Compliance April 18, 2012

IRS Seeks Comments on Government Plan Retirement Age

April 18, 2012 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) and the Treasury Department will issue guidance on the normal retirement age rules for governmental plans. 
 

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Notice 2012-29 announces that in response to comments received about Notice 2007-69, the IRS and the Treasury Department intend to modify provisions of the 2007 NRA regulations, as applied to governmental plans, in two ways.

The first modification would clarify that if a governmental pension plan—that is not subject to § 411(a) through (d) and does not provide for the payment of in-service distributions before age 62—does not have a definition of normal retirement age or normal retirement age that satisfies the requirements of the 2007 NRA regulations, it nevertheless satisfies the requirement that the plan provide definitely determinable benefits to employees after retirement or attainment of normal retirement age.

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Second, the IRS and the Treasury Department intend to modify the 2007 NRA regulations concerning the age-50 safe harbor rule for qualified public safety employees (within the meaning of § 72(t)(10)(B)). Under the 2007 NRA regulations, if a plan in which all of the participants are qualified public safety employees, a normal retirement age of 50 or later satisfies the requirement that a pension plan’s normal retirement age be no earlier than an age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.

The IRS and Treasury also intend to amend the 2007 NRA regulations, changing the effective date for governmental plans. The effective dates will change to annuity starting dates that occur in plan years beginning on or after the later of (1) January 1, 2015 or (2) the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date that is three months after the final regulations are published in the Federal Register. Governmental plan sponsors may rely on Notice 2012-29 for the extension until the 2007 NRA regulations are so amended.

The Notice also includes a request for public comment. Specifically, comments are being requested regarding whether—because qualified public safety employees generally tend to have career spans that commence at a young age and continue over a limited period of years—an additional rule should be provided under which retirement after 20 to 30 years of service may be a normal retirement that is reasonably representative for qualified public safety employees.

Comments are also requested on whether there is information indicating that other categories of governmental employees with career spans similar to qualified public safety employees would justify a similar rule. In addition, any information that governmental plans have about the overall retirement patterns of other employees in government service is requested, to assist the IRS and Treasury in determining the earliest age that is reasonably representative of the typical retirement ages.

Written comments should be submitted by July 30. Send submissions to CC:PA:LPD:PR, (Notice 2012-29), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: Internal Revenue Service, CC:PA:LPD:PR, (Notice 2012-29), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington D.C. Alternatively, comments may also be submitted via email at notice.comments@irscounsel.treas.gov.

Click here to view Notice 2012-29

  

Benefits April 18, 2012

Income Drop in Retirement Could be 28%

April 18, 2012 (PLANSPONSOR.com) - American households may experience a potential income drop of 28% in retirement.
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Nearly four in 10 retiree households (38%) report not having sufficient income to cover their monthly expenses, according to Fidelity Investments Retirement Savings Assessment. These estimated retirement income gaps could force significant sacrifices that could include cuts in discretionary expenses.

To help improve Americans’ retirement readiness, Fidelity conducted an analysis that quantifies the potential monetary benefits of five straightforward steps—such as adjusting asset allocation and annuitizing retirement assets. In the context of a comprehensive retirement plan, this analysis can help individuals better understand which steps may make the greatest impact.

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“While there is evidence that Americans are saving more for retirement, our analysis finds that they need to take additional steps to prepare for the future and take better control of their personal economy,” said Kathleen A. Murphy, president, Personal Investing, Fidelity Investments. “The study underscores the importance of early engagement in the retirement planning process and the potential impact these five actionable steps can have in helping address the retirement income gap that many Americans are facing today.” 

 

Five Steps That Can Improve Monthly Income in Retirement  

Fidelity modeled five steps for three generations (Baby Boomers, Gen X and Gen Y) to determine the potential impact on future retirement income. The steps include a mix of strategies that can be taken whether an investor is working or in retirement:

1) Adjust Asset Allocation: Twenty-one percent of those surveyed are invested too conservatively with limited exposure to stocks, based on their current age and planned retirement date. This highlights how many investors have improperly allocated their assets and are losing the long-term earnings potential of stocks.

2) Increase Savings: Respondents indicate they saved an average of $3,500 in 2011, but most are still not fully benefiting from the tax-advantaged/deferred savings potential of their workplace or individual retirement accounts. This is especially important for younger investors, who have a longer time frame and more potential for their money to grow.

3) Adjust Retirement Date: The average planned retirement age is 65, but delaying full retirement by a couple of years or continuing to work part-time can help preserve assets so they have a better chance of lasting through retirement. This can be especially powerful for Boomers, many of whom are facing a potential drop in retirement income.

4) Annuitize Retirement Assets: Fewer than one-fifth of retirees (17%) are using an annuity to create a guaranteed lifetime income stream to cover essential expenses, but it can be an important tool to help ensure savings last through retirement, particularly if a retiree lives beyond his or her mid 80s.

5) Tap into Home Equity: Seventy-two percent of respondents own a home and one-third of homeowners (32%) have no mortgage. Through downsizing and expense reduction, home equity could be harnessed to generate income in retirement.

“Most Americans have the potential to get significantly closer to achieving their retirement goals, but they have to take action and consider implementing a mix of these five steps,” Murphy said.

To help Americans take improve their current retirement plan, Fidelity released “Don’t Take a Lifestyle Cut in Retirement,” a Viewpoints article. It outlines the five steps and the hypothetical impact of each for a Baby Boomer and for a Generation X household.

A hypothetical example profiles  a Gen X household, based on that group’s survey responses. This generation reported an estimated need of $4,900 in monthly retirement income. Based on their current household salary of $74,000 and the amount currently saved for retirement, Fidelity estimates these households will have approximately $3,200 in monthly retirement income—a shortfall of $1,700. After taking all five steps, the Generation X household could completely erase its estimated retirement income shortfall.

  

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