Wonder What IRS Agents Look for When They Audit Retirement Plans?

Large participant loans are a key examination issue.  During an audit, IRS checks how plans handle loans, such as the time they allow for repayment, and what happens upon default.  Agents ask for copies of signed loan agreements and promissory notes, as well as documentation to substantiate residential loans.  Generally, plan loans are tax-free if the total doesn’t exceed the smaller of $50,000 or 50% of the account balance.  Excess loans are treated as taxable distributions.  Among the most common plan loan failures: loans over $50,000; Nonresidential loans in which repayment exceeds five years; and loan defaults, in which the participant fails to make the payment.

Source: The Kiplinger Tax Letter, June 17, 2016

One of the Best Retirement Deals 9 Out of 10 People Ignore

By Carla Fried

There are some easy decisions around 401(k)s. Contributing enough to trigger the highest possible matching contribution from your employer, for example, is one of them.

Contributing to a Roth 401(k) should be another. But it’s not. Eight years after retirement savings plans were allowed to offer the option, which can help many people boost their retirement funds, more than half added it. Yet just 11 percent of savers with access to the account use it, according to benefits consultant Aon Hewitt.

Roth 401(k)s are much like your garden variety 401(k). The big difference is that you contribute after-tax money, not pre-tax dollars like with the standard 401(k). Later in life when you want to tap that Roth money you won’t pay income tax on it — not a penny, as long as you’ve held the account for five years and are 59 ½.

The conventional wisdom is that the Roth 401(k) makes the most sense if your current income tax rate is lower than what you expect to pay in retirement. Opting for the Roth 401(k) essentially prepays your tax bill. Granted, deciding if the Roth route makes sense for you is tougher than deciding whether to contribute enough to get the company match. But the lack of broad buy-in suggests many 401(k) savers are missing out on an important way to build retirement security.


With a traditional 401(k) you delay the tax bill and your money compounds over time. You get an upfront break that reduces taxable income. The tradeoff: Your later withdrawals get taxed as ordinary income. Stands to reason that prepaying — as you do with a Roth account — makes sense when you’re in a low tax bracket, especially for younger workers yet to reach peak earnings.

An analysis by T. Rowe Price found that a 30-year-old saving in a Roth 401(k) would have 17 percent more spendable income in retirement even if his pre- and post-retirement tax rates were the same. If his retirement tax rate is 5 percentage points higher, the Roth 401(k) will generate 25 percent more income than the after-tax money from a traditional 401(k). A future tax rate 10 percentage points higher will generate nearly 35 percent more spendable income in retirement compared to the traditional, courtesy of the time factor of tax-free (not tax-deferred) compounding.

While the young get the greatest benefit, even middle-agers who anticipate a lower tax rate in retirement would likely be better off saving via a Roth 401(k). “Unless you’re planning for a steep lifestyle change in retirement, what’s likely is that at best you might drop into a tax rate a few percentage points lower,” said Stuart Ritter, a senior financial planner at T. Rowe Price.

For example, the tax bracket for a 45-year old married couple with taxable income of $200,000 is 28 percent. If they retired today, that income would have to drop below $74,000 to fall into the 15 percent tax bracket. More likely, they’d be in the 25 percent bracket, which tops out at $148,500 for married couples filing jointly. T. Rowe Price estimates that even if they pay a tax rate in retirement just three percentage points lower, the Roth 401(k) will leave them with 8 percent more spendable income in retirement than a traditional 401(k).

Only if the future tax rate is more than 10 percentage points lower than the initial tax rate does the traditional 401(k) becomes a better deal for the 45-year-old couple. That would be a large lifestyle haircut even if federal tax rates merely stay steady.


For 55-year-olds the traditional 401(k) becomes the smarter choice when the future tax rate is at least 8 percentage points lower. A married couple in the 35 percent federal tax bracket today (so income between $405,101 and $457,600) would need to get by on income of no more than $226,850 (the top of the 28 percent federal tax bracket) to pull that off.

Higher-income earners need to carefully navigate potential short-term tradeoffs. For example, two fifty-somethings can each defer up to $23,000 this year in a traditional 401(k). That’s a lovely $46,000 reduction in taxable income. Put that in the Roth 401(k) and you lose that upfront tax break, which could wreak alternative minimum tax havoc.

And remember, if you opt for the traditional 401(k), the IRS will come knocking at age 70 ½, expecting you to start taking annual required minimum distribution (RMDs) — forced taxable withdrawals — from your savings. RMDs are taxable income and make it harder to generate a steeply lower tax rate.

If you don’t think you’ll rely heavily on your 401(k) savings in retirement, a Roth 401(k) looks even better. Roll it into a Roth IRA before age 70 ½ and you won’t suffer forced withdrawals. That can help manage taxable income in retirement and give you the latitude to keep more of your retirement funds growing tax-free for heirs.

SOURCE: http://www.bloomberg.com/news/2014-05-08/one-of-the-best-retirement-deals-9-out-of-10-people-ignore.html

What to Expect Now That Britain Has Voted to Leave the E.U.

It’s troubling news for investors and savers, but traveling abroad may suddenly cost less

The surprise vote by Britons to exit the European Union — nicknamed Brexit — has roiled financial markets across the globe and could have an impact on the retirement and finances of Americans.

Here’s what you can expect:


Stock markets across the globe have taken a dive, concerned that the United Kingdom may be headed now for a recession that in turn will drag down the economies of the rest of Europe and the United States. The U.S. market, which rallied a day ago on expectations that Britain would remain in the European Union, forfeited about 3 percent early Friday based on the S&P 500 index.

More than half of Americans are invested in the stock market, largely through retirement plans at work. And many workers have been encouraged in recent years to diversify their portfolios and invest overseas. These investors will likely see their balances drop — at least for the next few months, experts predict. That’s bad news for retirees and others who must pull money out of the stock market at this time.

Financial firms are advising clients that there is no reason to panic.

Even if Britain eventually pulls out of the European Union, it will be a gradual process that will take at least a couple of years, says Tim Steffen, director of financial planning at Robert W. Baird & Co.

“If it looks like this will have a longer impact on people’s finances, you will have plenty of time to react to it,” he says.

Investment firms have been reaching out to clients with a similar message.

“Given that it may take several years for the specifics of Brexit to play out, and markets may be rattled as plans take shape, investors’ best protection is to hold a portfolio that is diversified across asset classes and regions,” the Vanguard Group wrote to its investors.

Nevertheless, some financial professionals see some positives from the stock sell-off.

“This is a good buying opportunity,” said Greg McBride, chief financial analyst with Bankrate.com. He favors investing in broad-based, low-cost index funds.

“Overall, I would recommend that investors think more about buying than bailing,” said Sam Stovall of S&P Global Market Intelligence in a statement. He sees long-term buying opportunities in mid- and small-cap stocks that have low international exposure as well as high-quality stocks with lower volatility.


Good news if you are shopping for a mortgage now. Interest rates on these loans have dipped slightly on the news of the vote, said Keith Gumbinger, vice president at mortgage research firm HSH.com.

“How far they can go down and stay down is really unclear at this point,” he said.

Investors fleeing stocks are seeking safety in U.S. Treasuries, and the rush of money flowing into these securities pushed their yields lower, Gumbinger explained. Mortgage rates closely track U.S. Treasury yields.

Credit cards, loans and savings rates

Before the Brexit vote, Federal Reserve policymakers were expected to raise short-term interest rates at least once this year, most likely after the November election, says David Payne, staff economist at the Kiplinger Letter. Now policymakers may not do so even then as they wait to see the economic fallout of Brexit here and abroad.

These short-term rates influence the interest rates consumers pay on credit cards and home equity lines of credit. So consumers can expect a reprieve from higher rates for many months to come.

On the other hand, those short-term rates also affect interest rates on bank CDs, savings accounts and money market mutual funds. So savers will remain stuck with today’s low rates for now.


The dollar already has appreciated against the euro and the British pound. “That will make traveling overseas less expensive,” Payne says. “It will be a good time for summer travel to Europe or England.”

George Hobica, president of the travel site Airefarewatchdog, agrees.

With the euro and pound weaker, fewer Brits and Europeans will visit the United States, causing the airlines to try to attract more customers by lowering the price for Americans traveling to Europe, he said.

“The day after the Brexit vote, we saw airfares to London on Virgin Atlantic and other airlines for fall travel reduced to $500 round-trip,” Hobica said in a statement.

He also advises travelers who have already made hotel and other land arrangements in Europe to see if they can rebook at a better price now that the exchange rates have fallen.

By Eileen Ambrose, AARP

Source: http://www.aarp.org/money/investing/info-2016/britain-voted-to-leave-eu-what-to-expect-ea.html

MassMutual Settles 401(k) Suit with its Employees for $31 million

The insurer joins other firms such as Fidelity Investments and Ameriprise Financial in settling allegations over excessive 401(k) fees in their own company plans

Massachusetts Mutual Life Insurance Co. has agreed to a nearly $31 million settlement in an excessive-fee lawsuit involving the firm’s own retirement plans, joining the ranks of other prominent retirement services providers that have settled allegations over their company 401(k) plans.

The class-action suit, Dennis Gordan et al v. Massachusetts Mutual Life Insurance Co. et al, concerned two of MassMutual’s retirement plans: the $2.2 billion Thrift Plan and the $200 million Agent Pension Plan, in which MassMutual served as record keeper and investment manager.

Plaintiffs, who are current and former plan participants, allege defendants breached their fiduciary duty under the Employee Retirement Income Security Act of 1974 by causing unreasonable administrative fees to be charged to the plans, offering high-cost and poor-performing investments, and offering a fixed-income option that was “unduly” risky and expensive.

Parties to the suit filed a motion June 15 in the U.S. District Court for the District of Massachusetts seeking preliminary approval of their settlement agreement, which includes a $30.9 million payment by MassMutual as well as certain non-monetary provisions meant to benefit plan participants.

Other firms such as Fidelity Investments and Ameriprise Financial have settled similar suits alleging excessive 401(k) fees, for $12 million and $27.5 million, respectively.

Non-monetary provisions include, in part:

  • Using an independent investment consultant, ensuring participants aren’t charged more than $35 for standard record-keeping services and not assessing record-keeping fees on a percentage of assets;
  • Reviewing and evaluating all investment options in the plan; taking into consideration the lowest-cost share class available for each fund, collective-investment-trust-fund and separately-managed-account alternatives; and passively managed funds for each category or fund offering;
  • Considering at least three finalists in making an investment selection.

“While MassMutual denies the allegations within the complaint and admits no fault or liability, we are pleased to put this matter behind us, avoiding the expense, distraction and uncertainty associated with protracted litigation,” spokesman Michael McNamara said in an e-mailed statement. “Importantly, the amount of the settlement is not material to MassMutual’s financial strength, nor its 2016 financial results.”

“MassMutual employees and retirees are going to have a great plan going forward, after this settlement is completed,” said Jerome Schlichter, managing partner at Schlichter, Bogard & Denton and lead attorney for plaintiffs.

Mr. Schlichter has been a pioneer of excessive-fee litigation in 401(k) plans over the past decade. He secured the largest-ever settlement in such a case last year — $62 million, paid by Lockheed Martin Corp.

He’s won other large settlements with companies such as The Boeing Co., Bechtel Corp., International Paper Co., Caterpillar Inc., General Dynamics Corp. and Kraft Foods Global Inc., and won a decision in the first 401(k) fee case to be heard by the Supreme Court, Tibble v. Edison.

Mr. Schlichter and his firm stand to collect attorneys’ fees of up to $10.3 million from the MassMutual settlement. The suit was originally filed in November 2013.

Source: http://www.investmentnews.com/article/20160617/FREE/160619920/massmutual-settles-401-k-suit-with-its-employees-for-31-million

Annual 401(k) Plan Education: 5 Action Items for Participants

By Robert C. Lawton

 Here are five items plan sponsors should discuss with their investment advisors may wish to consider sharing with plan participants as part of the annual employee education session:

  1. Contribute as much as you can. Remember, we all need to average at least 13% in contributions to our 401(k) accounts each year if we are to retire without reducing our standard of living. Since most of us don’t contribute anything close to that amount, advise participants to consider increasing their contribution rates by at least 1% every time they get a raise. Increasing contributions gradually when participants experience a salary increase minimizes the impact of additional 401(k) contributions on take home pay.
  1. Grab all of that free money. Most 401(k) plans have a company matching contribution and, believe it or not, most participants don’t contribute the amount necessary to receive the maximum employer match. As a result, they leave free money on the table. Quick, what is the best performing investment in any 401(k) plan? Of course, employee contributions that result in a company match! In most plans the company match is dollar for dollar up to a certain percentage — resulting in a 100% immediate return on investment.
  1. Consider target date funds. Most participants are too busy to manage their 401(k) accounts properly. As a result, many only look at them in times of stress (think crashing markets). The decisions some make at those points aren’t necessarily helpful in achieving a comfortable retirement. The experts believe 75% of all plan participants should invest 100% of their account balances in target date funds. Professional management can help participants avoid making bad decisions in times of stress.
  1. Set goals. Not enough of us do this. It’s hard to discipline ourselves to save when what we are saving for is ambiguous. It is easier for participants to set meaningful savings goals if they know whether they are going to travel, relocate to a warmer climate or continue to work in retirement. Even if their retirement turns out completely different from what they had planned, having goals now makes the future seem more concrete.
  1. Don’t take withdraws or borrow. Plan loans are one of the worst investments participants can make. Amounts borrowed are double-taxed and the rate of return on borrowed funds (a loan is one of the investments in a borrower’s account) is equal to the interest rate on the loan. Remember the S&P 500 returned nearly 32% in 2013! Withdrawals permanently remove assets from participant retirement accounts. Help your participants stay on the path to retirement readiness.


Source: Employee Benefit News


Make 401(k)s a Vault, Not an ATM

If they want to, employers can make the loan process harder for plan participants.
Experts agree that taking a 401(k) loan rarely is a good idea. Still, research suggests the number of plan participants doing just that is on the rise, particularly since 2008, when layoffs and financial turmoil left many American workers with nowhere else to turn for funds.

“We have seen an increase [since 2008], and I don’t think that’s very surprising, given the economy today,” says Denise Preece, assistant vice president of field services with OneAmerica.

According to Aon Hewitt, nearly 28% of active participants had a 401(k) loan outstanding at the end of 2010, a record high. Nearly 14% of participants initiated new loans last year, slightly higher than in previous years. The average balance outstanding was $7,860, which represented 21% of these participants’ total plan assets.

And while the majority of participants (68%) had only one loan outstanding, 29% had two loans outstanding simultaneously, and 3% had more than two loans.
Loan usage varies significantly based on the participant’s situation, according to the Aon Hewitt research. Middle-aged and middle-income participants are most likely to have outstanding loans, while women with lower salaries are more apt to take loans than their similarly paid male counterparts. Women are also more likely to take more than one loan at a given time, as compared to men.

Even the time of year affects whether or not your participants are likely to take loans from their 401(k), says Catherine Golladay, vice president, participant services, with Charles Schwab. In the fall months, particularly September, there’s always a fairly dramatic increase in the number of loans taken. Likewise, in the spring, particularly in March, there’s always a dramatic decrease.

“You can look at typical behavior and draw some assumptions,” she says. “In September, one typical thing someone might do is look at their 401(k) loan as an opportunity to help them fund their education. That’s the time frame when tuition is due. My hypothesis on the spring is, unfortunately, I think individuals may be using their tax returns as a way to help them smooth out cash flow if they’ve gotten behind. So they look to that as a resource and don’t go to their 401(k).”

Allowing plan members to take several loans concurrently is probably not in their best interests, agree industry experts. When Senators Herb Kohl (D-Wis.) and Michael Enzi (R-Wyo.)

introduced the Savings Enhancement by Alleviating Leakage in 401(k)s Act last May (see “SEAL Act provisions” sidebar), they included a clause that would have limited to three the number of loans participants could take from their 401(k) at any one time. That provision, however, was later withdrawn, since it’s up to plan sponsors to decide how many loans participants are allowed to take at once.

“Loans are not a protected benefit and the employer can choose to manage it how they want,” explains Patrick Shelton, managing member of Benefit Plans Plus.
Loans are not all bad, however, says Pamela Hess, director of retirement research with Aon Hewitt, and 401(k)s are an appealing way to access money since participants essentially are borrowing from themselves.

“If it’s a short-term need and the 401(k) fits the bill, it really doesn’t do long-term harm. As long as it’s not constant loan taking, as long as you pay it back and keep saving,” she says.

The problem is many participants may not realize that if they lose their jobs, or even quit their job to go somewhere else, that loan is due pretty quickly – usually within 60 days. “And a lot of people can’t pay it back or don’t pay it back, and then they owe taxes on that money as well,” says Hess. “And then it becomes a permanent withdrawal from the system.”

There are a few things employers can do to discourage excessive loan taking. First, amend your plan document so that employees are only allowed to take one or two loans at a time.
Some employees will take a loan from their 401(k) to help them with a down payment on a house. “That’s usually something that’s part of a longer-term plan, and it’s not a case of someone using a loan to manage cash flow or for a quick fix,” says Golladay.

Second, consider adding a loan fee if you don’t already have one. “You don’t want to hurt people who need money,” notes Hess. “But having a loan fee does help curb some of the excessive loan taking – a $75 fee, for example. For people who need it and are taking a significant amount, it’s probably not going to be a big deal, but it can deter people who are maybe taking smaller amounts.”

Third, consider adding a timeout between loans. For example, make employees wait, say, 60 days before letting them take another loan.

Finally, encourage those who do take loans to continue saving. “Do a targeted message, for example, saying ‘you took a 401(k) loan this month. Don’t forget to keep saving,'” suggests Hess. “Personalized communications can be really impactful.”

And if your plan doesn’t already have a loan provision, keep it that way, advises Golladay. “I’d be hard-pressed – if you didn’t have a loan provision in your plan – to think of a reason why you’d want to add that,” she says. “If at this point you don’t have a loan provision, I wouldn’t recommend it as something you should do.”

Preece says she’s heard more discussion over the past few months about making it harder for participants to access loans. “We’ve had a couple of plan sponsors who’ve not wanted participants to have the ability to request a loan on the Internet, for example,” she says. “I don’t think there’s a wholesale shift in that, but it’s interesting that it is more of a topic of discussion than it was, say, two years ago.”

Common thinking many years ago was that plan sponsors should have a loan provision in place because it would help with enrollment – more employees would participate in the plan if they knew they could access their money in an emergency. But Golladay says she’s not sure that argument holds true anymore, now that auto-enrollment in plans and auto-escalation of contributions have become more prevalent.

“We don’t see many people opting out of those, so employers might want to challenge their common thinking around loan provisions,” she says.

Says Shelton: “Our philosophy as retirement plan consultants is basically to discourage loans. 401(k) plans are not a checking account. When we’re talking to our plan sponsors, we’re encouraging them to not offer loans, first of all, and if they do, to make it as restrictive as possible. Have a minimum loan amount of $1,000, for example, and charge a fee.”


Source: http://ebn.benefitnews.com/news/401k-loans-retirement-2717891-1.

Uncovering the Hidden Fees in Retirement Plans

Financial advisers understand there are undisclosed fees on employer-sponsored retirement plans, but an alarming number of our clients don’t. In fact, according to a recent AARP study, seven out of 10 participants in such plans have no clue what they’re paying in fees—or how those costs can eat into their retirement savings.

We’ve been trying to educate clients about this for a while, but a Department of Labor rule that took effect July 1 has made the issue part of a national conversation. Essentially, the rule requires that all hidden fees attached to retirement plans and mutual funds be disclosed to employers and employees. Not surprisingly, many of the administrators and big firms behind 401(k)s, 403(b)s, and SEP individual retirement accounts weren’t thrilled by the change.

Disclosed fees, such as operating fees and advisory fees, account for only about 10% of the total fees attached to many retirement plans. Hidden fees account for the rest, and they are difficult to understand. Even highly trained fiduciaries and actuaries sometimes struggle to calculate the actual cost of undisclosed fees.

While the fee-disclosure law is a step in the right direction, it will be helpful only if plan participants can decipher the information. That’s where advisers come in. They have a duty to stay on top of the fee issue and teach clients how hidden costs affect retirement savings.

We’ve found private workshops to be an effective way to educate consumers. Our clients often invite their peers and co-workers to attend the workshops. We do risk and fee analysis with the group, make sure they understand the fees attached to their account, and, most importantly, we cover income planning.

Many people are heading toward a retirement in which they will have to rely on their 401(k), IRA or similar plan for the bulk of their income. It’s important that advisers make the risks of that clear and ensure that clients have a portion of their income in a low-risk account. It’s going to take people a while to adapt to the fee-disclosure information, and advisers need to be at the forefront of those conversations.

By Laura Stover

Source: http://online.wsj.com/article/SB10001424127887323940004578257793514318474.html