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New Rules of Retirement Planning


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Retirement planning is a constantly changing subject. John Friar, AIF, of HJB Financial walks employers through the new landscape of retirement planning.

Published in: Economy & Finance
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New Rules of Retirement Planning

  1. 1. The New Rules of Retirement Planning Presented By: John Friar, AIF® Director of Corporate Retirement Plans Hausmann-Johnson Bauch Financial
  2. 2. Today’s Agenda  Look at Why Retirement Plans Demand So Much Attention  Roles and Responsibilities Inside a Retirement Plan  What Areas are Being Scrutinized  Ultimately, What Can Plan Sponsors Do
  3. 3. What’s So Important About Retirement Plans
  4. 4. America’s Top Financial Concerns 18 to 29 30 to 49 50 to 64 65+ Not having enough money for retirement 50% 70% 68% 37% Not having enough money for kid’s college 46% 55% 23% 8% Not being able to pay medical costs of serious illness or accident 52% 54% 58% 43% Not being able to pay off debt 47% 45% 42% 20% Not able to maintain standard of living you enjoy 52% 44% 52% 41% Not able to pay normal monthly bills 35% 37% 46% 33% Not able to pay for normal health care costs 40% 33% 38% 29% Not able to pay rent, mortgage or other housing costs 40% 30% 31% 30% Not able to make minimum payment on credit cards 14% 17% 18% 15% Gallup, Economy and Personal Finance Survey, April 2014
  5. 5. Snapshot of 401(k) Plan Activity $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 Average Account Balance $72,383 Median Account Balance $18,433 as of 12/31/13 Only 20% of participants had account balances >$100,000 Only 10% of participants had account balances > $200,000 Source: Employee Benefit Research Institute
  6. 6. Retirement Income Concerns
  7. 7. Retirement Income Concerns Participants lack knowledge of life expectancy and sustainable withdrawal rates RealityBelief 20 yrs. 30 yrs. 7-10% annual draw down 4% annual draw down
  8. 8. Defining What Your Role Is
  9. 9. Definitions Investment Fiduciary – Someone who is managing the assets of another person and stands in a special relationship of trust, confidence, and/or legal responsibility.
  10. 10. Investment Fiduciaries - Stewards Stewards – Manage the investment decision making process (trustees, investment committee members, plan sponsors)
  11. 11. The Investment Steward Cont… More than 5 million men and women serve as: • Members of investment committees of retirement plans, foundations, and endowments • Trustees of private trusts Stewards manage more than 80% of the nation’s liquid investable wealth, yet few have received formal training for their role.
  12. 12. Investment Fiduciaries - Advisors Advisors – Provide comprehensive and continuous investment advice (wealth managers, financial advisors, trust officers, financial consultants, investment consultants, financial planners)
  13. 13. Investment Fiduciaries – Advisors Cont… • 3-21 Fiduciary • 3-38 Fiduciary
  14. 14. Investment Fiduciaries – Advisors Cont… Most Stewards share their fiduciary responsibilities with Investment Advisors. Even so, Investment Advisors: • Often have a limited understanding of the fiduciary code of conduct, and • Have no uniform advanced education requirements. Therefore, effective due diligence in selecting Investment Advisors is critical.
  15. 15. Investment Fiduciaries – Investment Managers Managers – Make investment decisions, and select the individual securities to implement a specific investment
  16. 16. Investment Fiduciaries – Investment Managers Cont… Investment Managers make investment decisions. They select the individual securities to implement a specific investment mandate (such as large cap growth). The Steward and Advisor have a fiduciary duty to demonstrate that Investment Managers have been prudently selected and monitored.
  17. 17. Responsibility vs. Liability Fiduciary responsibilities can be shared but not abdicated. Liability exposures exist where there are unfulfilled responsibilities. Fiduciaries can reduce liability by identifying and filling gaps in their practices.
  18. 18. We Haven’t Had to Worry About This Before!
  19. 19. President’s budget proposal Mandatory autoIRA for employer with more than 10 EEs w/ 3 yr. $500 tax credit Limit the total accrual of tax-favored retirement benefits (basically the 415(b) limit) Require plans to allow EEs with 3 yrs of 500 hrs. to defer into 401(k) plan Exempt accounts of $100,000 or less from RMD rules Encourage state retirement savings initiatives
  20. 20. DOL 2013 Enforcement Results
  21. 21. DOL Guidance Definition of “Fiduciary” •The proposal significantly expands the definition of fiduciary investment advice •Level-fee advisors generally not affected, except with respect to rollovers •Recommending an IRA rollover becomes a fiduciary act requiring level fees; BIC exemption •Educating participants not considered a fiduciary act
  22. 22. ERISA Litigation - fee litigation Tibble v. Edison International (9th Cir. 2013, Supreme Ct. May 18, 2015)  SC considered whether a fiduciary’s allegedly imprudent retention of an investment is an ‘action’ or ‘omission’ that triggers the running of the 6-year limitations period  SC ruled that basically each review of (or failure to review) the plan’s investment options starts a new six-year clock running for a potential claim of a fiduciary breach with respect to those investments
  23. 23. ERISA Litigation Tibble v. Edison International (cont.) Key takeaways: •A fiduciary’s duty to monitor investments is separate from the duty to prudently select the investment •“Trustee must ‘systematically consider all the investments of the trust at regular intervals’ to ensure they are appropriate” •A “fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances” •A fiduciary has a “duty to monitor investments and remove imprudent ones”
  24. 24. A Word About IRA Rollovers Great opportunity to discuss rollovers from qualified plans to IRAs Regulatory scrutiny on advice concerning these transactions DOL definition “Conflict of Interest Rule – Investment Advice” FINRA regulatory Notice 13-45 Remember: leaving assets in the plan should always be discussed
  25. 25. TDF Glide Paths – “to or through” “To” retirement - for participants who expect to withdraw most of their money at the target date. •They typically maintain their allocations once they reach the target date. “Through” retirement - for participants who plan to gradually withdraw from their accounts after the target date. •They continue adjusting the allocation for 20 to 30 years after the target date.
  26. 26. TDF Glide Paths – “to or through” Example of equity range in two funds 2010 Fund 2050 Fund Low Equity 20% Other Low Equity 38% Other High Equity 70% Other High Equity 95% Other
  27. 27. What To Do?
  28. 28. 1. Know standards, laws, and trust provisions 2. Diversify assets to specific risk/return profile of client 3. Prepare investment policy statement 4. Use “prudent experts” and document due diligence 5. Control and account for investment expenses 6. Monitor the activities of “prudent experts” 7. Avoid conflicts of interest and prohibited transactions 8. Work with an advisor who is committed to the 401(k) industry 8 Fiduciary Precepts
  29. 29. “The greatest enemy of a good plan is the dream of a perfect plan.” Carl von Clausewitz – Prussian General
  30. 30. Thank you! For More Information Contact: John Friar, AIF® Financial Consultant/ Director of Corporate Retirement Plans Direct: 608-252-9634
  31. 31. Webinar CE Credit SHRM Activity ID: 15-3P543 1 hour HRCI Program ID: 252085 1.0 HR (General) recertification hour *The use of this seal is not an endorsement by the HR Certification Institute of the quality of the activity. It means that this activity has met the HR Certification Institute’s criteria to be pre-approved for recertification credit.