Important Considerations Before Waiving RMDs

Taking required minimum distributions (RMDs) is about shifting to a taxable account, not necessarily about liquidating investments.

Just a few months ago, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, folding the popular retirement focused legislation into a bigger federal appropriations bill.

Among its many provisions, the landmark law made an important change to the rules governing “required minimum distributions,” or RMDs, drawn from individual retirement accounts (IRAs) and employer-sponsored defined contribution (DC) plans. Namely, the SECURE Act established that an account owner must begin making withdrawals on “April 1 of the calendar year following the calendar year in which the individual attains age 72.” Previously, the date was April 1 of the calendar year following the calendar year in which the individual attained age 70 1/2.

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At the time, industry analysts voiced strong support for this provision of the SECURE Act, suggesting the extra year and a half added to the RMD deadline should give Americans a meaningful amount of additional flexibility in their retirement income planning. They said Congress had taken an important step to recognize Americans’ improved longevity.

Under the SECURE Act, this amendment became effective for distributions required to be made after December 31, 2019, with respect to individuals who will reach age 70 1/2 after that date. As such, explaining this change to clients has been an important part of many retirement plan sponsors’ communication strategies for 2020. But with the outbreak of the coronavirus pandemic, there is now justifiably more attention being paid to the recently passed “CARES Act,” or the Coronavirus Aid, Relief and Economic Security Act, which also addresses the complex topic of required minimum distributions.

For its part, the CARES Act does away with RMDs for 2020, observes Mark Iwry, former Senior Advisor to the Secretary of the Treasury in the Obama Administration and currently nonresident Senior Fellow at the Brookings Institution, and Visiting Scholar at the Wharton School. This development should give plan sponsors and their service provider partners more time to educate participants about RMDs.

Looking ahead to 2021, Iwry says, there are a few important points sponsors might emphasize in their communications with participants. First and foremost is the basic fact that taking an RMD does not always mean one has to liquidate his investments—a fact which is especially important to consider in a sudden and sustained bear market.  

“While one reason cited for the legislative 2020 RMD relief is to save retirees from having to sell when the market seems unusually low, an individual required to take a RMD from a traditional IRA often could actually avoid selling stock while the market is down by transferring the investments ‘in kind’ to a taxable account,” Iwry explains. “You will still have to come up with funds to pay the tax, but you ordinarily will have a way to avoid selling your equity investments at what may be the bottom of a market dip.”

This opportunity assumes the service provider or providers involved allow for such in-kind transfers. That’s not always going to be the case, Iwry says. While this type of maneuver will often be possible for IRA owners (for example, with brokerage accounts), DC plans usually make cash distributions. Even in that case, though, Iwry notes that participants could often fairly quickly resume a similar equity investment position by reinvesting the cash distribution in similar stocks.

“The public often doesn’t focus on this basic fact about RMDs,” Iwry says, “although more affluent people tend to be more aware that taking RMDs is about shifting to a taxable account, not necessarily about liquidating investments. That said, the 2020 RMD holiday of course is of limited value to the many retirees who need to or will in any event be spending at least as much in 2020 as the RMD amount.”

Supreme Court Denies Review of UPenn ERISA Lawsuit

A last ditch effort to point out that another circuit found no evidence of fiduciary misconduct in a similar case apparently did not persuade the high court it needed to resolve a circuit split.

Without explanation, the U.S. Supreme Court denied a petition by the University of Pennsylvania to have the high court review a case alleging its retirement plan fiduciaries violated their Employee Retirement Income Security Act (ERISA) duties.

In its petition, the university asked whether the pleading standard the court established in its decision in Bell Atlantic Corp. v. Twombly governs breach of fiduciary duty claims under ERISA. The petition also asked “whether a complaint states a plausible claim for breach of fiduciary duty under ERISA if it alleges that a retirement plan’s investment options charged excessive fees and underperformed, but does not allege any fiduciary conduct inconsistent with lawful management of the plan.”

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The university pointed out that in Twombly, the high court held that allegations that are “merely consistent with” antitrust violations—but “just as much in line with” lawful behavior—fail to state a claim for relief. It reaffirmed that principle in Ashcroft v. Iqbal, stressing that Twombly provides “the pleading standard for ‘all civil actions.’” And, in Fifth Third Bancorp v. Dudenhoeffer, it held that “the pleading standard as discussed in Twombly and Iqbal” governs breach of fiduciary duty claims under ERISA.

Last May, the 3rd U.S. Circuit Court of Appeals revived the lawsuit against fiduciaries of the University of Pennsylvania’s 403(b) plan, which had been fully dismissed by a District Court in 2017. The petition pointed out that the 3rd Circuit’s reasoning was a split from other circuit court decisions.

On March 26, the university filed a supplemental brief attempting to bolster its argument to the Supreme Court based on a 7th Circuit decision to affirm the dismissal of a similar case against Northwestern University. In that case, the appellate court found no fiduciary misconduct by plan fiduciaries and said, “Taken as a whole, the amended complaint appears to reflect plaintiffs’ own opinions on ERISA and the investment strategy they believe is appropriate for people without specialized knowledge in stocks or mutual funds.”

Apparently, the Supreme Court was unpersuaded.

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