Newly Proposed Bills May Help Your Plan Sponsors

bills

Tax reform isn’t the only newsworthy event affecting the benefits industry–several bills were introduced in Congress at the end of 2017 that could dramatically impact certain kinds of retirement plans. While these new proposals have an uncertain future, they all signal Congressional interest in improving retirement security. Here are some common trends news that you may see affecting your retirement plans soon.

Increase access to multiple employer plans (MEPs)

The Small Businesses Add Value for Employees Act (SAVE Act, HR 4637) removes the “common bond” requirement, thereby making it easier for small businesses to pool together, regardless of industry, and offer retirement plans to their employees while alleviating some burdens of plan administration.

The Retirement Security Act of 2017 (SB 1383) offers employers a tax credit and protects employees from losing their tax benefiits if one employer in a MEP fails to meet the participation criteria. Similarly, the Auto401k Act (HR 4523) provides relief from the “one bad apple” rule of MEPs so that all participating employers are not penalized when one employer violates the qualification rules.

Incentivize small businesses to offer retirement benefits

Through tax credits and other incentives, Congress is attempting to make retirement plans more accessible and promoting lifetime income solutions.The Retirement Plan Simplification and Enhancement Act (RPSEA; HR 4524) would increase the current automatic enrollment safe harbor cap and encourage employers to defer more than the automatic deferral floor of 3% of salary in the first year. It would also exempt retirement savings below $250,000 from complicated required minimum distribution rules and make it easier to take advantage of the saver’s credit. The SAVE Act increases the limit on elective deferrals under a simple IRA and permitting employers to make non-elective contributions for their employees of up to 10% of pay.

Reduce administrative burdens for plan sponsors

Congress is also addressing some of the lesser-known, but equally painful administrative burdens of sponsoring retirement plans. Access to a Secure Retirement Act (HR 4604) corrects some of the confusing regulations that often stop employers from including a guaranteed lifetime income product in their benefits package.

The Receiving Electronic Statements to Improve Retiree Earnings Act (RETIRE Act HR 4610) allows plan sponsors to use electronic delivery as the default distribution method for retirement plan notices and documents. A companion Senate bill is expected soon and the timing coincides with an effort by the Employee Benefits Security Administration’s project to address electronic delivery.

Staying on top of these bills can help eliminate the often confusing world of government. As Congress continues to takes steps to help plan sponsors, we will keep you updated on the way new legislation is affecting your clients. That way, as client questions come about surrounding what they hear in the news – their trusted advisor has the answers.

2017 Year in Review: The DOL Fiduciary Rule

DOL

Last year saw plenty of activity concerning Americans’ personal finances and investments. A new president and his administration initiated sweeping changes—not just to Obama-era proposed legislation but also to longtime rules.

While this year portends possible interest rates rises, cryptocurrency controversy, and the potential rebound of global markets (particularly in China), it’s important to understand the most pertinent issues from 2017, which will impact your clients and advisory businesses not just this year but also in the years ahead.

New tax laws

Among the bigger financial developments of 2017 was the recent passage of the Tax Cuts and Jobs Act, which will result in the most significant overhaul of the U.S. tax system in more than 30 years.

While there was no direct impact on 401(k) plans, there could be a number of indirect hits ahead. Earlier tax plan proposals would have capped the pre-tax contribution amount to 401(k) plans, but thankfully rumors of this change didn’t materialize in the final version.

The DOL Fiduciary Rule

The fiduciary rule was rolled out in April of 2016, with final implementation – originally scheduled to commence on April 10, 2017 – to be finalized by January 1, 2018.

In early 2017, the Trump administration issued an executive memo instructing that the DOL review the rule. The applicability (or the commencement of the final implementation process) of the rule was moved to June 9, 2017, with full implementation now set for July 1, 2019.

Financial advisors who provide advice to 401(k) plan sponsors (and other retirement plans) already had a fiduciary responsibility predating the new rule. Much of this is rooted in the DOL’s ERISA statutes. There are a number of provisions in the new rule which effect  small 401(k) plans. Moreover, there are provisions in the rule concerning rollovers from 401(k) plans to IRAs.

401(k) plans and Roth IRAs

While there were no new rules regarding 401(k) plans in 2017, the participant contribution levels for 2018 increased to $18,500 for those under 50 years old, and up to $24,500 for those 50 or over in 2018.

Also of note, the IRS increased income limits for those wishing to participate in Roth IRAs.  Income limits increased to $135,000 in 2018 for individuals (up from $133,000 in 2017) and up to $199,000 (from $196,000) for those married and filing jointly.

The total amount that can be contributed begins to phase out at $120,000 for single filers and at $189,000 for those married filing jointly. Maximum contributions remain at $5,500 and $6,500 for those 50 and over.

The impact of the activity from 2017 will require even more attention for your clients in the coming year. Be sure to familiarize yourself with last year’s biggest changes and how they will impact the coming year.

 

About Vestwell Holdings, Inc.
Vestwell Advisors, LLC is a SEC registered investment advisor, a wholly owned subsidiary of Vestwell Holdings, Inc., specializing in 401(k), 403(b) and other defined contribution and benefit retirement investment management services. Built by an experienced team led by CEO Aaron Schumm, Vestwell assumes 3(38) investment management and ERISA3(16) fiduciary responsibility on the behalf of advisors and their plan sponsor clients. Learn more at Vestwell.com and on Twitter @Vestwell.

This is not an offer, solicitation, or advice to buy or sell securities in jurisdictions where Vestwell Advisors is not registered. An investor should consider investment objectives, risks and expenses before investing. More information is available within Vestwell Advisors’ ADV. There are risks involved with investing. Investors should consider all of their assets, income and investments. Portfolios are subject to change. All opinions and results included in this publication constitute Vestwell Advisors’ judgment as of the date of this publication and are subject to change without notice.

SOURCE Vestwell Holdings, Inc.

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Vestwell Visits D.C. to talk 401(k) and Tax Reform with Congress

tax reformVestwell Team arriving in D.C. Left to right: Aaron Schumm, Mike Shuckerow, Peter Kennedy

As the tax reform conversation gained steam in October, some lawmakers began discussing limits on individual 401(k) deductions as a way to raise government revenues.

At Vestwell, we were concerned about this development, given that Americans are already not saving enough for retirement.

The proposed legislation would worsen the problem known as the retirement savings gap, which is the difference between a person’s income and actual expenses during retirement.

The Retirement Gap is Getting Worse, and We Want to Help Fix it

The retirement gap threatens the long-term financial security of nearly all Americans, outside of what formal lobbying committees say.

That’s why we traveled to Washington D.C.  to speak with representatives about this savings crisis.

Along with our Special SEC Adviser and Chief Compliance Officer, Mike Shuckerow, and Special ERISA Adviser, Peter Kennedy, the Vestwell team met with 22 Senators, Congressional House members and their staff within the banking, finance, and technology committees.

Our goal was to educate the representatives on the ways that we can work together to help close the retirement gap.

Americans Aren’t Saving Enough (Or At All) for Retirement

The statistics are staggering; only 8% of people in all working households have enough saved for retirement, given their ages and income.

The median retirement savings for individuals aged 25 to 64 is shockingly low at only $3,000, and a mere $12,000 for those nearing retirement aged 55 to 64.

Left to right: Aaron Schumm, Perre Smalls
Defined Contribution Plans and Accounts Can Close this Gap

We already know that 75% of Americans rely on defined benefit plans and defined contribution plans, such as 401(k)s and 403(b)s, as their only sources of invested assets.

Social security is also an elephant in the room that no one is addressing; its uncertain future places even more importance on saving and investing during one’s working years.

More Than Ever, Financial Advisors Can Help Companies Facilitate and Administer the Right Retirement Plans

During my time in D.C., I underlined the importance of 401(k) plans to address savings deficiencies.

I also talked about the key role that financial advisors, empowered by technology, play in the administration of and access to retirement plans.

This is revolutionizing the way plans are administered today, as well as providing access and opportunities for companies who previously did not offer a 401(k) or 403(b) plan to their employees. In fact, up to 90% of plans with less than $50 million AUM are managed by financial professionals.

What’s more, according to the Department of Labor & Bureau of Labor Statistics, more than 500,000 companies in America do not offer retirement plans for principals and employees.

Fortunately, with technology, financial advisors are paving the way for SMBs to help their employees and principals save for retirement.


(Top) Left to Right: Peter Kennedy, Aaron Schumm, Rep. Bill Foster, Mike Shuckerow; (Left) Meeting with Congressman Huizenga, Left to right: Aaron Schumm, Bill Huizenga, Marliss McManus
“Rothification” Threatens Long-Term Savings

Finally, we discussed the long-term pitfalls of the trend toward “Rothification,” which replaces tax-deferred 401(k) plans with accounts funded by after-tax money.

Moving tax revenue up within the 10-year budget window via a Roth-type account would end up further widening the savings shortfall across the hard working Americans that need the tax benefit most to retire securely.

Our goal was not to lobby for 401(k)s, but rather to remind lawmakers about the significant impact these proposed changes would have in further weakening American retirement readiness.

 

 (Top) Meeting at Cannon House Office Building; Left to right: Aaron Schumm, Congressman Ted Budd, Peter Kennedy, Mike Shuckerow; (Bottom) Left to Right: Aaron Schumm, Congressman Ted Budd 
Real Change Takes Partnership

Since my trip, I’ve continued to communicate with lawmakers and their staffers about these issues.

We have even invited them to meet us in our New York offices so that they can learn more about what Vestwell is doing.

Congressman Ted Budd, R-NC, took us up on the offer. The passion that Congressman Budd and his Chief of Staff showed us toward helping businesses, as well as learning more about how Vestwell services the retirement landscape, was truly invigorating.

On a personal level, I found it reassuring that our elected officials see saving for retirement as a non-partisan concern. Everyone I talked to was very willing to help others. They were ready to think deeply about the issues we raised and engage with us and others, to create solutions.

Our government is not just listening, they are acting. Vestwell is mobilizing financial advisors with technology to propel retirement savings forward, and we remain hopeful the regulators remain informed and are on a path to help.

I’m excited about the potential for change and proud of our role in it.

Wishing you all a very happy holiday season and the warmest wishes for a happy New Year!

Kind Regards,

Aaron Schumm

How Tax Reform May Impact the Investment Industry

investment industry

The Senate recently passed its version of the GOP’s tax reform legislation.

The legislation isn’t final, however, as the House and the Senate must hammer out a final version of the bill that reconciles their differences.

Until that happens, you should be aware of the major changes proposed, and how they may impact your clients.

Exemptions and deductions

Under both proposals, personal exemptions would be eliminated. Both proposals would also eliminate the state and local income tax or sales tax deduction for individual taxpayers, though the standard deduction will nearly double.

The deduction for property taxes will now be capped at $10,000 (as there was no federal cap before).

While the impact on individuals will vary by situation, this could result in many investors having less cash flow to invest in their 401(k) plans and elsewhere.

No changes to 401(k) deferrals

One provision that was discussed early on in the process was limiting employee pre-tax contributions to 401(k) retirement plans.

This ultimately was not part of the package, and the IRS has increased 401(k) contribution limits to $18,500 (with $24,500 for those 50 and over) in 2018.

For those who lose the ability to itemize deductions via the changes in the tax bill, such as the increase in the standard deduction, the ability to make pre-tax retirement contributions becomes even more valuable.

It is important to remind your clients and prospects to max out their contributions if they aren’t already doing so, if this is an appropriate strategy for their situation.

For small business owners who were on the fence about starting a small business retirement plan, the ability to contribute to one for themselves might be an even better incentive under the new tax rules.

Impact on the markets

While trying to predict the direction of the stock market is always a fool’s errand at best, part of the premise of the plan is to lower corporate tax rates in an effort to spur growth.

This could well be a stimulus for the markets, but of course there are many factors that come into play here.

Be a resource

Even if you aren’t a tax expert, become knowledgeable about the features of these new rules that will impact your clients and prospects. Incorporate more knowledge into your advice to existing clients and your marketing to prospects.

Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.

The “Rothification” of the Investment Industry

"rothification"

Even before President Trump’s tax reform legislation was finalized, rumblings of limits to 401(k) contribution amounts gave credence to “Rothification” impacting the investment industry.

If such proposals had passed, this would have reduced the amount of pre-tax money that people could contribute to their 401(k) plans, while freeing up spending money for the government.

But the industry is already seeing a rise in the conversion from some or all traditional defined contribution plans to Roth-like plans, hence the movement being coined Rothification. The results have sparked a debate about the pros and cons of moving in this direction.

Pros

Proponents of the increased reliance on Roth 401(k)s and IRAs point to the tax benefits later in life for retirement savers.

These savers will sacrifice a tax break today, so that they can avoid paying taxes when the money is withdrawn from their savings in retirement.

There are also estate planning benefits, because there are no required minimum distributions (RMDs) on Roth IRAs. Roth 401(k) accounts rolled over to Roth IRAs would also receive such benefits.

Cons

Many financial advisors fear that Rothification would lead to reduced retirement savings at a time when Americans can ill-afford to do so.

The loss of the income tax deduction would cause worker’s take-home pay to be reduced.

This could, in effect, limit the cash-flow available for 401(k) contributions and other retirement savings.

Consider Taxes

Roth accounts certainly offer solid options for retirement saving. While the benefit of tax savings down the road in retirement can seem distant, the reality is that many retirees may find themselves in a higher income tax bracket in the future.

Many also see Roth accounts as a way for retirement savers to diversify their retirement accounts’ tax profiles, in efforts to be prepared no matter what tax rules are passed in the future.

In the Meantime

Financial advisors should consider how Roth accounts can make sense for 401(k) plan sponsors and their employees.

We haven’t seen the last of the Rothification movement, so it’s best to first be educated, and then be prepared for what’s next.

Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.