Data and Research December 17, 2015

Retirees Today Need Much More Savings

An analysis illustrates the unfortunate consequences imposed on U.S. retirees due to the extended period of exceptionally low bond market yields witnessed over the past seven years.
Reported by

Not only do current-day prospective retirees greatly need a reasonably attractive risk-adjusted fixed income coupon interest rate, but they also likely need stronger personal income growth that enables adequate lifetime savings.

In addition, retirees need enough excess investment principal to act as a buffer against the corrosive portfolio effects of future consumer price inflation, concludes a report from S&P Capital IQ and SNL Financial, “Retirees Can No Longer Afford to Live on Investment-Grade Fixed Income Returns.”

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

In contemporary times, a seven-figure investment principal account is now needed to generate fixed retirement income equating to half of median U.S. household income, as opposed to a $200,000 to $300,000 account (in 2013 dollars) between 1997 and 1990, the firm’s analysis found.

S&P Capital IQ and SNL Financial analyzed the annual cash flow generated by the 10-year U.S. Treasury note per calendar year, dating back to 1976. They tracked total inflation- and risk-adjusted retirement income generated from a $100,000 principal investment.

The average annual income generated on an inflation-adjusted $100,000 principal investment in U.S. Treasuries has been 13.3% of median household income between 1976 and 2015. Based on that 40-year average figure, principal invested in 2015 would need to increase by more than 600% to generate that same level of return.

“The last seven years of short-term interest rates at or near zero percent has created some serious problems for retiree and near-retiree investors,” says Michael Thompson, chairman of S&P Investment Advisory Services. “The net result has been low-risk profile investors moving further and further out on the risk curve, investing in corporate bonds and equities to generate the same level of income they historically earned in the fixed-income markets. Long term, that is not a sustainable solution.”

S&P Capital IQ and SNL Financial, a business unit of McGraw Hill Financial, provide financial and industry data, research, news and analytics to investment professionals, government agencies, corporations and universities worldwide.

The full research note can be accessed through the firm’s website.

Compliance December 17, 2015

Obergefell Decision Could Affect Retirement Plans

IRS guidance applies same-gender marriage court decision to retirement plans.

Reported by

A notice from the Internal Revenue Service (IRS) gives guidance to plan sponsors, applying the Supreme Court’s same-sex marriage case to retirement plans, as well as other benefits. The landmark case, Obergefell v. Hodges, decided in June 2015, held that under the 14th Amendment states cannot deny same-gender couples the right to marry and must recognize same-gender marriages performed in other states.  

The Treasury and the IRS said they understand that some plan sponsors may alter aspects of their employee benefit plans, or how their plans are administered, in response to the decision, and some plan sponsors have already asked for clarification of how it might apply to some employee benefit plans, such as a discretionary expansion of benefits not required under the federal tax rules.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

IRS Notice 2015-86 provides a Q-and-A to address issues, such as the ones below, that plan sponsors might be grappling with. 

For federal tax law purposes, does Obergefell require that a sponsor of a qualified retirement plan change the terms or operation of its plan?

The short answer is “no.” A qualified retirement plan is not required to make additional changes as a result of the decision. An earlier IRS notice from 2014 did require qualified retirement plans to be amended to reflect the Windsor decision. However, a plan sponsor may decide to amend its plan following Obergefell to make certain optional changes or clarifications.

NEXT: Amending a qualified retirement plan

May a qualified retirement plan be amended to provide new rights or benefits with respect to participants with same-sex spouses?

In response to Windsor, some plan sponsors may have amended their qualified retirement plans to provide new rights or benefits with respect to participants with same-sex spouses in order to make up for benefits or benefit options that had not previously been available to those participants.

For example, such an amendment may have provided participants who commenced a single life annuity distribution before June 26, 2013 (the date of the Windsor decision) with an opportunity to elect a qualified joint and survivor annuity form of distribution as of a new annuity starting date.

Following Obergefell, some plan sponsors might similarly decide to make discretionary plan amendments to provide new rights or benefits with respect to participants with same-sex spouses. Plan sponsors are permitted to make such amendments, which must comply with the applicable qualification requirements (such as the nondiscrimination requirements of section 401(a)(4)).

Is an amendment to a single-employer defined benefit plan that is intended to respond to Obergefell or this notice (for example, by extending certain rights and benefits to a same-sex spouse) subject to the requirements of section 436(c)?

In general, a discretionary amendment to a single-employer defined benefit plan that increases the liabilities of the plan cannot take effect unless the plan’s adjusted funding target attainment percentage is sufficient or the plan sponsor makes the additional contribution specified under section 436(c)(2). Because an amendment that extends rights and benefits to a same-sex spouse in response to Obergefell or this notice is a discretionary expansion of coverage, the amendment is subject to the requirements of section 436(c).

More information and other questions are on the IRS website.

«