Retirement Plan Changes in 2012 by Robert Powell

Retirement-Plan Changes Coming in 2012
By Robert Powell | MarketWatch – Tue, Jan 3, 2012 3:08 PM EST
Even though lawmakers may shy away from passing major laws in an election year, 2012 will bring changes to 401(k)s and other retirement plans.

From fee disclosure to lifetime-income options and more, your 401(k) or other workplace plan likely will look different by this time next year.

Still, experts say there won’t be many legal or regulatory changes in 2012 given that it’s an election year. “Given the fiscal situation, there is certain to be a quite long political debate over the question of entitlement reform, which includes Social Security and Medicare,” said Stephen Utkus, a principal with the Vanguard Center for Retirement Research.

“No one really envisions major changes in 2012, given that it is an election year,” Utkus said.

Others agree. “Not much will happen in Washington,” said Stacy Schaus, a senior vice president with PIMCO.

But even absent new laws, your retirement plan may see changes.

Fee disclosure

The year 2012 should largely be about enhanced disclosure, said Lew Minsky, the executive director of the Defined Contribution Institutional Investment Association.

For instance, retirement-plan sponsors will have to disclose to 401(k) participants the fees and expenses associated with the funds in their retirement plan.

That includes new annual notices, quarterly statements, enrollment workbooks and education about fees. Read more: New directions for 401(k)s: A MarketWatch Retirement Adviser Special Report.

“The materials are mandated under new regulations and are intended to make it easier for participants to understand their retirement-plan investment choices by providing information about such things as past performance, benchmarks and fees in a comparative chart,” said Larry Goldbrum, general counsel at the SPARK Institute.

Such fee disclosure may not change participant behavior as intended, however, said Michael Falcon, managing director and head of retirement in the U.S. and Canada for J.P. Morgan Asset Management. Learning that a fund costs 45 basis point is interesting math, but the most important way to change outcomes is to change how much you save. “The savings rate is the most important element of a retirement plan, not the fees,” he said.

Lifetime income options and illustrations

There are those who hope, or expect, that regulators and lawmakers will make progress on other initiatives.

Howard Heller, manager of legislative and regulatory strategy for T. Rowe Price Retirement Plan Services, said he expects the U.S. Labor Department to issue guidance in 2012 on providing lifetime income illustrations on participant benefit statements.

The illustrations would show participants their expected monthly benefit at retirement age given their current account balance and, perhaps, give certain assumptions regarding future contributions and earnings. T. Rowe Price research suggests that plan participants value such information, he said.

Schaus also said she hopes to see the Lifetime Income Disclosure Act or LIDA, which was proposed in 2010, become law. Read LIDA at this website. She also hopes the U.S. Treasury Department will issue guidance on deferred annuities within defined-contribution plans, especially as it pertains to required minimum distributions.

Fiduciary investment advice

Also on the docket: The Labor Department has said it plans to re-propose its rule on the definition of a fiduciary for the purposes of giving investment advice.

“It is very difficult to say what the impact would be on savers at this time without seeing the final rule,” said Terri Hale, a spokeswoman for the Principal Financial Group. “We are hoping any re-proposal is a workable regulation that protects retirement-plan participants, IRA account holders and employers, while ensuring they continue to have access to the much-needed investment information and services they receive today.”

But Heller said the timing of the fiduciary proposal makes it unlikely that it will be finalized by the end of President Obama’s current term, which raises the possibility of the regulation being modified once again should Obama not serve a second term.

“Some have expressed concern with the current proposal in that it would have unintended consequences and limit the ability of plan sponsors to obtain the information and support they have come to expect from their service providers, such as information relating to the investment options on a recordkeeper’s investment platform and information provided to participants regarding their rollover options,” Heller said.

Auto-everything

The Labor Department’s guidance on lifetime-income illustrations will lead to greater focus on outcome-oriented approaches to retirement-plan design and management, some say.

“As such, I expect to see increased use of auto features (particularly auto escalation) to drive increased savings rates,” said Minsky, of the Defined Contribution Institutional Investment Association.

Others agree. “I do think auto-enrollment and auto-escalation will become very common,” said Craig Brimhall, vice president of retirement wealth strategies at Ameriprise Financial.

In these types of plans, new employees are automatically enrolled in the plan, for example at a 3% contribution rate, and that rate is automatically escalated a certain percentage each year until it reaches the maximum, unless employees opt out.

Another point of view

Meanwhile, others say that many of the regulatory and legislative changes that may occur are largely distractions for investors saving for retirement.

“Ultimately investors should keep their eye on the long-term goal of accumulating a large enough nest egg to create sustainable retirement income,” said Josh Cohen, defined-contribution practice leader at Russell Investments.

New in-plan income options

Minsky also expects to see large plan sponsors begin to follow the example set by United Technologies Corp. and look at ways to build lifetime income solutions into the default investment vehicles within their plans. United Technologies recently became the first Fortune 100 company to offer a lifetime income annuity as an investment option inside its 401(k) plan.

Others agreed. “I would expect to see more product options for employers who want to encourage and facilitate life income and a continued focus on the part of mutual funds on retaining dollars after people retire or terminate employment,” said Anna Rappaport, president of Anna Rappaport Consulting and a member of the Society of Actuaries’ Retirement 20/20 Advisory Panel.

Meanwhile, David Wray, the president of the Plan Sponsor Council of America, sees a different trend with 401(k) investment options. Plan sponsors will fewer choices, more target-date funds, and more passive funds in 2012, he said.

New products

Experts say that in 2012 financial-services firms will focus more on selling products more suitable for the times. “There will be an increased interest in strategies that offer lower volatility and guards against market shocks,” said Schaus. And more investment will go to emerging markets and inflation hedging such as commodities and real estate, she said.

Goldbrum said there will be continued focus on lifetime income products. “Lifetime income annuity options and other products and services will continue to be a focus as plan participants, especially baby boomers nearing retirement, employers and the retirement-plan community try to help workers figure out how to construct a reliable retirement income stream,” he said.

“Most of the momentum on this will come from product and service providers but regulators may adopt rules that would require employers to provide lifetime income illustrations or examples on participant statements,” he said.

Wray also suggested that 401(k) plan participants should keep an eye on stable-value funds, one of the more common investment options in a 401(k) plan.

“Eventually these extremely low interest rates could impact its viability,” he said. “Stable value is expensive on its face because you have to include the cost of the guarantee. If interest rates are zero for five-year bonds, that's a problem.”

New strategies

Brimhall suggested you would be wise to consider tax diversification in 2012, “especially in light of uncertainty around future tax rates.” He recommends putting assets in each of the three types of accounts — tax-free, tax-deferred and taxable — so you have the “maximum flexibility to respond if tax rates change.”

Pre-retirees who are quite confident that they will stay in the upper tax brackets, and who believe taxes will continue to rise, may consider putting more of their savings into tax-free accounts, like Roth IRAs,” Brimhall said.

“The higher taxes go, the more valuable tax-free income becomes,” he said.

Couples who don't qualify for a contributory Roth IRA because their income is too high may still consider contributing to a traditional non-deductible IRA and then converting it, Brimhall said. “Since the traditional non-deductible IRA was bought with after-tax dollars, the only thing taxable upon a conversion would be any gain since the IRA was contributed to,” Brimhall said.

Of course, there are some accounting pitfalls to be aware of — the IRS's pro-rata rule among them — so this idea should not be implemented without careful consideration by a tax professional beforehand, he said.

Also, Hale noted that in 2012 the oldest of the baby boomers reach age 66, making them eligible to receive their full Social Security benefit, if they haven’t already elected it.

“Some may want to consider delaying longer if they have the financial resources,” she said. “Every year they delay up to age 70, they will receive a guaranteed 8% boost in the form of delayed credits.”

Entitlement reform on hold

Pat Connor, a spokesman for MetLife, said he agreed that comprehensive tax and entitlement reform most likely will be put off until 2013, though there is a small chance of seeing something in 2012.

“On the retirement front, when tax reform does happen, we will likely see a cap on contributions to plans and/or a consolidation of plan types (401(k), 403(b) and 457 plans),” he said.

Brimhall and others said Congress may reduce spending at some point, and that could affect Medicare beneficiaries. “Medicare part B premiums are now ‘means tested’ and the premium for higher income folks can be three times that of the lower income,” he said.

“If Congress moves forward with entitlement reform, more means testing will probably come into play. Therefore, those in the higher brackets may need to plan on paying a larger and larger share of their premiums and maybe even co-insurance amounts.”

Other trends

Employers and employees both are going to be frustrated because employees at or near retirement age cannot afford to retire, said Rappaport.

“They will want to stay and it may create talent management challenges,” she said.

In addition, she warned that as more people see retirees struggling, “there will be growing awareness of the challenges of retirees.”