- Various federal government initiatives, including tax reform, will impact the way Americans save for retirement.
- Trends to watch include enforcement, pension de-risking and participant empowerment measures.
- Staying current on changes can help you identify critical retirement savings decision points.
Retirement security is the financial issue that is most disconcerting to Americans.* Likewise, the current administration has concluded the U.S. is in a “growing retirement crisis,” and, as part of its major tax reform initiatives, has put forth proposals to address the retirement security of American workers. Here are some key areas worth watching as the changes evolve:
Enforcement: The Department of Labor (DOL) and the IRS are committed to compliance enforcement and further bolstering their compliance assistance programs, which include the DOL’s Voluntary Fiduciary Correction Program and the IRS’s Employee Plans Compliance Resolution System.
Defined benefit (DB) plan trends: Pension de-risking—a leading trend among DB plans—consists of a series of plan design, investment and settlement strategies engineered to help reduce volatility with respect to a corporation’s DB pension plan obligations and balance sheet. 75% of DB plan sponsors say they already have, or will implement, de-risking strategies by 2015.†
Defined contribution (DC) plan trends: Empowering participants through disclosure appears to be the salient goal for many of the anticipated DC plan directives. These directives encompass target date fund disclosures, participant and service provider fee disclosures, fair and balanced rollover practices, the definition of investment advice fiduciary, brokerage windows and participant benefit statements.
Tax regime: Many high income individuals have felt the impact of the new tax regime that began in 2013, specifically regarding the net investment income (NII) tax. Fortunately, there are ways to “rearrange” income in order to lower modified adjusted gross income and/or reduce NII that counts toward the application of the tax (e.g., through 401(k) plans and nonqualified deferred compensation plans). This rearranging can potentially reduce or eliminate altogether the impact of NIIT.
New retirement programs and proposals: By the end of 2014, My Retirement Accounts (MyRAs) will be available for lower income workers whose employers do not offer traditional retirement plans, like 401(k) plans.
Other retirement proposals at this point attempt to address common concerns such as simplifying the existing retirement plans system and providing more workers with an opportunity to accumulate assets for retirement.
The U.S. retirement savings system has seen dramatic changes over the years and there is every indication that this pattern of change will continue. Staying current on these developments can help you identify retirement decision points that may be key to a successful savings strategy.
*Gallup, Economy and Personal Finance Survey, April 2013
†Towers Watson survey: U.S. Pension Risk Management — What Comes Next? 2013