Compliance December 27, 2016

The Best of PLANSPONSOR Magazine Columnist Stephen Saxon

Groom Law Group attorney Saxon writes opinion and advice on the legislative and regulatory changes affecting plan sponsors today.

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PS-Portrait-Article-Saxon_JCiardiello.jpgArt by J.CardielloCollected below are some of Stephen Saxon and his colleagues’ invaluable takes on topics from 2016 that are important for all plan sponsors. Saxon is a partner with Groom Law Group, headquartered in Washington, DC.

Here Comes Trump! 

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On November 9, Americans across the country woke up to the realization that Donald Trump had been elected president of the United States. This surprising turn of events may lead to the reversal or modification of many of President Obama’s policies in the area of retirement. 

Post-Dudenhoeffer

The fog created by Fifth Third may be clearing. Courts are beginning to eliminate the vagueness that the plaintiffs’ bar has tried to exploit and are, instead, signaling that stock drop claims are not easy claims to bring.

A Form 5500 Overhaul  

On July 11, 2016, the Department of Labor (DOL), the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) proposed revisions to the forms and regulations governing the Form 5500 annual reporting process for employee benefit plans. These proposed revisions, if implemented, would be the most significant overhaul of Form 5500 since the agencies’ last update with the 2009 plan year.

Why Fee Policy Statements?  

In light of the ongoing fee litigation, a plan fiduciary needs to augment those prudent decisions with documentation showing its prudent process. In other words, it is not longer sufficient to simply make prudent decisions of you can’t show how you made them.

Actively Managed Funds  

Plan fiduciaries have been increasingly concerned that offering actively managed funds might unnecessarily raise scrutiny from the U.S. Department of Labor (DOL) or the plaintiffs’ bar. While such a sentiment continues to grow within the retirement plan community, it is not grounded by the evidence.

Variable Annuities  

The most obvious feature of variable annuity products is that they provide retirement savers with the opportunity and choices for accumulating wealth through the market during their productive years, then help them manage their assets during the decumulation phase of their life as well.

State IRAs Finalized

The Department of Labor’s (DOL) regulatory effort in the area of state IRAs has already sown the seeds for potential shifts in the retirement system as a whole. We expect this will signal another shift away from employer-based retirement programs.

Data and Research December 27, 2016

Retirement Savings Drive Shift in Capital Distribution

A new analysis by several well-known economists warns of severe economic consequences related to income inequality; but there are also positive findings about capital distribution and retirement savings. 

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Researchers from the Paris School of Economics and the University of California, Berkeley, have published an in-depth analysis of income distribution in the United States—utilizing a data set that seeks to cover all nationally significant forms of income.  

The paper, “Distributional National Accounts: Methods and Estimates for The United States,” was penned by Thomas Piketty (Paris School), Emmanuel Saez (Berkeley), and Gabriel Zucman, (also Berkeley). It draws wide-reaching conclusions about the present American economy, supported by extensive data.

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At the highest level, the research finds the pre-tax income of the middle class—adults between the median and the 90th percentile—has grown 40% since 1980. This is “faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits.” For the lowest 50% of income earners, income has stalled since the 1980s.

It will be news to few that income has absolutely boomed, relatively speaking, at the top of the distribution scale: “In 1980, top 1% adults earned on average 27 times more than bottom 50% adults, while they earn 81 times more today. The upsurge of top incomes was first a labor income phenomenon but has mostly been a capital income phenomenon since 2000.”

Of particular interest to readers in the retirement plan industry will be the findings showing strong growth in equity and bond assets over the decades—and how the distribution of these capital assets across income groups has shifted over time. Notably, for the bottom 90% of income earners, capital share has significantly increased over time, from around 10% during the 1970s to close to 20% today. Researchers pin this largely to the rise of pension funds and defined contribution plan investing. In fact, such pension funds account for a growing share of household wealth (36% in 2014).

Other relevant findings suggest that, since income has collapsed for the bottom 50% of all working-age groups—including experienced workers above 45 years old—it is unlikely that the bottom 50% of lifetime income has grown much since the 1980s. Further, “the stagnation of the bottom 50% is not due to population aging—quite the contrary: It is only the income of the elderly which is rising at the bottom.” 

For the bottom half of the working-age population, average income before government intervention has fallen since 1980—this is true whether one looks at pre-tax income, including Social Security benefit, or factor income, excluding Social Security.

The full paper has been made available for download on Zucman’s website: http://gabriel-zucman.eu/files/PSZ2016.pdf. 

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