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.

Related Links

http://www.vestwell.com

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.