dying. Forty-eight 703.516.9300 percent are interested in a guaranteed rate of return in exchange for a lower rate of return. 403(b) Advisor Editorial Committee • Understand the “10/10/10 reality” of today’s near-retirees: The 10,000 Boomers Susan Diehl Mark Griffin who turn 65 every day have seen 10 years of market volatility; and their life Kimberly Flett Scott Hayes Richard Ford Frank Owen expectancy is 10 years greater than that of their parents. I’m giving these ideas away, of course, because they’re not mine in the first place. Internet Address They came from the NTSAA 403(b) Summit held last month in Chicago. If you were www.403b-advisor.net there too, you can confirm just how great the conference was — from keynoters Bill Rancic, Dan Veto and Nevin Adams, to the expert panel discussions, the workshops, 403(b) Advisor is published quarterly by the peer-to-peer roundtables, social events in the exhibit hall, a rousing NTSAA update National Tax Sheltered Accounts Association and the American Society of Pension Professionals & from NTSAA Executive Director Chris DeGrassi, gracious MC-ing by Summit Chair Actuaries, 4245 North Fairfax Drive, Suite 750, Roxanne Marvasti and NTSAA President David Blask, and much more. Arlington, VA 22203. For subscription information, If you couldn’t make it, look for my Summit wrap-up article in our next issue. And advertising, and customer service contact do yourself a favor: Make plans to join us at next year’s conference in Washington, DC. ASPPA at the address above or 800.308.6714, [email protected]. Copyright 2013. All rights reserved. This magazine may not be John Ortman, Editor reproduced in whole or in part without written permission of the publisher. Opinions expressed in signed articles are those of the authors and do not necessarily reflect the official policy of NTSAA or ASPPA. Correction Postmaster: Please send change-of-address notices Our Spring issue included a special “thank you” to sponsors and exhibitors of the 2013 Summit. In the list for 403(b) Advisor to ASPPA, 4245 North Fairfax of Summit sponsors, the logo of Lincoln Financial Group (which wasn’t a sponsor) was included by mistake Drive, Suite 750, Arlington, VA 22203. instead of the logo of Lincoln Investment Planning (which was). An updated “thank you” appears on page 45 of this issue.
4 403(b) Advisor :: summer 2013 Lincoln Investment is Proud to be an NTSAA Strategic Partner
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Legislative Proposals Would Affect 403(b) and 457 Plans By Mark E. Griffin A trio of proposals affecting defined contribution plans have prompted reactions of varying degrees on and off Capitol Hill.
6 403(b) Advisor :: summer 2013 www.403b-advisor.net 7 Congress’ consideration of DB plan limits, the MPA likely will be possible tax reform and deficit far lower than $3.4 million if interest reduction measures has prompted rates return to historic averages and for Congress and others to examine the younger workers. Write On! Internal Revenue Code for provisions If an individual’s account balances, that should be added, amended, or aggregated across all covered plans s advisors, we cannot sit by and removed for various reasons. This and accounts, exceed the MPA, the Awatch our industry be changed by examination has extended to the rules individual would not be permitted others. Instead, we need to be the agents for tax-advantaged retirement plans — to make additional contributions to of change, helping to ensure not only the including Code Sections 403(b) and covered retirement plans and accounts retirement security of our clients, but of 457 — and the value of the tax benefits in the subsequent year. In addition, the next generation of advisors and their associated with them. This article if the individual were still working, clients as well. Join us in this endeavor identifies and briefly explains: the individual would not be allowed — help shape the future by contributing • a proposal by the Obama to receive any additional employer your thought leadership in 403(b) Advisor. administration to limit the size of contributions in a defined contribution We’re always on the lookout for articles retirement plans; plan or receive any additional accruals submitted by NTSAA members like you. • a proposal in the U.S. Senate to under a DB plan. The individual could Please email John Ortman, Editor, at accelerate the distribution of amounts resume making contributions if: [email protected] for more information under such plans; and • the investment performance was on how to contribute an article. Thanks! • a proposal from the private sector that such that the updated calculation would consolidate certain retirement of the equivalent annuity based on plans. the individual’s covered plans and accounts is less than the maximum whether a plan sponsor could provide Limit the Size of Tax-advantaged annuity for DB plans; the missed contribution or accrual in Retirement Saving Plans • the maximum DB plan limit increases another form (e.g., as a cash payment or President Obama’s fiscal year 2014 as a result of the cost of living deferred benefit under a nonqualified budget, released on April 10, 2013, adjustment, which would lead to an plan). includes a proposed new limitation — increase in the maximum permitted the “maximum permitted allocation” accumulation; or Eliminate ‘Stretch’ Payments After — on the aggregate value across • a decrease in interest rates led to an Death tax-advantaged retirement plans and increase in the MPA expressed as an Last year, and again this year, a bill accounts, including 403(b) plans, 401(a) account value. was introduced in the Senate which plans, IRAs and governmental 457(b) There are several complicating included a provision that would amend plans. The MPA would be based on the aspects to this proposal. To facilitate the required minimum distribution maximum annual benefit that a defined compliance, plan sponsors (and perhaps rules in Code Section 401(a)(9). These benefit plan may pay upon retirement providers) would need to report each RMD rules apply to 403(b) plans, 401(a) under Code Section 415(b). Currently participant’s account balance and qualified plans, 457(b) plans and IRAs. this limit (which is adjusted each contributions as of year-end, presumably The current RMD rules require that year for increases in cost of living) is to the participant/accountholder. distributions from these arrangements $205,000 per year. Presumably, this notification would must commence no later than the The basic idea in applying Section need to occur promptly after the end employee’s “required beginning date” 415(b) to the MPA is that an individual’s of the calendar year. Also, the IRS (e.g., after the later of age 70½ or aggregate value across all covered plans seemingly would need to publish annual retirement in the case of a section and accounts would be converted to tables showing the age 62 qualified 403(b) plan). If the employee dies an annuity payable at age 62 and in joint and survivor annuity equivalent of prior to the required beginning the form of a 100% joint and survivor different account balances to enable an date, the remaining interest either annuity. The proposal is intended to individual to calculate if the MPA has must be distributed within five years limit an individual’s total balance across been reached. Furthermore, individuals of the employee’s death, or it can covered arrangements to an amount might need to report to their employers be “stretched” over the designated sufficient to finance an annuity of that the MPA has been reached and beneficiary’s life or life expectancy, not more than $205,000 per year in that contributions and accruals must commencing within one year of the retirement (estimated to be roughly cease. In addition, plan sponsors might employee’s death. If the employee dies $3.4 million for a person age 62 retiring be required to amend plans to preclude on or after the required beginning in 2013). However, because the MPA is further contributions or accruals date, distributions to the designated based on actuarial assumptions tied to when the MPA is reached. It is unclear beneficiary must be made at least
6 403(b) Advisor :: summer 2013 www.403b-advisor.net 7 Individuals might need to report to their employers that the MPA has been reached and that contributions and accruals must cease.
as rapidly as under the method of rule would apply regardless of whether plans as four variations of the same distribution being used on the date the employee dies before or after the plan type, and states that having these of death. Under this “at-least-as- required beginning date. variations causes confusion for many rapidly” rule, the remaining interest plan participants and employers. The generally can be “stretched” over Consolidate Retirement Plans letter does not specify the details of the the remaining life expectancy of the In a letter to the Pensions/ proposed commutation. deceased employee or the remaining Retirement Tax Reform Working life expectancy of the designated Group of the House Ways and Means Uncertain Outlook beneficiary, whichever is longer. Committee dated April 11, 2013, the The three proposals mentioned The RMD proposal would require American Institute of CPAs (AICPA) above have prompted reactions of the designated beneficiary to draw down suggested that Congress consider, varying degrees on and off Capitol all assets in a 403(b) plan and other among other things, a proposal to Hill. It is too early to predict whether select retirement arrangements within consolidate and simplify the multiple any of these proposals will gain serious five years, subject to exceptions for types of tax-favored retirement plans momentum and, if so, how a surviving beneficiaries who are: (1) the surviving and the rules governing them. The letter proposal might change as it works its spouse of the deceased employee; (2) describes the possible simplification way through the legislative process. a child who has not attained the age of measures as including the creation However, these proposals would affect majority; (3) disabled; (4) chronically of a uniform employee contributory the 403(b) and 457 industries, and ill; or (5) not more than 10 years deferral type plan that would replace should be monitored closely. b younger than the deceased employee. In 403(b) plans, 457 plans, 401(k) plans the case of a child who has not attained and SIMPLE IRA plans. (Certain plan Mark E. Griffin is the managing the age of majority, the five-year rule consolidation proposals were made in partner at Davis & Harman LLP in would apply as of the date the child budgets by President George W. Bush.) Washington, DC and a member of the attains the age of majority. The new The AICPA letter characterizes these 403(b) Advisor editorial advisory board.
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Simple Truths
This business is about By Chris DeGrassi doing the right things to I had just walked through the side door to our house help people make the and stepped into the kitchen, back from a short trip to speak at a conference and meet with some NTSAA members. My best decisions they can, youngest son, Colin — always most curious and talkative when often under challenging he knows it’s past his bedtime — wanted a full download on my trip. Where did I go, was the hotel nice, did I meet anyone circumstances. It’s not famous and did I have anything in my bag for him? In an attempt to take advantage of a teachable moment, about transactions. I told Colin about the conference — the people I spoke with; how much I learned from the experience; the new
10 403(b) AAdvisordvisor :: sprisummerng 2013 2013 www.403b-advisor.net 11 opportunities discovered and new business won. I attempted a response more meaningful than, “Daddy went on a trip.” Immune to the drone of my excellent parenting, Colin was busily looking through my briefcase, searching for the keychain I bought at the airport newsstand. Colin has quite a collection from various airports around the country. He hangs so many on his backpack that we can hear him jingling as he walks home from school. “Cool!” The newest addition to his collection was a colorful surfboard on a silver chain. The keychain was a hit; the teachable moment lost, I thought. “Well, you most likely didn’t propose to Mom by telephone and she When I look at the criticism directed at likely didn’t respond to you by letter.” My elder son, Michael, was looking at the financial services industry, I can’t help his Spanish vocabulary sheet, studying but wonder if part of the problem is that for an exam scheduled for the next day. the critics don’t understand that being a True to form for a high school freshman, financial advisor is a people business. Michael had grunted to acknowledge my return home, but had not looked up from his studies. Or maybe it was the text messages on his phone that held his attention. of going fast. I listened with a smile, challenging circumstances. “What?” I asked Michael with a acknowledging the valid points on When I look at the criticism directed smile. both sides of the palaver, knowing that at the financial services industry, I can’t “I heard that in a movie once.” Colleen and I had two very special boys help but wonder if part of the problem Michael said, looking up at me. “It started on the right path in life. is that the critics don’t understand means that if you have something I share this story because I’m a that being a financial advisor is a important to say to someone, you need proud Dad, but also because it struck people business. If your point of view to do it face to face.” After a brief pause, me how casually and clearly my boys is predicated on the notion that the he went on. “I mean, that’s why you had expressed very simple truths of life financial services industry is a product- travel, right, Dad? You can’t expect to that we should all remember and apply and transaction-focused business, then build a business unless you get out and to our business dealings. Life — and it stands to reason that you would focus meet with people. Why would they business — is all about people. And on perceived deficiencies in products want to do business and give you their success is built through our relationships and transactions, and the regulatory money if they don’t know you?” and the trust we earn by doing the right regimens that govern them. The result Colin chimed in: “When I grow up thing to help others. is the commoditization of our industry. I’m going to make a lot of money and In business-speak we sometimes Or, as a colleague recently said, “We’re help people.” His ever-present grin refer to the ideal outcome as a “win- turning our industry into concentrated grew bigger as he spoke. “And I’ll have win” — the sweet spot where both frozen orange juice that babies buy and a Lamborghini to drive when I’m not parties benefit from a transaction. sell on smart phone apps from their driving my kids to soccer practice in my But our business — helping people cribs.” minivan.” prepare for and manage a secure and So as it turns out, the teachable The boys went on to argue the comfortable lifestyle beyond work — moment was not lost after all. It’s just merits of driving a Lamborghini isn’t about a transaction or a win-win that the lesson was for me! b versus a Corolla. Michael focused outcome. Our business isn’t about on gas mileage, insurance costs and transactions at all, but about doing the Chris DeGrassi is NTSAA’s better things to do with your money; right things to help people make the Executive Director. Colin was smitten with the thought best decisions they can, often under
10 403(b) Advisor :: spring 2013 www.403b-advisor.net 11 trend spotting
The ACA’s New Rules for 501(c)(3) Hospitals By Kimberly Flett Advisors should be knowledgeable about the important new rules affecting their 501(c)(3) hospital clients under the Affordable Care Act.
12 403(b) Advisor :: summer 2013 www.403b-advisor.net 13 The Affordable Care Act (ACA) for assistance under the organization’s affects many employers, including financial assistance policy. These those in the nonprofit sector. Although include lawsuits, liens, arrests or other there are numerous provisions under aggressive policies. Furthermore, the ACA, this article focuses on one key the organization must limit amounts area: 501(c)(3) hospitals. charged for emergency medical care for Section 501(r) of the ACA requires those eligible for assistance and these 501(c)(3) hospitals to meet four general amounts cannot exceed amounts billed requirements: to those with insurance coverage. The 1. establish a written financial assistance rates may equate the average of three and emergency medical care policy; commercial vendors or Medicare rates. 2. limit amounts charged under the hospital’s financial assistance policy Community Health Needs Assessment for vital and emergency care; Every three years a hospital 3. before imposing aggressive collection organization must conduct a community policies, determine if an individual is health needs assessment (CHNA). eligible for financial assistance; The purpose of this assessment is to 4. for tax years beginning after March determine community health needs 23, 2012, conduct a community and apply an effective course of action health needs assessment. to ensure that health services are The ACA imposes a new excise tax if sufficient. Data should be collected from these requirements are not met. a variety of sources, including local An organization qualifying as a public health agencies and not-for-profit hospital under 501(r)(2) of the ACA is organizations. defined as one that is required by a state This information is required to be For nonprofits, to be licensed or that provides hospital disclosed on Form 990 (see below), compliance care as its primary purpose and qualifies including the description of how the for exemption under 501(c)(3). The health needs are being addressed, and issues affecting new requirements apply to each facility which needs are not being addressed their medical maintained by the hospital organization. and why. A $50,000 excise tax will be plans can be just imposed on a hospital organization that as important as Financial Policy fails to meet this requirement. The written financial policy requires those affecting the following: Schedule H Added their 403(b) and • the criteria for establishing the need A new Schedule H was added to other qualified for financial assistance, including free Form 990, “Return of Organization or discounted care; Exempt from Tax,” for hospitals to retirement plans. • the method used to calculate amounts report information under the CHNA charged to patients; requirement. These enhancements • the methods used to obtain financial were implemented to Form 990 for the knowledgeable insight into some of the assistance; filing year 2010 and further updated important new rules affecting their • publicity in the community; and for 2011. If a hospital is required to file clients. It is important that nonprofit • collection methods. Form 990, Schedule H, the most recent clients consult with their legal, A hospital must also have a policy audited financial statements are required accounting and medical advisors to for the method of providing care to be attached to the return. understand the full impact of the new under emergency medical conditions, issues created by the Affordable Care regardless of a patient’s eligibility under Conclusion Act. b the financial assistance policy. For nonprofits, compliance issues affecting their medical plans can be just Kimberly Flett, CPA, QPA, QKA, Collection Methods as important as those affecting their is the lead director of the retirement plan A hospital organization must not 403(b) and other qualified retirement design and administration department use extreme collection methods for plans. A good knowledge of the of SS&G. She has served on several payment until an assessment has been requirements under the Affordable ASPPA boards, including the 403(b) made whether the individual qualifies Care Act will give practitioners Advisor editorial advisory board.
12 403(b) Advisor :: summer 2013 www.403b-advisor.net 13 sound Thinking Playing with Distance By Art Markman
Meet ‘construal When you’re advising people about life a decade or more in the future is their retirement, you’re constantly dealing focused on general aspects of who they level theory,’ which with problems of distance. On the one hand, will be. They focus on broad necessities suggests that when retirement is off in the future. It’s hard for like housing, but not on all of the daily people to think clearly about what their details like new clothes, birthday gifts, people are far needs will be at that stage of life. On the vacations and car repairs. However, other hand, their current life is lived in rich these details become clear when from something, detail. People know exactly how they would thinking about present day life. One they think about spend money that they have right now. key reason why people have difficulty For the past decade, psychology saving for the future is that it is hard to it abstractly, but researchers have explored construal level take money away from all of the specific theory. This theory, which was first posited needs that arise right now in order to when they are by Yaacov Trope and Nira Liberman, provide for a vague and hazy future. close to it, they suggests that when people are far from In your role as an advisor, it can be something, they think about it abstractly, helpful to play around with people’s treat it specifically. but when they are close to it, they treat perception of distance to help them it specifically. This theory points out that prepare for the future. distance can be distance in space, time Perhaps the most obvious thing you (events in the far future or distant past), or can do is to decrease the distance to in social relationships (people are closer to the future. The best way to do that is themselves than to other people). to have people visualize specific days When thinking about retirement, this they will experience after retiring. means that a person who is planning for their Have them think about the activities
14 403(b) Advisor :: summer 2013 www.403b-advisor.net 15 they want to engage in, the presents When you find a start to pay attention to the ways that they want to buy, the vacations they discussion getting distance affects how people talk about want to take, and the cars they want to mired down in their lives. When you find a discussion drive. Having people think about these getting mired down in specifics, find details will draw them closer to their specifics, find a a way to increase the distance to help lives in retirement, and will help them way to increase people think more abstractly. When to realize the kind of finances they will the distance to people are not focusing on the fine need to enjoy that future. help people think details, try to bring them mentally Playing with Less obviously, it can be helpful more abstractly. nearer to the event. b to increase people’s distance from their own present. An easy way to do Art Markman, PhD, is a that is to have people imagine giving professor of Psychology and retirement advice to another person Marketing at the University of Distance who is just like them. By thinking of about the amount of money they would Texas and director of the themselves from this social distance, invest in their retirement in six months program in the Human Dimensions of it becomes easier to gloss over all of or a year. Even the distance of a year can Organizations. He is the editor of the the specific expenses that make people get people to think beyond their current scientific journal Cognitive Science and reluctant to invest in their retirement. needs. Then have them actually commit author of the books Smart Thinking and Another way to increase distance to those investments. Habits of Leadership. from the present is to have people think The central lesson is that you should
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14 403(b) Advisor :: summer 2013 www.403b-advisor.net 15 value proposition
Add ‘Estate Planner’ to Your Toolbox
By clark kendall
As a client ages and In today’s rapidly changing retirement planning marketplace, 403(b) and 457 advisors should strongly consider amasses wealth, estate adding the Accredited Estate Planner (AEP) designation to their planning becomes an list of credentials. In several key ways, becoming an AEP can add value to the services you provide to retirement plan participants increasingly important at charitable institutions, school districts, and higher education element of his or institutions. Before we get into the professional advantages of becoming an her overall wealth AEP, let’s take a look at the two most significant new realities of management strategy. retirement in the 403(b) and 457 marketplaces.
16 403(b) Advisor :: summer 2013 Greater Longevity families resulting from divorces and Increased longevity is by far the second marriages, a client may have most significant new retirement reality. issues related to financial treatment of In our grandparents’ generation, life children from a second marriage. There is a critical expectancy was in the 70s. Now, for a Within a retirement plan, married couple age 65, there is a 50% beneficiaries are separate from the ones intersection between chance that one spouse will live past listed in the client’s will. Let’s say that estate planning and his or her 90th birthday. This stretches when your client fills out your 403(b) the time horizon for clients who are application, he or she lists children X retirement planning. thinking about when to retire. and Y from a second marriage. But his or her will leaves the estate to children The Economy A and B from the first marriage. The other new retirement reality Guess which legal instrument takes is the fallout from the recent recession precedence? The retirement plan. and sluggish economic recovery. But that’s just the beginning. Charitable organizations have been hurt The relationship between retirement Accredited disproportionately by the economic planning and estate planning can get ® downturn, due to a sharp drop-off in even more complicated in blended Estate Planner charitable donations. Meanwhile, K-12 families. For example, if your client dies school districts and higher education and names his wife as the beneficiary of Designation institutions haven’t been immune his 403(b), she can roll those assets into from economic hardship. University her IRA account that may name only he Accredited Estate Planner® of Maryland professors, for example, her children. When she dies, all of your Tdesignation is awarded by the haven’t received a raise in three years. wealth goes to the beneficiaries she’s National Association of Estate Planners listed — which may not include your & Councils to recognized estate An Added Skill client’s children. planning professionals who meet special What does it take to become an One of the key estate planning requirements of education, experience, Accredited Estate Planner? To obtain questions that ties into retirement knowledge, professional reputation, and this designation from the National planning is, “To Roth or not to Roth?” character. Association of Estate Planners and In other words, should a client be The AEP® designation is available to Counsels (NAEPC), you must be a putting assets into a tax-deferred Roth attorneys, Chartered Life Underwriters, Certified Public Accountant (CPA), IRA or not? What are the short- and Certified Public Accountants, Certified Certified Financial Planner (CFP), long-term financial implications of Trust and Financial Advisors, Chartered Certified Life Underwriter (CLU) or an deferring taxes on these assets? Financial Consultants, and Certified attorney. You also have to demonstrate Let’s look at a specific example. I Financial Planners®. More information Add ‘Estate Planner’ at least five years of experience in advise a husband and wife who are 80 is available at http://www.naepc.org/ estate planning. In addition, you must years old and have accumulated a $2 designations/estate-planners. complete additional courses offered by million estate. They have $500,000 NAEPC and take a cumulative exam in an IRA account. For them, it made administered by the association. sense to convert the $500,000 IRA to of Roth IRAs and the estate planning to Your Toolbox Why should a 403(b) or 457 advisor a Roth IRA. Of course, they had to pay implications of naming beneficiaries invest the time and money needed to income tax on the $500,000, roughly in retirement plans. Before your become an Accredited Estate Planner? $140,000, as if it were income. But client checks any boxes, you can make Because there is a critical intersection once the money is in the Roth account, sure that they fully understand the between estate planning and retirement they no longer have to take the required ramifications of those choices. b planning. Estate planning isn’t just about minimum distribution that they would what happens after we die; it’s also have had to take each year from the IRA Clark Kendall, founder of Kendall Capital about what happens during our lifetime, (3.5% per year beginning at age 70). Management in Rockville, MD, has more especially if we have substantial wealth. As a client ages and amasses wealth, than 20 years of experience in investment From a tax perspective, there estate management becomes an management and wealth management are income, capital gains and estate increasingly important element of his or strategies. He is one of a select few taxes to consider. From a nonfinancial her overall wealth management strategy. professionals in the world who has earned perspective, there could be many By becoming an Accredited Estate the triple designations of Chartered factors involved. For example, with Planner, you will better understand Financial Analyst, Chartered Financial today’s increasing number of blended the retirement planning advantages Planner and Accredited Estate Planner.
www.403b-advisor.net 17 cover story
State teacher retirement systems all across the country are in trouble. Advisors need to understand what their states are doing to fix the problem. The Pension Underfunding Threat By Steve Sullivan
18 403(b) Advisor :: summer 2013 Threat
www.403b-advisor.net 19 cover story
hese days, the three-legged • How many people are in the system “States continue to lose ground in stool is something that’s more now? their efforts to cover the long-term costs likely to turn up on an episode • How many will there be next year, of their employees’ pensions and retiree of “Antiques Roadshow” than the year after that, and so on? health care,” the report concluded, “due T it is to serve as a metaphor for • Where will the money come to continued investment losses from comfortable retirement. from? How much will come from the financial crisis of 2008 and states’ Not one of its legs is without a contributions? From investments? inability to set aside enough each year wobble: Defined benefit pensions are • How will these investments perform? to adequately fund their retirement pretty much history. Social Security will That’s a lot of uncertainty that has promises. States have responded with start experiencing shortfalls at about the to be tamed by actuaries in order to an unprecedented number of reforms same time the number of retiring Baby provide a defined benefit. that, with strong investment gains, may Boomers reaches its peak. And private Not surprisingly, recent economic improve the funding situation they face savings in 403(b)s and 401(k)s are downturns have taken a severe toll on going forward, but continued fiscal subject to the vagaries of markets and all states’ budgets, and not just their discipline and additional reforms will the economy. No wonder that a National retirement plans. And even when times be needed to put states back on a firm Institute of Retirement Security (NIRS) are good, states don’t always fund their footing.” study released earlier this year found pension plans to recommended levels The Pew report’s scorecard (see that 85% of Americans — not just or take advantage of booms to build a Fig. 1) used the states’ own actuarial teachers and government employees — financial cushion against the inevitable assumptions — usually an 8% rate of are worried about whether they’ll be bust. After all, those obligations are return on investments — to evaluate able to retire. long-term and usually way down the their unfunded liability. Under Teachers have always been road. As long as states have enough those criteria, states such as North particularly fortunate. The mainstay money on hand to pay their current Carolina, South Dakota, Washington of their retirement has been a usually retirees, it’s often tempting to use and Wisconsin were funded at 95% generous defined benefit state teachers’ those funds that should be covering or better. Others at the bottom of the future retirees for something else rankings were Connecticut, Illinois, more immediate and, perhaps, more Kentucky and Rhode Island, with politically attractive. funding below 55%. The majority of the In states where pension funding states in between need improvement, In states where is on the negotiation table, teacher the report concluded. pension funding is demands for salary increases have often Many experts question, however, been countered with promises of better whether an 8% ROI is realistic in on the negotiation retirement benefits down the road. today’s economic environment, table, teacher preferring a more realistic 3.5% or 4% demands for salary Widening Gap (see Fig. 2). But even a more moderate increases have often According to “Public Pension assumption of 6.25% can radically alter Pressure in the United States,” a 2011 the results. New York, for instance, been countered with paper written by the Wharton School’s using an 8% assumption, projects a promises of better Olivia S. Mitchell, “50 states together funding level of 101%, making it a star retirement benefits owed $117 billion to their pension plans performer. Drop the assumption to in 2009 but in fact only contributed $73 6.25%, however, and the Empire State down the road. billion. Contribution shortfalls of this is only 87% funded — better than nature have persisted because state DB most. But use the worst-case scenario retirement system (STRS) that they plans follow rules set by their legislatures and the ratio drops to 65%, putting it in supplemented with defined contribution rather than by a centralized accounting the “needs improvement” territory. plans such as 403(b) and 457 accounts authority; this permits politicians to The Pew report also assumes that and personal savings. Now, even adjust payment targets in times of fiscal a funding ratio of 80% represents a those defined benefits, at least in their stringency.” fiscally healthy plan. Not so fast, warns traditional form, may not be there for In 2012, the Pew Trust Center on the American Academy of Actuaries. many future public school retirees. the States updated a previous report, “A funded ratio of 80% should not be The reasons for this are varied and “The Widening Gap,” that quantified the used as a criterion for identifying a complicated. Since most STRS are DB disconnect between what state pensions plan as being either in good financial plans, their funding is determined by were promising and what their funding health or poor financial health,” it said complex actuarial formulas based on would allow them to provide. It reported in an issue brief published last year. myriad facts and assumptions: the overall pension gap as $757 billion. “No single level of funding should be
20 403(b) Advisor :: summer 2013 figure 1: how did we get here? How did we get here?
In 2000, nearly half the states were fully funded. In 2008, only four states could make that claim.
February 2011 Source: The Pew Charitable Trust 5
figure 2: rate of return assumptionRates of m Returnatter Assumptions Matter
State: New York Plans: ERS, PFRS
Return Assumption Assets Liabilities Percent Funded Unfunded Liability
8.00% $148,861,000 $146,733,000 101.45% -$2,128,000
6.25% $148,861,000 $171,879,765 86.61% $23,018,765
3.50% $148,861,000 $229,732,022 64.80% $80,871,022
State: Illinois Plans: SERS, SURS, TRS
Return Assumption Assets Liabilities Percent Funded Unfunded Liability
8.50% $64,012,414 $117,391,324 54.53% $53,378,910
6.25% $64,012,414 $143,383,415 44.64% $79,371,001
3.50% $64,012,414 $191,644,211 33.40% $127,631,797
Source: The Pew Charitable Trust
February 2011 www.403b-advisor.net 4 21 cover story
identified as a defining line between a falling behind. I hired another analyst fought pension reforms — increasing ‘healthy’ and an ‘unhealthy’ pension in 2011. The volume of changes is the retirement age for new employees, plan. All plans should have the objective overwhelming.” capping the annual payout at $132,120, of accumulating assets equal to 100% “State retirement systems across the eliminating numerous abuses of the of a relevant pension obligation, unless country are making changes,” concurs system and requiring workers who reasons for a different target have been Ellie Lowder, TGPC, TSA Training aren’t contributing half of their clearly identified and the consequences and Consulting Services in Tucson, retirement costs to pay more — are too of that target are well understood.” AZ. “Many of them are trying to move little, too late, and do nothing to solve away from a defined benefit plan and the growing problem. Accelerated Change substitute a defined contribution plan so And similar controversies rage in So what are states to do? They the risk is on the employees rather than other states that are trying to address have options, but they’re limited by the employer.” But even if they decide the problem in their own ways. a very important fact: Most state to do that, the contract won’t allow the teacher pension systems are contracts, change to apply to participants already Advisors Have a Role negotiated between school systems and covered under the plan. They can apply Though 403(b) advisors can’t do teachers, usually through their unions, only to new hires. anything to solve the problems of and ratified by state legislatures. “Once “Another option to reduce the underfunded STRS, they can and should benefits are put in place, it’s a contract unfunded liability is the cost-of-living understand how their systems work. and it’s very difficult to work around it,” adjustment (COLA),” says Ellingson, Educating clients about what part of says Dave Ellingson, research analyst at “which is usually controlled by the state their retirement will be funded by Trust Builders in Dallas, OR. “When legislatures. Most systems are tied to their defined benefit pension (as well there’s an abrupt change in the situation the consumer price index. So if you’re as Social Security and their voluntary — like the crash of 2008 — that does a retired teacher with a $30,000 annual contributions) is a big part of the service not negate a contract just because the retirement benefit, let’s say the COLA they provide. Vendors and providers can STRS can’t perform. The employer is on is 5%. Some systems grant a maximum be good sources of this information, as the hook for making up the shortfall.” of up to 3% but guarantee a minimum well as the STRS themselves. Lowder So states and school systems can’t of 1%. That means retirees can depend suggests that advisors get a copy of just liquidate a troubled plan the on a COLA but it may not match the the state system’s employee benefits way a private company can, leaving inflation rate in those years when it’s handbook and use it to gain a complete participants to be covered by the high. But even in years when there is no understanding of how the system works, Pension Benefit Guaranty Corp. They inflation, they’ll still get an increase of including how to calculate a person’s have to either raise more money or 1%.” benefits. cut benefits, and they have to do it by Advisors should be aware, she adds, tinkering around the edges. No Easy Choices that if states shift from DB to DC plans “Changes include reducing the However they deal with it, pension for new employees, those state pension percentage of crediting, trimming back underfunding is an issue that states can benefits will no longer be determined early retirement ages so you’re not able no longer afford to ignore. But whatever by the traditional actuarial formula, to retire at 55 with full benefits as you they do usually ends up being politically making them even harder to calculate. could before, and using more stringent unpopular and wildly controversial. “My expectation is that this problem actuarial valuations of the plan,” says In New York, Gov. Andrew Cuomo will be ongoing for many years as the Edward Dressel, president of Trust (D) has proposed a plan that would states continue to deal with the funding Builders. Dressel’s company creates replace the traditional defined benefit issues of their DB plans and seek software that helps advisors illustrate plan for new employees with a defined alternatives,” says Lowder. “There’s retirement benefits for more than 500 contribution plan and reduce their a major fear factor out there among public pension plans across the country. benefits, bringing down the wrath of participants about how they’ll be able He says that keeping up with the pace of public employee unions. to afford retirement. There’s a crying change has created a couple of full-time According to the Chicago Tribune, need for individual consultation and jobs at his firm. Illinois’ $96.8 billion STRS pension debt assistance to help them prepare for a “When I bought the company in is the worst in the country. Gov. Pat comfortable retirement.” b 2007 I could keep up with the changes Quinn’s (D) plan to freeze the annual pretty well,” he says. “But because of 3% cost of living increase for three years Steven Sullivan is a freelance what happened in 2008, I started seeing is drawing fire from politicians, unions writer in Baltimore, MD, a lot of new changes coming in. In 2010 and pensioners alike. and former editor of 403(b) I hired a full-time person just to keep And in California, critics charge Advisor. track of the changes and even he started that Gov. Jerry Brown’s (D) hard-
22 403(b) Advisor :: summer 2013 Tax-Exempt & Governmental Plan Consultant
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An Overview of Retirement Income Strategies
By Steve Hanson and Richard Ford Guaranteed income, while very important, does come at a cost to the client. An analysis shows that these products provide much more value to the client when used as part of a customized income strategy than when used on a stand-alone basis.
24 403(b) Advisor :: summer 2013 ith 10,000 Americans turning 65 every day, there is no shortage of potential clients asking for your help in determining if, when and how they will be able to retire. Sixty-one percent of Baby Boomers say they’re more afraid of running out of money than they are of dying. While some W who reach retirement age may be opting to continue working so they can rebuild savings impacted by the recession, many are looking to you to help them retire in the lifestyle they’ve worked so long for and desire. Retirees are asking: • Have I saved enough money to live the lifestyle I want? • Will my money last as long as I live? • How can I maintain control of my portfolio and make changes when I need to? Advisors tell us they are concerned about: • Increasing demand for their time, advice and personalized solutions. • Not having the knowledge or customized solutions to meet client needs over an uncertain period of time. • Growing their practice as retirees draw down on their savings, rather than contribute to them. Making the transition from retirement accumulation planning to retirement income planning can be a challenge for While the rankings can even the most experienced advisor. While An Overview of there is a nearly limitless list of strategies help advisors determine for providing income from a client’s the relative overall investments, there is a smaller number of effectiveness of the retirement income strategies commonly utilized by independent financial advisors. various strategies, there This article compares some of the more is no single strategy that Retirement Income commonly used strategies, including: is right for all clients. • Variable Annuity with a Guaranteed Lifetime Income Rider (both a “standard surrender” variable annuity and a “short surrender” variable annuity) Strategies • Fixed Indexed Annuity with a Guaranteed Lifetime Income Rider • Time-Segmented Income Strategy • Market-Responsive Withdrawal Program • Customized Income Strategy that combines: (1) an immediate lifetime income annuity with a market-responsive withdrawal program; and (2) a variable annuity with a guaranteed lifetime income rider (both “standard surrender” variable annuity and a “short surrender” variable annuity) with a market responsive withdrawal program. • Longevity Insurance Strategy that combines a market-responsive withdrawal program with a deferred lifetime income annuity. Utilizing financial market and other economic data dating back to 1926, we tested each scenario using both back-testing and Monte-Carlo simulation methodologies. We then compared the relative advantages and disadvantages of these strategies from the perspective of both the client and the financial advisor and ranked the strategies based on key criteria to produce an overall report card on each strategy. Key considerations of a retirement income program from the client’s perspective are: • Amount of income generated
www.403b-advisor.net 25 in this analysis are the “standard is increased, so is the risk profile of surrender” contract and the “short the segment. At the inception of the 61% surrender” contract. The standard strategy, the client invests enough of Baby Boomers say surrender contract generally has a money into a five-year SPIA or a money they’re more afraid longer surrender period (typically seven market fund to provide them with five of running out of years) and lower contract expenses years of income. Every five years, a money than they as compared to the short surrender segment is liquidated and the proceeds are of dying. contract. Also, the standard surrender are used to purchase another five-year contract will typically pay a higher SPIA or money market fund, thus upfront commission and either no asset- providing an additional five years of • Amount of income guaranteed for the based trail or a lower asset-based trail income. The theory is that the more client’s lifetime than the short surrender contract. aggressively invested segments have • The residual value of the account longer time horizons and are, thus, at the end of the desired timeframe Fixed Indexed Annuity with a more likely to produce returns equal to (legacy) Guaranteed Lifetime Income Benefit their long-term historical averages. • The liquidity of the assets throughout (GLIB) the income time horizon This is very similar to the variable Market-Responsive Withdrawal The financial advisor’s primary goal, annuity strategy, but the funding vehicle Program of course, is to ensure that the client is a fixed indexed annuity rather than a This strategy is an adaptation needs relative to the factors mentioned variable annuity. We did not perform of a traditional inflation-adjusted above are met. That being said, no simulations for this strategy — mainly withdrawal strategy. The client matter how effective an income strategy due to the difficulty of modeling FIA invests their assets in a moderate asset may be, it will not gain acceptance caps, spreads and/or participation allocation portfolio and takes systematic in the advisor community unless the rates. These mechanisms are an integral withdrawals from the portfolio. Each advisor can implement it efficiently and part of determining the return on the year, the client’s withdrawals are be fairly compensated for the services contract, but they are not tied directly automatically adjusted upward or that they provide the client. Therefore, to any index or asset class that can be downward based on the performance the following additional factors must be modeled. While, generally speaking, of the account in accordance with the considered by the financial advisor: caps, spreads and participation rates predetermined rules. By implementing • Ease of implementation (both initially are related to current interest rates and these rules, the initial withdrawal and ongoing) market volatility, they are ultimately set rate can be dramatically increased as • Income generated by the strategy for at the discretion of the insurer. compared to a traditional systematic the financial advisor (both up-front That being said, the results of the withdrawal program without decreasing and overall) variable annuity products can be used the probability of success. Following are descriptions of these as a proxy for the results of the FIA strategies. products. FIAs have a lower upside Customized Income Strategy and a lower expected return than VAs, The Customized Income Strategy Variable Annuity with a Guaranteed but they also don’t have as much of a combines a Market-Responsive Withdraw- Lifetime Income Benefit GL( IB) downside. Thus, one would expect the al Program with a source of guaranteed There are many flavors of variable income and residual account balance for lifetime income (either a Lifetime Income annuities with lifetime income riders, the FIA to be lower than the variable Annuity or a Variable Annuity with a but most of them provide a guaranteed annuity for the median and 75th Guaranteed Lifetime Income Benefit). rate of growth to the “benefit base” percentile cases and equal to or better The primary tenet of this strategy is that prior to the client taking income and than the variable annuity for the 25th every client should establish a “floor” of then guarantee income equal to a percentile cases. guaranteed income to meet their essential percentage of the benefit base even if income requirements. To the extent that the client’s account value should fall to Time-Segmented Withdrawal Strategy this floor is not covered by Social Security, zero. These contracts typically also have This strategy was developed to pensions or other guaranteed sources, a “step-up” provision that allows the address one of the key issues with the guaranteed income product (either an benefit base to increase if the contract a traditional systematic withdrawal immediate lifetime income annuity or a value exceeds the benefit base. These program — sequence of returns risk. variable annuity with a guaranteed lifetime contracts have been very popular in In this strategy, the client divides their income benefit rider) is used to fill the recent years and account for a very large assets into segments (typically with 5, gap. For the client’s non-essential income, portion of variable annuity sales. 10, 15, 20, and 25-year time horizons). a market-responsive withdrawal strategy The two forms of contracts included As the time horizon of each segment is utilized.
26 403(b) Advisor :: summer 2013 Follow NTSAA Online — Stay Connected to Influence the Conversation!
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Follow NTSAA online: www.welcomentsaa.org Longevity Insurance Strategy the strategies tested in terms of total to the additional costs associated with The Longevity Insurance Strategy is purchasing power provided to the providing guaranteed income. For designed for the client who is reluctant client; however, this strategy provides that additional cost, the customized to commit a significant portion of little in the way of guaranteed lifetime income strategies did provide a high their retirement assets to a guaranteed income. Residual account value and level of guaranteed lifetime income income product due to liquidity or liquid account value were low due to the that was “customizable” to meet expense factors. In this strategy, the fact that a large portion of the account the specific client’s needs. These client initially generates all of their value is initially invested in a period- strategies also ranked high in terms income from a Market-Responsive certain income annuity to provide for of residual account value and liquid Withdrawal Program. However, the the first five years’ worth of income. account value because only a portion client also allocates a small portion Every five years, another substantial of the client’s assets was tied up in of their assets to a deferred lifetime portion of the account is liquidated products with surrender restrictions income annuity that will begin paying and used to purchase another period- and higher costs. The customized the client a stream at some point in the certain annuity, further eroding liquid strategy is somewhat more difficult future (typically 20 years later). Because account value and residual account to implement, as it does require the the client has a guaranteed income value. From the advisor’s perspective, sale of multiple products, but it is less stream that they know will commence this strategy ranked the lowest in complex than the time-segmented in 20 years, they can confidently terms of ease of implementation and withdrawal strategy. Finally, these withdraw more income from their up-front compensation, though it was strategies ranked in the upper half Market-Responsive Withdrawal in the middle of the pack in terms of in terms of initial and total advisor Program than they would otherwise. total advisor income over the life of the income — indicating that the advisor Also, the cost of the deferred income client. is fairly compensated for the services annuity is significantly less than the cost being provided. of an immediate income annuity. Market-Responsive Withdrawal Strategy Longevity Insurance Strategy Testing Results The market-responsive withdrawal The longevity insurance strategy Variable Annuity with a Guaranteed program ranked very high in terms of provided the most total purchasing Lifetime Income Benefit (GLIB) the purchasing power provided to the power and ranked in the middle of the The stand-alone variable annuity client, though it does not provide the pack in terms of guaranteed lifetime with a guaranteed income rider ranked client with any guaranteed lifetime income. It also ranked in the middle fairly low in terms of its ability to income. Because it is a relatively in terms of residual and liquid account generate income for the client over inexpensive strategy to implement value, ease of implementation and the long term. This is due to the fact and the assets remain in accounts that initial and total advisor income. that compared to the non-guaranteed are free from withdrawal penalties, solutions that were tested; there is a this strategy ranked highest in terms Strategy Report Card relatively high cost to implement such of residual account value and liquid The report card shown in the chart a strategy due to the variable annuity account value. While this strategy summarizes the results of our testing contract and rider expenses. These requires an annual review process, it based on the following criteria: expenses eroded the client’s purchasing still ranked relatively high in terms of • Purchasing Power — the amount of power over time in our simulations. For ease of implementation. The primary income that the strategy can reliably similar reasons, this strategy ranked in downside from the advisor’s perspective provide the client the lower third for liquid account value is that it provided little up-front • Guaranteed Lifetime Income — the and residual account value. The primary compensation, but it did rank highest in amount of guaranteed lifetime appeal of such a solution is the ease of terms of overall income to the advisor income the strategy produces implementation, due to the fact that it over the life of the client. • Residual Account Value — the residual is a “single application” solution. Also, value of the account at the end of the potential up-front compensation to Customized Income Strategy the desired timeframe (legacy) the advisor was the highest among the The customized income strategies, • Liquidity — how easy will it be for alternatives, though total income to the whether the guaranteed portion of the clients to access their money should advisor over the client’s lifetime was client’s income was provided by an the need arise during the income actually the lowest. income annuity or a variable annuity time horizon with a lifetime income rider, performed • Ease of Implementation — a measure Time-Segmented Withdrawal Strategy similarly in our tests. They ranked of the ease with which an income The time-segmented withdrawal in the lower half in terms of total strategy can be implemented (both strategy ranked in the top third of purchasing power — again attributable initially and ongoing)
28 403(b) Advisor :: summer 2013 The strategies were ranked (1st through 8th) based on each of the criteria and provide an average overall ranking for each. Purchasing Power Guaranteed Income Lifetime Residual Account Value Liquid Account Value Ease of Implementation Income Advisor (Up Front) Income Advisor (Total) Average Ranking
Market-Responsive Withdrawal Program 2 7* 1 1 3 7 1 3.14 Customized Income Strategy with Variable 5 2* 2 2 6* 3 3 3.29 Annuity (Standard Withdrawal) Customized Income Strategy with Variable 6 2* 3 3 6* 4 2 3.71 Annuity (Short Withdrawal) Longevity Insurance Strategy 1 4 5 4 4* 5 4 3.86 Customized Income Strategy with Lifetime 4 1 4 6 4* 6 6 4.43 Income Annuity VA with GLIB – Standard Surrender 7 7* 6 5 1* 1 8 5.00 VA with GLIB – Short Surrender 8 5* 7 7 1* 2 7 5.29 Time-Segmented Withdrawal Strategy 3 6* 8 8 8 8 5 6.57 *Tied
• Advisor Income (Up Front) — One point that is clear is that needs. Regardless of the strategy you compensation received up front for guaranteed income, while very select, look for products and planning the work done to ensure that clients important, does come at a cost to the resources to help you effectively have income streams that meets client. It will be very rare to find a implement the strategy. b their needs situation that justifies putting all of the • Advisor Income (Total) — cumulative client’s assets into a guaranteed income Steve Hanson is Vice President compensation received for the work product such as a variable annuity with Strategic and Product done to ensure that the client has an a guaranteed lifetime income benefit — Development for PlanMember income stream that meets their needs the cost of the benefit is just too high. Services. He is responsible for given a time horizon As shown in our analysis, these products project management, development of provide much more value to the client alternative distribution platforms, Conclusions when used as part of a Customized supporting internal and external While the rankings in the previous Income Strategy than when used on a investment groups and overseeing strategic section can help advisors determine stand-alone basis. planning and product development the relative overall effectiveness of the When implementing a Customized initiatives. Steve can be reached at various strategies, there is no single Income Strategy, the choice of the 800-874-6910 x 2504 or Steve@ strategy that is right for all clients. Also, guaranteed income component (lifetime planmember.com. just because a strategy has a high overall income annuity versus variable annuity ranking that does not necessarily mean with guaranteed lifetime income Richard Ford is Senior Vice that it will be appropriate for any given benefit) has little effect on the outcome President Chief Marketing client. For example, the stand-alone for the client. The Lifetime Income Officer for PlanMember Market-Responsive Withdrawal Strategy Annuity, in general, will provide slightly Services. He is responsible for — despite its high overall ranking — more guaranteed income but with less employer group development, marketing, would not be appropriate on its own liquidity. The shorter surrender period web development and strategic alliances for for a client with a need for guaranteed variable annuity is likely to produce PlanMember’s business lines. Richard can income. Conversely, a Customized less total income for the client than the be reached at 800-874-6910 x2400 or Income Strategy that includes a standard surrender variable annuity or [email protected]. guaranteed income component would the lifetime income annuity. not be appropriate for a client who has In the end, the choice of income PlanMember Securities Corporation is enough guaranteed income coming from strategy will come down to the a registered broker/dealer, investment Social Security or pensions. advisor’s preferences and the client’s advisor and member FINRA/SIPC.
www.403b-advisor.net 29 feature story
How Do I Move My Money? Navigating the Minefield of Contract Exchanges, Plan-to-Plan Transfers and Rollovers By Michael Webb
hough the 403(b) final Plan-to-plan regulations became effective nearly three years ago, rampant transfers can be confusion remains with respect T to moving one’s money into used to move and out of plans and between assets between vendors within a 403(b) plan. In fact, to this day, I have seen plan sponsors and similar plan types, participants consistently attempt one type of transaction (rollover, exchange, but beware of or plan-to-plan transfer) when another the significant transaction type would have been far more appropriate. restrictions that This article will attempt to demystify the regulations that govern apply to such participants’ movement of 403(b) (and transactions — 457(b)) assets, and will address some common misconceptions about the especially with differences between these three very distinct types of transactions. respect to ERISA plans. Rollovers Out of Plans The good news: Rollovers were unaffected by the final regulations.
30 403(b) AAdvisordvisor :: sprisummerng 2013 2013 www.403b-advisor.net 31 30 403(b) Advisor :: spring 2013 www.403b-advisor.net 31 The bad news: Many participants did Rampant confusion Thus, contract exchanges are only not understand the rollover rules in the remains with utilized in plans with multiple approved first place! respect to moving providers. Such providers must be Understanding a rollover is one’s money into specifically listed in the plan as being grounded in the two principles: approved in order to receive a contract • One may only roll over an eligible and out of plans exchange of assets. rollover distribution, which means and between Approved providers are generally that an individual must be eligible vendors within a providers to which current contribu- for a distribution under a retirement tions are being made, although it is plan. 403(b) plan. possible to list “exchange-only” pro- • A rollover is the only one of the viders in the current plan document. three transaction types (ignoring Such providers would not be eligible to the limited exception for transfers an IRA. Since different plan types receive current contributions, but could to purchase service credits under a are involved, it is clear that the only receive exchanges. That actually occurs governmental defined benefit plan) allowable transaction is a rollover. relatively rarely in non-ERISA plans. whereby assets can move between Thus, we would ascertain whether ERISA plans often, however, contain different types of plans (such as the employee is active or has had a “inactive” plan vendors that are required 403(b) to IRA, or a 403(b) to severance from employment. If the to remain part of the plan under ERISA. 401(k), etc.) employee has experienced a severance, In addition to the requirement that The first principle is the most and is no longer an employee of the plan the plan must permit exchanges, there misunderstood aspect of rollovers. If sponsor, a rollover may be completed, are two other requirements for contract there is no distributable event (e.g., with a rare exception when distribution exchanges: with respect to elective deferrals, an of certain plan assets cannot be • The accumulated benefit after the in-service employee who is not at least withdrawn until actual retirement. If exchange must equal the accumulated 59½ years of age wishes to move assets), the employee is active, chances are he/ benefit prior to the exchange. (Note there can be no rollover. she cannot complete a rollover, unless that the application of surrender As a reminder, in-service another distribution eligible event (e.g., charges would not violate this distributions of elective deferrals prior attainment of age 59½, if the plan requirement.) to age 59½ are generally only available permits), has occurred. No distribution • The distribution restrictions in the in the event of financial hardship, and means no rollover. new contract must be as stringent hardship distributions are not eligible Any rules that would apply to as those in the prior contract, for rollover. If the plan is even more ordinary distributions, such as spousal and the new contract issuer must restrictive — for example, if all in- consent to waive a QJSA for ERISA agree to provide the employer with service distributions are prohibited — plans, would apply to rollovers as well. information necessary for compliance then rollovers for current employees Lastly, 403(b) information sharing with the final 403(b) and other tax out of the 403(b) plans of their current agreements (ISAs) are not required for regulations for transactions like loans employer would not be possible. rollovers out of a 403(b) plan. and hardship distributions. Distributions on certain types of It should be noted that the second employer contributions (as opposed Contract Exchanges requirement does not necessarily to elective deferrals) may be less Two types of transactions arose call for the execution of a separate restrictive; but these are often more from the ashes of Revenue Ruling 90-24 information sharing agreement, restrictive than the restrictions on transfers, which were eliminated under since all providers receiving ongoing elective deferrals. Thus, most active the final 403(b) regulations. They are contributions would be required employees are not in a position to use contract exchanges and plan-to-plan in their written plans to share rollovers out of the 403(b) plan of their transfers. information. An information sharing current employers. Unique to 403(b) plans, and unlike agreement would only be necessary for The rules are similar for rollovers, contract exchanges may be the “exchange-only” recipient providers governmental 457(b) plans. However, made prior to a distributable event, described above. for 457(b) plans of private tax-exempt such as severance from employment. Finally, rules that would apply to entities, rollovers are not permitted. Thus, for in-service employees, contract rollovers, such as spousal consent to The second principle involves an exchanges are much more viable. The waive QJSA for ERISA plans, would important distinction, within the disadvantage is that contract exchanges not apply to contract exchanges. In context of the first one. Let’s take the are only permitted within a plan that that case, a distribution is not involved, example of an individual who wishes permits exchanges, so assets cannot be and, moreover, assets remain within to move assets from a 403(b) plan to moved outside the plan in this fashion. the plan.
32 403(b) Advisor :: summer 2013 Plan-to-Plan Transfers regulations permit transfers by an active out of their plans. The third method of moving assets employee from his/her current 403(b) Information sharing agreements are is via a plan-to-plan transfer, which is plan to that of a prior employer or to not required for plan-to-plan transfers. permitted in both 457(b) and 403(b) another 403(b) plan of his or her current As with contract exchanges, rules that plans, but with differing restrictions. employer. would apply to rollovers would not As the name of this type of Several caveats do apply. One major apply to plan-to-plan transfers, since a transaction indicates, it is used to issue is the requirement that both the distribution is not involved. transfer assets between plans, as receiving plan and the current plan Finally it should be noted that there opposed to within a plan, where permit such transfers. In other words, is a special subsection of the plan-to- the contract exchange would be the the current plan must permit transfers plan transfer provisions that permits appropriate transaction. out, and the receiving plan must allow 403(b) plan assets to be transferred to a Unlike a rollover, a plan-to-plan transfers in. qualified governmental defined benefit transfer is permitted only between plans Having seen completed plan plan for the purpose of purchasing of the same type (e.g., 403(b) to 403(b), documents of various plan sponsors, permissible service credit in the defined 457(b) to 457(b), etc.). However there I can state that it may be difficult to benefit plan. This is the sole example is a limited exception to this same- find both a plan that permits transfers of where a plan-to-plan transfer can be plan-type rule for transfers to purchase out, and a receiving plan that permits made between different plan types (a service credits under a governmental transfers in. Many plans restrict 403(b) plan and a 401(a) defined benefit defined benefit plan (see below). transfers out, due to vendor contract plan, in this case). Unfortunately, 457(b) plans involve restrictions, while a number of plans a further complication: plan-to-plan also limit transfers into the plan, out of Conclusion transfers are not permitted between concern that any defects associated with If one is attempting to move assets 457(b) plans of governmental and tax- transferred assets under the prior plan between different plan types (e.g., exempt entities. In addition, plan-to- could carry over to the current 403(b) 403(b) to IRA), one will need to be plan transfers are further restricted by plan. eligible for a distribution from the plan type. For governmental plans, an The IRS’s model plan language plan one wishes to move assets from, active employee may transfer his/her emphasizes this concern, requesting since only rollovers are permitted in current 457(b) plan assets to another confirmation that the transferor plan is a such a scenario. Plan-to-plan transfers 457(b) plan maintained by his/her plan that “satisfies section 403(b) of the can be used to move assets between current employer; transfers are not Code.” similar plan types, but beware of the permitted to plans of prior employers. In addition, for ERISA plans, significant restrictions that apply to such The final 457(b) regulations limit certain sections of the Code and ERISA transactions, especially with respect to transfers between plans of tax-exempt essentially conflict with the plan- ERISA plans. entities to those employees who have to-plan transfer provisions. Though In summary, when transferring incurred a severance of employment those fiduciary and other provisions assets between plan providers within a from one plan sponsor and subsequently are beyond the scope of this article, 403(b) plan, contract exchanges are the wish to transfer assets to the 457(b) plan consider the following example of one transaction of choice. of their current tax-exempt employer; such conflict. Please note that this article is for active employees of tax-exempt entities Suppose a plan contains a QJSA general informational purposes only, may not transfer plan assets. Such provision whereby spousal consent is and is not intended to be taken as legal 457(b) plan-to-plan transfers, while required for loans and any distributions advice or a recommended course of permissible, are relatively rare, and that are not in the form of a QJSA. action in any given situation. Readers thankfully so, since the rules are so Imagine a participant whose assets are should consult their own legal advisor convoluted. currently in an ERISA 403(b). If there before taking any actions suggested in Plan-to-plan transfers are likely to is a non-ERISA 403(b) plan, which is this article. b be only slightly more commonplace also maintained by her current or prior for 403(b) plans, since rollovers will employer, she could circumvent the Michael Webb, TGPC, be available for many employees who spousal consent provisions by simply CEBS, AIF™, is the chair of are eligible for plan-to-plan transfers. completing a plan-to-plan transfer of NTSAA’s Education However plan-to-plan transfers will assets to a non-ERISA plan, where Committee. He is Vice be permitted in two situations where spousal consent would not be required President, Retirement Services, at rollovers would not be permitted, for future loans/distributions. This Cammack LaRhette Consulting, an assuming the employee was not eligible example explains only one of many independent HR benefits consulting firm for a distribution. reasons that ERISA plans would not specializing in non-profit industries. Specifically, the final 403(b) permit individual plan-to-plan transfers
www.403b-advisor.net 33 best practices
Audit Concerns for 403(b) Plan Sponsors: Year 2
By Steven P. Kjar and n the Winter 2010 issue of Emily Powers 403(b) Advisor, we published “Audit Concerns for 403(b) I Plan Sponsors,” which highlighted issues uncovered during the first year of the new regulations Most 403(b) plan sponsors have and provided solutions to help plan sponsors mitigate risks in the future. now completed their second Now that Year 2 of the new requirements round of governmental filings and is behind us, we thought a follow-up article focusing on common audit issues uncovered independent plan audits under during the most recent plan audits would be a helpful tool for plan sponsors. We’ll the regulations that went into discuss the audit issues that CapinCrouse, an independent accounting and auditing firm effect on Jan. 1, 2009. Since these specializing in not-for-profit organizations, saw most frequently during audits performed requirements are still relatively new, for its clients. We’ll also provide Lockton plan sponsors continue to run into Retirement Services’ suggestions for correcting these issues. These suggestions questions and issues. are based on our work as an independent retirement plan consulting firm, specializing in providing solutions to retirement plan sponsors.
34 403(b) Advisor :: summer 2013 www.403b-advisor.net 35 Audit Concern Suggested Solutions
Definition of Compensation • Contributions to a 403(b) plan are based on the • Define your objective for the definition of definition of compensations found in each plan compensation. document. The most recent audit results indicate • Review your plan’s definition of compensation that many plan sponsors administered their plan and compare it to your payroll procedures. If using a definition found in the plan document. they don’t match, you need to either change your This is especially true for plans that were drafted payroll processing for plan contributions or amend for the first time in 2009. your plan document. • For example, many 403(b) plan documents define • Your retirement plan consultant, your retirement compensation as “gross income.” Historically, plan vendor or an ERISA attorney can assist you 403(b) plans have excluded overtime and in this. bonuses from the definition of compensation. Housing allowances are also commonly excluded. Plan sponsors are required to administer the plan using the correct definition of compensation. If you are using “gross income”, exclusion of compensation is an error and will be noted in your audit results.
Discrimination Testing • Under the universal availability requirements, • Plan sponsors can “exclude” certain employees your plan must now be available to all employees. from the universal availability requirements. The latest audits found that many plans — • Your plan must be expressly written to exclude especially those adopted for the first time in these employees. Plan sponsors must operate a 2009 — include blanket language stating that plan in compliance with the plan document. all employees are eligible to participate, but in • Common classes of employees improperly operation, certain classifications of employees are excluded: temporary employees, part-time excluded from participation. This is a violation of employees and student employees. your plan provisions. • Review you plan provisions and check with your Human Resources department to determined how you currently administer plan eligibility.
Incorrect Calculation of Distributions • Plan administrators did not calculate the correct • Most plan sponsors rely on their third-party plan vesting percentage, tax withholding or both. administrators to calculate and distribute funds. • Consider requiring the plan administrator to review and sign before a withdrawal is approved. • Consider implementing 100% immediate vesting in all contributions.
34 403(b) Advisor :: summer 2013 www.403b-advisor.net 35 Audit Concern Suggested Solutions
Hardship Withdrawals and Participant Loans • Some plan documents do not allow for hardship • Plans that use multiple vendors are especially withdrawals or participant loans. Many third-party vulnerable to this problem. administrator (TPAs) are equipped to process • Many plan sponsors have adopted a single vendor these requests without plan sponsor direction. to control these types of issues. Typically, participants request loan or withdrawals • Some plans require the plan sponsor to review directly from the TPA, and the plan sponsor is and approve loans and withdrawals. unaware of the transaction. • Discuss plan provisions with your vendors, communicate your specific objectives in writing, and make sure vendors follow them. • Retirement plan consultants specialize in vendor management and in making sure the plan is administered according to the provisions of the plan document. ERISA Fidelity Bond • If you have an ERISA retirement plan, you are • Review Field Assistance Bulletin 2008-04, required to have an ERISA fidelity bond for those Guidance Regarding ERISA Fidelity Bonding individuals with access to plan assets. Note that Requirements. fiduciary liability insurance is not the same as an • Contact a broker who can help you secure the ERISA fidelity bond. appropriate bond.
Lack of Plan Governance • Many plan sponsors are unaware of regulatory • Plan sponsors are required to have a process compliance requirements and their responsibility to evaluate plan investments, fees, services, for oversight of the plan. revenues and compliance. • A best practice for plan sponsors is to establish a retirement plan committee that implements a process for regular oversight of your plan.
The overriding cause behind these izing in 403(b) retirement plans are issues is the fact that many 403(b) plans available to help plan sponsors navigate Steven P. Kjar, CIMA, CEBS, is a are not being administered in accor- these issues. Attorneys and auditors can vice president with Lockton Retirement dance with the written plan document. also provide compliance support for Services. You can reach him at Plan administrators are required to your plan. 408.200.3603 or [email protected]. follow the provisions of the written It is very important for your plan to plan document, and plan sponsors are be administered correctly and in accor- Emily Powers is an audit manager with responsible for making sure the plan dance with your specific objectives. The CapinCrouse LLP. You can reach her at is written according to their specific audit process can help you define areas 317.885.2620 x1270 or objectives and then administered as for improvement and provide the oppor- [email protected]. written. tunity to obtain assistance in complying As we noted in last year’s article, with the law, your plan document and help is available. Consultants special- your specific objectives. b
36 403(b) Advisor :: summer 2013
sales nuggets
RMDs and the 21st Century ‘Grandparent’s Delight’
By Frank Owen, III
s Dickens wrote in his today’s retirees face — especially the A new twist on an old classic novel, A Tale of Two educational retiree. The best of times idea may be a good way Cities, “It was the best of because they have in most cases a secure times; it was the worst pension and Social Security check each to turn RMDs into an A of times…” Of course, month, yet the economic uncertainty he was writing about the still exists. unexpected legacy for a economic and political unrest in London They hear daily about the looming and Paris in the late 18th century. I am federal debt, the uncertainty of client’s grandchildren. no literary scholar and this is no political entitlements, looming inflation, a low essay, but I think the beginning lines interest rate environment and political of that book seem appropriate to what gridlock in Congress. As uncertain
38 403(b) Advisor :: sprisummnger 2013 2013 www.403b-advisor.net 39 Do you have a systematic program to discuss legacy planning ideas with your retiree clients, or does the check just go out and away?
as things may be, most of my clients RMD = Outflow obligation to help our retired clients don’t have to worry about losing a job Now let’s look at it from today’s address that concern for their heirs. or foreclosure on their homes, so life, perspective and reality. Most advisors Some advisors have already while it could be better, is still pretty who practice in the 403(b) environment addressed this by focusing on using the good. have done an excellent job helping their RMD income to fund a long-term care But worry they do, because they clients accumulate assets for retirement. contract to make sure that assets are know that the future their children Despite some of the discussion about not depleted and are still there to pass and grandchildren face may not be as fees and markets, most of our clients on to the next generation. Others have secure as theirs was 40 or 50 years would say that the most important thing discussed survivorship life to allow ago. Politically they may feel helpless to them was to have a secure financial parents to spend the inheritance but in correcting that problem. Financially retirement and someone they could leave it tax free after their death. they have enough to live on, but trust to help them sort out all of their Those are all worthwhile not an excess of assets to leave as an options. For the large part, most 403(b) discussions, but I remember years ago inheritance. So it is also the worst of advisors have succeeded in that effort. a client of mine retired and said his times to them. Many of my clients have been able focus would be on the “4Gs” of his to retire with their state pension and life: Grandma, gardening, God and Blast from the Past Social Security as their primary income grandkids. His eyes really lit up when he I entered the financial services sources. The 403(b) assets have become said “grandkids.” profession in 1978. As a young an inflation hedge or cash access for Most retirees will say that they are insurance agent I was introduced to the emergencies or opportunities. As a worried about what will happen to phrase, “grandparent’s delight.” You matter of fact, many of my clients would their grandchildren, or maybe they are may remember it too. Upon the birth of prefer not to take money out but at concerned that if left to the children a grandchild, the grandparents bought 70½, they have no choice. it will get spent. So why not offer a a life insurance policy on the child that They do have a choice on what they solution? Most grandparents help with would provide an immediate death do with those withdrawals, however. the education of their grandchildren; benefit, future opportunity to buy more Last year we finally realized that more can you imagine the legacy and impact insurance without proving insurability than $1.5 million a year was flowing of providing something to a grandchild and a buildup of cash values that could out of our clients’ accounts for required when they reach retirement? be used later in life. minimum distributions (RMD) and we Many people are worried about how While writing this article I Googled had no plan to help redirect it. the world will look 50 years from now. “insurance policy on grandchildren” How about you? Do you have a Will their children and their families and it led me to the Gerber Life Grow- systematic program to discuss legacy enjoy the same standard of living? Do Up Plan. Not much has changed in 35 planning ideas with your retiree clients, they worry how they will help resolve years. or does the check just go out and away? that concern since they won’t be here 50 I think the two biggest differences years from now? between today and 1978 are the Focus on RMD Income uncertainty of the times and the Almost all retirees are parents and Possible Solution sophistication of the buyer. Not that grandparents. Many of them believe the So here’s an idea that might be these policies were bad, but I think next generation’s retirement will not be a useful planning tool. Today’s life more importantly they did not really as secure. That’s a sad statement but a insurance products are much more allow grandparent to leave a legacy for widely shared perception. This means flexible and innovative than they were their grandchildren. we have the perfect opportunity and 35 years ago, with computers generating
38 403(b) Advisor :: spring 2013 www.403b-advisor.net 39 concerns about not knowing what the future holds. There are a lot of unknowns; and there will always be critics. I can hear them now: Will the grandchild keep the policy that long; will the S&P grow at 5% each year; will the company be in business when they retire; what about tax law changes; and will inflation offset the value of these dollars? We know this: Assuming a 3% inflation rate each year, the purchasing power of $33,487 is the equivalent of about $6,000 today. Inflation will certainly affect the numbers, but would $6,000 per year help a grandparent today to supplement their lifetime of saving? But even beyond that, the biggest unknown is this question: Will my grandchild’s future be as secure as mine?
Solving Beats Selling Most retirees will say that they are If you have clients receiving an RMD each year that they don’t need for their worried about what will happen to income, why not have this discussion? their grandchildren, or maybe they Maybe instead of leaving a legacy of love are concerned that if left to the for the next 50 years, some will decide to put it in a college savings program children it will get spent. So why to help save for college. Maybe they not offer a solution? purchase long-term care coverage or buy a survivorship life policy to pass it on. Maybe they do nothing but thank you illustrations in minutes. In 1978 it took are made or required beyond that point for the discussion. weeks to get an illustration. But speed in time. The death benefit is simply a Over the last 35 years I have learned needs to be tempered with letting byproduct of the strategy because we that sharing solutions with my clients is clients see the advantages, disadvantages are focusing on income in the future. a lot better than selling a product. I’ve and uncertainties that can occur. The policy is left to accumulate also learned that most 403(b) advisors Why not have the grandparents value until the grandchild reaches age do a great job helping people accumulate purchase a policy on the life of a 65. Contract performance is unknown assets. Sometimes we forget they can’t grandchild? Making sure they comply and markets are uncertain, but for this take this money with them when they with all of the issues regarding guideline example let’s assume the S&P averages die, and fail to discuss what they want to premium tests. Consider using a 5% per year for the next 56 years. At accomplish with it while they are living. universal life product and an income age 65 the accumulated cash value Here is what you don’t want them to do: benefit rider. As you know, the devil is would generate $33,487 annually in hear about a good idea from someone always in the details and it’s important guaranteed income through policy else and say goodbye to you. b to stay within those guidelines. loans not currently subject to taxes, for Let’s look briefly at an example the life to the grandchild. Of course, Frank Owen III is president of using a 9-year-old granddaughter. The income payments are based on the FR Owen & Associates in grandparent funds the policy at $1,000 insurer’s ability to pay. Charlotte, N.C. He is a per year for seven years. In exchange, You can imagine the compounding member of the editorial board of a death benefit is created for $100,000 effect on the internal build-up of value 403(b) Advisor magazine. on the grandchild. No further payments — and you can imagine the skeptics’
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42 403(b) Advisor :: summer 2013 Lemon Wallet • [www.Lemon.com]
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Yannis Koumantaros, CPC, QPA, QKA, is a Adam and Yannis are always on the lookout for new and creative shareholder with Spectrum Pension Consultants, Inc. mobile applications and other technologies. If you have any tips or in Tacoma, Wash. He is a frequent speaker at national conferences, and is the editor of the blog and suggestions, please email them at adam.pozek@dwcconsultants. newsroom at www.spectrumpension.com. com and [email protected]. Adam Pozek, ERPA, QPA, QKA, QPFC, is a partner with DWC ERISA Consultants, LLC in Salem, N.H. He is a frequent author and speaker, and publishes a blog at www.PozekOnPension.com. 44 403(b) Advisor :: sprisummnger 2013 2013 www.403b-advisor.net 45 THE ULTIMATE 403(b) SUMMIT
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44 403(b) Advisor :: spring 2013 www.403b-advisor.net 45 grade points
Conversion Communication in a Commoditized World
By Sarah Simoneaux
Plan conversion, no acebook me,” he said, in While I was surprised, his answer answer to my question made sense. As a law professor, he matter how we thin- about the best way to was used to dealing with Millenials F reach him. I stared in and their electronic communication slice it, is a detailed astonishment. This preferences. I had just never thought was not my college to ask him about how he wanted me and complex process. sophomore son, but my 80-year-old to communicate with him, and it father. Seeing my wide eyes, he went explained why he was slow to return Don’t underestimate on: “Look, you know I’ve never liked my calls. the importance of talking on the phone. I reserve email How does my octogenarian for my students, and I keep Facebook Gen Y-loving father figure into the communication in it. open on my iPad so I can chat with my retirement services profession? All grandchildren. Facebook is the way I I had to do to get him to respond like to communicate.” to me was to ask how he wanted to
46 403(b) Advisor :: sprisummnger 2013 2013 www.403b-advisor.net 47 be communicated with. And the answer might be — remember my answer he gave me was not what I Facebook-loving dad’s response to me. expected. Think about how often that Meaningful happens in our business: We fire off Troubleshooting emails or leave voicemails requesting What do you do when you find the communication and information, asking detailed questions requested way of communicating isn’t and delivering complex information working? First, apply the “rule of two.” teamwork should be without ever asking how our clients If you have to send two emails about at the core of our want to receive that information. the same topic, pick up the phone. Takeover plans — which represent If you have to call a second time, ask business. a large part of our business these when would be a convenient day and days — are especially vulnerable to time to set up a call. communication missteps. Service Second, ask a question rather than providers ask for list after list of reciting a list: “What can we do to help skills. They may also be struggling to required items and then hand the you provide this information?” These balance conversion with a caseload. plan off to another staff member tips may be intuitive to salespeople As a result, curt and rigid client who may or may not be aware of and business owners, but conversion communication is likely to be the first what has happened in the initial specialists and administrative staff are impression of the company. While conversion process. It’s a recipe for likely not to have been trained in these soft skills training can help break turning a consultative service provider important communication techniques. the communication logjam, consider into a commodity. Meaningful Regardless of how intuitive or well- adding a conversion team member communication and teamwork trained everyone is in communicating, with a limited or no caseload who can should be at the core of our business, things will go wrong. Ross Shafer, a build relationships among clients, especially when clients first encounter keynote speaker a few years ago at The providers and advisors. the services staff with their takeover ASPPA 401(k) SUMMIT, points out Remember that successful plan. in the book The Customer Shouts Back communication strategies have these that 88% of customers would stay with five ingredients: First Contact the firm after being badly treated if 1. Find out how people want The first impression of a service they felt that their complaints were to communicate and stick to firm is the key to winning and keeping heard and problems were fixed. that method. clients. Malcolm Gladwell, in his book 2. Use the “rules of two.” Blink, describes how people use “thin- Foster Communication Skills 3. Remember that you are building slicing,” or quick first impressions, Malpractice insurance companies relationships and not just to form lasting opinions of others. will give premium discounts to doctors gathering data. in a Commoditized World Gladwell profiles Dr. John Gottman who go through communication 4. Train everyone on “soft skills.” of the University of Washington, who training. Why? Their research shows 5. Make sure you are communicating the is able to predict with 90% accuracy the highest probability that a physician values and objectives of the firm. whether or not a couple will stay will be sued is not for making Effective communication fosters married for the long term by watching mistakes, but instead when they have human connections in an increasingly their conversation about a mundane poor relationships with patients and technological and commoditized topic — for less than one minute. staff. A services firm should foster an retirement services world. b Clients and advisors will be environment where employees can face forming lasting impressions of reality and take responsibility without Sarah Simoneaux, CPC, is services staff in this first minute of placing blame on others, as well as president of Simoneaux communication. Which question having the freedom to suggest changes Consulting Services in Man- would leave a better impression of the to improve flawed processes and bad deville, LA, and a principal of company: “We need your signed plan customer service. Simoneaux & Stroud Consulting Services. document, last year’s testing reports, Knowing how to communicate She is a former president of ASPPA and this year’s census and your employees’ well with clients and advisors should previously served on the Education and enrollment forms” or “Before we get be a key skill for takeover plan Examination Committee as a Technical involved in your plan’s details, how associates. However, these employees Education Consultant. She is the author of would you like us to communicate are often put in this position because the textbook, Retirement Plan Consult- with you?” Listen to the answer and of their attention to detail and their ing for Financial Professionals, which is then stick to that communication qualified plan knowledge, and they used for the PFC-1 course in ASPPA’s method. Don’t assume what the may have limited customer service QPFC credentialing program.
46 403(b) Advisor :: spring 2013 www.403b-advisor.net 47 takeaway Reports have included audits of plans where only 18-20% of employees actually The IRS Wants to Know: participate in the How Effective is the plan. Opportunity to Participate? By Ellie Lowder IRS field examiners are asking employers to share their employee education plan when participation rates in the 403(b) plan are low — causing the IRS to question whether the rules governing the universal availability requirement are being met.
In reports of recent IRS audits of by “effective opportunity” — or in to enrollment, or changes in 403(b) plans, we’re learning that IRS simpler terms, “What is the makeup of contribution levels, or approved field examiners are asking employers a good education plan?” The answer? product providers. to share their employee education plan “The educational activity must be Financial advisors (and TPAs) will when participation rates in the 403(b) diverse to fit the needs of a wide range want to begin discussions with these plan are low. Reports have included of employee types — and, the annual employers and offer assistance to them, audits of plans where only 18-20% of meaningful notice of the right to only so that an effective opportunity employees actually participate in the participate and make changes should be to participate in the 403(b) plan is plan. Those low participation rates are followed up with year-round activity.” provided. This will provide a double causing the IRS to question whether, in Those activities include: win for employers that set up an fact, the rules governing the universal • frequent educational workshops employee education program: availability requirement are being met. • financial advisors to provide face • the program will increase employee As a Senior Staff Specialist in to face enrollment and counseling satisfaction with the benefit provided the IRS audit area said, “The field services to employees by the employer; and examiners are being provided • online tools for those employees • employees who participate in saving the actual participation rates of comfortable with seeking out and their own retirement dollars are more an employer where an audit is acting upon retirement savings likely to retire at normal retirement planned, and that is raising red information online. (Note: In a ages, leaving room for employers flags. The examiner is intent on recent report from the Census to save budget dollars when those discovering whether, in fact, an Bureau, we learned that roughly departing employees are replaced “effective opportunity” has been 30% of the population either does with new employees starting at the given to employees to not only not have a computer (16%) or, if lower end of the salary scale. b enroll in the plan, but to continue they have a computer, does not have to make contributions, and increase Internet service (14%).) Ellie Lowder, TGPC, writes contributions over time.” • Written communications designed frequently for 403(b) Advisor. In a telephone interview with to reach all eligible employees to She is a consultant with TSA the IRS Staff Specialist, I asked the include specific details to make it Training and Consulting staff member to define what is meant easy to gather information leading Services in Tucson.
48 403(b) Advisor :: summer 2013 How do you win the retirement game? Keep what you have. Capture more.
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