Compliance October 23, 2015

A Peek at a Pre-Approved Cash Balance Plan Submission

James E. Turpin, with The Turpin Consulting Group, has one concern with the submitted document he’s seen.
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The Internal Revenue Service (IRS) has expanded its pre-approved plans program to include defined benefit plans with cash balance plan features, and it is currently accepting prototype document submissions.

James E. Turpin, president of The Turpin Consulting Group, said he has seen one of the submitted prototype documents, and he shared a few features with attendees of the American Retirement Association’s 2015 ASPPA Annual Conference.

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“If dealing with a uniform plan design, I haven’t seen any problem with the prototype,” he said. However, he is concerned with an open box for plan sponsors to input their plan’s interest crediting rate.

Interest crediting rates are highly regulated, and rates outside of the IRS’ approved list cannot be used in cash balance plans. “If the document doesn’t use a list of approved rates, with a box for the plan sponsor to check beside the one it is using, I think it would be hard to depend on the reliance of the IRS approval letter,” Turpin said.

He also noted some new rules included in the listing of required modifications (LRM) for cash balance plans that plan sponsors will see in the new documents. For example, interest credits on participants’ notional accounts can be done quarterly, monthly, or more often.

Some cash balance plan sponsors, upon conversion from a traditional defined benefit (DB) plan, established a beginning balance for the cash balance plan that was based on the accrued benefit in the traditional DB discounted for present value. This resulted in a period of time—called “wear-away”—during which new accruals would not increase the benefit to which a participant was already entitled. Turpin said no “wear-away” formulas are allowed now.

Finally, Turpin noted that there is no requirement that plan sponsors have to limit contribution credits to participants’ notional accounts to the IRS 415 maximum annual addition limit.

Administration October 23, 2015

'Financial Independence' a Better Buzzword than 'Retirement'

Generation Y expects to work until they die, “so why bother saving in a retirement plan.”
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Generations X (born between the mid-60s and early 80s) and Y (born between the mid-80s and 2000) are more pessimistic about retirement than Baby Boomers.

A study from Northwestern Mutual found a strong majority (66%) of Gen X expects to work past traditional retirement age due to necessity, with two in 10 (18%) believing they will never retire. In addition, nearly three-quarters (73%) of Gen Y expect to work past 65, acknowledging that in old age, safety nets will not be there for them and Social Security will not take care of their needs.

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But, Sarah Simoneaux, a consultant with Simoneaux & Stroud Consulting Services, told attendees of the American Retirement Association’s 2015 ASPPA Annual Conference that Generation X “loves work/life balance.” They don’t want to work forever, she says, so they feel they need more than a 401(k) to prepare financially.

Natalie R. E. Wyatt, vice president of business development at Innovest Systems, added that a Scottrade/Pew study found Generation Y expects to work until they die, “so why bother saving in a retirement plan.”

Yet, both of these generations want to be debt-free and obtain financial independence. They need a retirement plan design and message that speaks about financial independence or flexibility, not retirement, Simoneaux said.

NEXT: Designing plans for younger generations

Plan sponsors need to design plans and communicate about them with outcomes in mind, Simoneaux suggested. For example, “some think if the employer matches up to 4% of pay, that’s all they need to save, and participants should know the advantage of saving in a Roth account after deferring pre-tax dollars up to the match.” Gens X and Y want to get their money out tax-free, she contended.

In addition, Simoneaux noted that studies show a majority of the younger generation have their savings in “safe” investments. “They don’t trust others with their money,” she said.

Automatic enrollment into a target-date fund will help Generation Y get out of their comfort zone, and will making saving and investing easy for Generation X, who may be busy or overwhelmed by choices.

And the message should focus on financial independence and flexibility. Plan sponsors should consider adding other benefits, such as non-qualified plans, health savings accounts (HSAs), student loan repayment plans or payroll deduction individual retirement accounts (IRAs), Simoneaux suggested.

Let them know if they use these tools, they can have flexibility later in life, whether they want to stop working, only work part-time or continue working.

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