News

GAO Recommends Further Guidance for Retirement Assets Escheated to States

The U.S. Government Accountability Office (GAO) has released the findings of a survey conducted to measure the effects transfers from qualified retirement plan sponsors and IRA trustees to state unclaimed property funds.

GAO was asked to study what happens after retirement assets transfer to states and to review IRS and DOL guidance to determine steps that can be taken by either agency to improve these transactions. The survey included responses from 22 states, and a variety of 401(k) service providers and IRA trustees.

GAO found that current guidance has resulted in uneven practices across service providers and trustees. To ensure the consistent administration of benefits, GAO has made three recommendations.

  1. The IRS should clarify if transfers to states are considered distributions subject to taxation and withholding requirements.
  2. The IRS should consider whether a transfer to a state is a permissible reason to extend the 60-day rollover period.
  3. The DOL should specify under what circumstances uncashed distribution checks from active qualified retirement plans may be transferred to a state.

The IRS has responded that it will work to implement the suggestions, while DOL has stated it will consider making the changes but will need to consider input from stakeholders before doing so.

The GAO released a Fast Facts summary, highlights of its findings, and the full report.

 

 


David Musto Discusses Benefits of HSAs

In a recent USA Today article, president David Musto explains how the triple tax breaks offered by HSAs help fast track retirement savings.”Longer-term advantages, after the age of 65, may include the payment of Medicare premiums and other long-term care expenses. The HSA becomes an important aspect of both solving near-term medical expenses, but also for larger expenses well into retirement with those accumulated​ earnings,” notes Musto.


Retirement Spotlight: Congressional Hearings a Harbinger of Pension Reform?

We witnessed several important hearings in Congress during the first week of February. The two that drew our attention revealed what could be a healthy, bipartisan push for retirement plan reform—and this bodes well for those trying to close the retirement savings gap.

The hearings, which were held in both the Senate and the House, focused on Social Security solvency and on the importance of making retirement plans easier for private employers to adopt and maintain. Specific examples of private-sector employers having success with their own workplace plans were also provided. Both hearings included testimony from independent organizations (such as the Pew Charitable Trusts and the American Enterprise Institute), and the House hearing featured a small business owner who touted the merits of the OregonSaves automatic-IRA program for his employees.

Rather than detailing the contents of the hours-long hearings, this article outlines several key retirement plan proposals that seem to surface repeatedly. It also allows readers to make their own assessments on the proposals’ merits. But one thing this article does not try to do: predict whether any particular item will or will not become law. Ascensus has been in the retirement industry long enough to understand the foibles of retirement plan reform and simplification—and to know that that the legislative process is unpredictable.

 

Continued Bipartisan Support

Despite the frequent—and sometimes bitter—disagreements that seem to permeate lawmaking on Capitol Hill, there is widespread bipartisan support for pension reform. This was evident from the witness testimony and from the senators’ and representatives’ comments and questions during the hearings. While there remains disagreement about the depth of the retirement savings crisis and about the best remedies, both Democrats and Republicans substantially agree on many matters.

 

Issues Putting Retirement Funding at Risk

Here are some of the findings in the hearings. Many of these issues have been discussed for years and so may sound quite familiar.

  • One-third to one-half of U.S. workers have no access to a workplace retirement plan.
  • Those who do have access often don’t participate—or save much less than they need to.
  • Saving for retirement and other personal needs is difficult for a number of reasons—including low wage growth, high household debt, and the rising costs of out-of-pocket medical care.
  • Increased life expectancy, especially for women, will require more Social Security resources and additional personal savings in order to avoid financial hardship in retirement.
  • Defined contribution (DC) plans have largely replaced defined benefit (DB) plans over the past 40 years. Many DB plans—especially multiemployer (union) plans—are significantly underfunded, and DC plans shift much of the retirement savings burden from employers to employees.
  • Small business owners (in particular) face barriers to establishing retirement plans, such as high start-up costs, lack of administrative capacity, and overall unfamiliarity with complex plan rules.

 

Possible Solutions

To address these concerns, a handful of retirement plan provisions consistently appear in legislative proposals. Here are some of the most common ones—ones that seem to enjoy broad support.

  • Automatic enrollment into employer-sponsored plans – This key provision recognizes the natural tendency for employees to stick with whatever default feature is part of the plan. If a plan “defaults” eligible employees at a certain deferral percentage (5 percent is common), they tend to accept that contribution rate. Of course, employees could always opt out or choose a different deferral percentage.
  • Automatic escalation of deferrals each year – As with the auto-enrollment feature, automatic escalation involves a default, in this case, a default deferral percentage increase each year. This increase would usually occur in increments of 1 percent every year until a participant’s overall deferral percentage reached 10 percent. Again, employees could choose another deferral rate or opt out.
  • Tax credits for new plans and small employers – Many retirement plan proposals contain provisions that could make adopting a new plan less expensive. The details differ, but for a certain number of years an employer’s start-up costs (ranging from $500 – $5,000) could be credited back, and smaller businesses could get a credit for maintaining a plan.
  • Open multiple employer plans (MEPs) – Open MEPs allow many employers to join a single qualified retirement plan (e.g., a 401(k) plan). The MEP concept isn’t new, but currently employers must have some common connection—such as belonging to the same trade—before they can join other employers in adopting a single plan. This is known as a “closed MEP.” Open MEPs (or pooled employer plans (PEPs)) would permit completely unrelated employers to adopt a plan with other employers. This approach could prove helpful for smaller employers, who would possibly enjoy both lower costs and lower liability.

While a wide array of provisions may find their way into legislative proposals, the ones just mentioned arise consistently. And in both the House and Senate hearings, these themes came up repeatedly. From employers to legislators to expert witnesses, most seemed to agree that some form of these provisions would boost savings rates and help Americans’ retirement readiness. So we can reasonably expect at least some of these provisions to appear in any broad-based retirement plan legislation.

 

More Proposed Bills in the Works

As soon as the government shutdown ended and Congress was back in session, retirement plan bills were introduced. In fact, during the House hearing, two congressmen—Rep. Ron Kind (D-WI) and Mike Kelly (R-PA)—reintroduced the Retirement Enhancement and Savings Act of 2019 (RESA 2019), which seems to have broad bipartisan support. (See our Washington Pulse article for more details on RESA 2019.) The Family Savings Act of 2019 (Rep. Mike Kelly) and the SIMPLE Modernization Act (Sen. Susan Collins (R-Maine) and Sen. Mark Warner (D-VA)) were also reintroduced. Other bills are in the pipeline, and congressional leaders appear poised to release them soon, based on their comments in the hearings.

It is tricky business predicting whether particular bills will make it through the difficult legislative process and gain the President’s signature. Many members of Congress will offer their best solutions to the widely acknowledged retirement savings gap. And they know that starting to fix a system that is so critically important to the nation’s long-term financial security can be both fiscally sound and politically popular. Based on those criteria alone some retirement plan reform seems—can we say it—likely.

Ascensus will continue to encourage federal legislators to take bold action to address America’s retirement savings shortfall. We will also try to nudge them toward comprehensive retirement plan simplification. Watch Ascensus.com News for any significant developments that may emerge.

Click here for a printable version of this issue of the Retirement Spotlight.


Ascensus and Owners Genstar Capital and Aquiline Capital Partners Welcome New Investors, Led by Atlas Merchant Capital LLC, to Ownership Group

Dresher, Pennsylvania—Ascensus—whose technology and expertise helps millions of people save for retirement, education, and healthcare—is pleased to announce that owners Genstar Capital and Aquiline Capital Partners have welcomed new investors to their ownership group. Led by Atlas Merchant Capital LLC, the new investors will acquire just under 25% of Ascensus. The transaction is expected to close in the first quarter, following regulatory approvals and other customary closing conditions. Terms of the transaction were not disclosed.

Atlas Merchant Capital has deep operating and technical expertise within the financial services industry. Its philosophy is rooted in long-term commitment and partnership. The Atlas investor group includes GIC, Singapore’s sovereign wealth fund.

“We’re extremely pleased that the Atlas investor group has chosen to invest in Ascensus,” said Bob Guillocheau, chairman and chief executive officer of Ascensus. “We’re also grateful to have the continued support of our owners Aquiline and Genstar as we continue to focus on delivering exceptional service to our clients and boost our future growth.”

“Strong support from our existing and new financial sponsors is critical as we continue to pursue our passion, which is helping Americans save today for a better tomorrow,” continued Guillocheau.

David Schamis, founding partner and chief investment officer of Atlas, was a previous chairman of Ascensus. “We admire Ascensus’ robust technology platform, industry-leading expertise, and unparalleled service model,” said Schamis. “Ascensus has experienced significant growth and has a strong track record of continued success. The Atlas investor group has confidence in Ascensus’ management and the company’s future growth trajectory. I am personally thrilled to be back in business with Bob and the excellent team at Ascensus.”

“Aquiline and Genstar believe that Ascensus has a strong management team and significant ability to create value and drive continued growth as a leader in savings and retirement. We fully support Ascensus’ strategy, mission, and vision and are pleased to help them maintain this positive momentum in conjunction with the Atlas investor group,” Aquiline and Genstar jointly stated. “Together, we stand behind Ascensus and their commitment to helping individuals, businesses, advisors, financial institutions, and governments.”

Barclays acted as the lead financial advisor and J.P. Morgan acted as financial advisor to Ascensus in connection with this transaction. Willkie Farr & Gallagher LLP acted as legal counsel to the company. Debevoise & Plimpton LLP acted as legal counsel to Atlas Merchant Capital and Sidley Austin LLP acted as legal counsel to GIC.

About Ascensus
Ascensus is the largest independent recordkeeping services provider, third-party administrator, and government savings facilitator in the United States. The firm delivers technology and expertise to help millions of people save for what matters most—retirement, education, and healthcare. For more information about Ascensus, visit ascensus.com. View career opportunities at careers.ascensus.com.

About Aquiline Capital Partners LLC

Aquiline Capital Partners, founded in 2005, is a private equity firm based in New York and London investing in businesses across the financial services sector in banking and credit, insurance, investment management, and financial technology and services. For more information about Aquiline, its investment professionals, and its portfolio companies, please visit: www.aquiline.com.

About Genstar Capital LLC

Genstar Capital (www.gencap.com) is a leading private equity firm that has been actively investing in high quality companies for 30 years. Based in San Francisco, Genstar works in partnership with its management teams and its network of strategic advisors to transform its portfolio companies into industry-leading businesses. Genstar currently has approximately $10 billion of assets under management and targets investments focused on targeted segments of the financial services, software, industrial technology, and healthcare industries.

About Atlas Merchant Capital LLC

Atlas Merchant Capital LLC was founded to participate in compelling market opportunities in the financial services sector. Based in New York and London, Atlas Merchant Capital was founded by Bob Diamond and David Schamis, who together with their partners form a complementary partnership with extensive operating and investing expertise across the financial services landscape. For more information about Atlas Merchant Capital, please visit www.atlasmerchantcapital.com.

About GIC

GIC is a leading global investment firm established in 1981 to manage Singapore’s foreign reserves. A disciplined long-term value investor, GIC is uniquely positioned for investments across a wide range of asset classes, including equities, fixed income, private equity, real estate, and infrastructure. GIC has investments in over 40 countries. Headquartered in Singapore, GIC employs over 1,500 people across 10 offices in key financial cities worldwide. For more information about GIC, please visit www.gic.com.sg.


IRA Updates Nonresident Alien Tax Withholding Publication and Tax Treaties

The IRS has released the 2019 tax year version of Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. This publication contains information on several aspects of withholding to satisfy potential tax obligations of nonresident aliens, one of which is associated with payments from retirement savings arrangements.

Such payments are subject to withholding at a 30 percent rate, unless a more favorable tax rate applies according to the tax treaty between the U.S. and the nonresident alien’s home country. To qualify for a treaty rate, the individual must provide the payor a completed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.

The treaty rates were formerly included in Publication 515, but are now found directly at the tax treaties page IRS website.

 


Rick Irace Discusses Emerging Trends from 2018

In a recent Wealth Management article, Chief Operating Officer Rick Irace discusses retirement industry trends that emerged in 2018. He mentions advisors’ transition from commission-based models to fee-based, increased utilization of auto-enrollment, the emergence of financial wellness programs, and the increased availability of Roth options in smaller plans. He also ​notes that business owners are looking for additional administrative services. “Business owners face many challenges just running their day-to-day businesses. At the same time, they want to help their employees prepare for their financial futures. Many are looking to their providers and TPAs for additional administrative services, perhaps even to take on 3(16) fiduciary responsibility,” he adds.


Rick Irace Discusses the “Quality Deficit” Among Small Retirement Plans

In a recent article published by Wealth Management, Rick Irace, chief operating officer of Ascensus retirement,  cites several points as evidence of a “quality deficit” for small  retirement plans versus their large market counterparts. As for closing this gap, Irace suggests that small business owners consider consulting with a third-party administrator (TPA). “I do think that for the sponsor that’s really concerned about administrative burdens and other things, the TPA can…step in and consult on specialized plan design. They can talk about technical details in a way that’s much easier understood for the sponsor and their employees,” adds Irace.


Rick Irace Comments on the Retirement Industry Outlook for 2019

In a recent Wealth Management article,  Chief Operating Officer Rick Irace comments on the key developments that retirement plan consultants should monitor in 2019. Irace focuses mainly on recent proposals related to multiemployer plans (MEPs) and the convergence of health savings and retirement savings efforts.

“Most recently, the concept of the ‘open MEP,’ in which employers would not be required to have common ownership or business purpose, has gained some serious traction,” notes Irace. “The most recent DOL regulations stop short of permitting ‘open MEPs,’ but they do broaden the definition of an employer. This could be a step in the right direction…,” concludes Irace.


Ascensus TPA Solutions Appoints Dan Kravitz as National Practice Leader for Cash Balance Plans

Strategic Drive to Expand Cash Balance Plan Offerings Aims to Improve American Retirement Outcomes

Dresher, PA  Ascensus TPA Solutions, the nation’s largest retirement TPA firm, is pleased to announce the appointment of Dan Kravitz as national practice leader for Cash Balance plans. In this role, Kravitz will expand the firm’s growing Cash Balance market share with innovative sales strategies, advisor outreach programs, and sales integration within the broader TPA Solutions network.

Also known as “hybrid” plans, Cash Balance plans combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k). Business owners enjoy greater tax deferral and can catch up on delayed retirement savings while enhancing contributions to their employees.

Ascensus acquired Kravitz, Inc., in 2017 as part of its strategy of buying and integrating best-in-class TPA firms across the country, including many local market leaders with unique specialty expertise. Following the 2018 acquisition of nine other TPA firms with substantial Cash Balance business, Ascensus TPA Solutions now serves more than 2,700 Cash Balance plans of all sizes across diverse industries.

“Cash Balance is the fastest growing sector of the retirement plan market and no one is better positioned to lead our expansion strategy than Dan Kravitz,” said Jerry Bramlett, head of TPA Solutions. “He has been a pioneer in the Cash Balance space for more than a decade and played a major role in increasing national awareness, contributing to 20% average annual growth in this marketplace.”

“We now have 20 actuaries with Cash Balance expertise supported by a deep bench of hundreds of advanced technical plan professionals,” continued Bramlett. “We’re unique in our ability to offer high-touch local service backed by national strength and security.”

In his prior role as owner and president of Kravitz, Inc., Kravitz developed a singular focus on Cash Balance plans and expanded the firm across the country, earning a nationwide reputation for cutting-edge plan design and unique strategic solutions. He introduced Cash Balance daily recordkeeping to the industry, founded Cash Balance Coach™, the first Cash Balance training and certification program for retirement plan advisors, and wrote the book, “Beyond the 401(k), How Financial Advisors Can Grow their Businesses with Cash Balance Plans.” Kravitz has over 25 years of experience in retirement plan consulting.

“I’m honored to take on this new national leadership role,” said Kravitz. “The Cash Balance market is fast-growing but underserved—there are thousands of small to mid-size businesses that could reduce their tax burden, catch up on delayed retirement savings, and improve retirement outcomes for staff by adding a Cash Balance plan.”

“Our goal is to make sure that all of these businesses have the opportunity to do so through our expanded program at TPA Solutions, which is a key part of the Ascenus mission to address America’s retirement savings crisis,” concluded Kravitz.

 

About TPA Solutions
TPA Solutions is the nation’s largest and foremost retirement TPA, combining high-touch local service with the strength and security of an industry leader. A business division of Ascenus, TPA Solutions’ dedicated team serves 33,000 retirement plan sponsors in 37 locations across the country. For more information, visit tpa.ascensus.com. View career opportunities at https://careers.ascensus.com/tpa.

 

About Ascensus
Ascensus is the largest independent recordkeeping services provider, third-party administrator, and government savings facilitator in the United States. The firm delivers technology and expertise to help millions of people save for what matters most—retirement, education, and healthcare. For more information about Ascensus, visit ascensus.com. View career opportunities at careers.ascensus.com.


Washington Pulse: Familiar Retirement Reforms Already in Play in New Congress

The new 116th Congress begins with a blank slate as bills introduced in the 115th Congress have sunset with the transition. But lawmakers and Hill watchers may justifiably have a sense of déjà vu, as familiar retirement legislation has been introduced in the brief period since the new Congress convened in January. Despite the U.S. House of Representatives flipping to Democratic control in November’s midterm elections, retirement reform remains an issue where significant bipartisan support is evident, and clearly growing.

The Retirement Enhancement and Savings Act of 2019 (RESA 2019) is the latest version of a bill that has been introduced in Congress multiple times since 2016. But, despite bipartisan support the legislation has failed to advance.

RESA 2019, whose primary sponsors are Rep. Ron Kind (D-WI) and Mike Kelly (R-PA), would make many changes to the retirement saving landscape that are primarily intended to achieve three objectives: encourage more employers to offer retirement plans, and encourage greater accumulation and preservation of savings in retirement plans and IRAs

Several significant items included in the bill and intended to address the bill’s objectives are described below.

Allow Pooled Employer Plans to Encourage Offering Workplace Saving Options

More than one-third of Americans have no access to an employer-sponsored retirement plan. Often-cited obstacles for employers considering establishing a plan —especially among small to mid-size employers—are the cost, administrative responsibility, and potential fiduciary liability. One proposed remedy in RESA 2019 is enhancement of the multiple employer plan (MEP) option. MEP arrangements allow many employers to participate in a commonly-administered plan, with the flexibility to tailor provisions to their respective needs. Proponents hope this will yield economies of scale that lead to reduced cost, greater sharing of administrative burden and reduced fiduciary liability for participating employers

Past regulatory restrictions have required MEP-participating employers to have a commonality among them (e.g., common ownership, business purpose, etc.). This has greatly limited use of the MEP concept. Among other MEP enhancements, RESA would permit “open MEPs” by creating “pooled employer plans” (PEPs). PEPs would be exempt from the commonality requirement and would be required to specify a “pooled plan provider” that is the plan’s named fiduciary and plan administrator. The result could be more employers offering a retirement plan to their employees.

Lifetime Income Investments – a Solution to Outliving Retirement Savings?

In addition to the issue of workers having no workplace retirement plan, there is great concern that the savings of many will not be enough to support them through their retirement years. An often-proposed solution is greater use of so-called “lifetime income investments,” which can be used to transform accumulated savings into an income stream throughout retirees lives. Such investments, whose payout in retirement can resemble a payment stream from a defined benefit pension plan, have seen limited use in the past. A major obstacle to their use has been the concern of retirement plan sponsors over potential fiduciary liability for the soundness of the lifetime income provider.

RESA 2019’s sponsors hope to address employers’ fear of fiduciary liability. The bill would require an annual statement that projects potential lifetime income payments—using a participant’s actual accumulation—in the hope of stimulating increased saving and increased use of lifetime income products to provide a secure retirement. The legislation also offers a new fiduciary safe harbor to encourage more employers to offer these investments in their plans.

Will Tax Incentives Motivate Employers and Savers?

RESA 2019 contains several tax incentives for establishing retirement plans and for workers to save more. The maximum tax credit for small employers establishing a plan would be 10 times greater. A new credit for implementing automatic enrollment of employees would be created. All workers—or those whose spouse has earned income—would be eligible to make Traditional IRA contributions beyond age 70½.

Proposal to Eliminate Life Expectancy Payments to Nonspouse Beneficiaries Remains

While RESA’s provisions generally have been welcomed, one that is particularly complex would require most nonspouse beneficiaries of IRA and employer plan accounts to distribute them and pay any taxes owed within five years, for aggregate balances that exceed $450,000. Lesser amounts could be distributed and taxed over a beneficiary’s lifetime. This provision is included in RESA 2019—as it has been in other legislation—to raise tax revenue in order to offset various incentives and enhancements the bill contains.

And More …

RESA 2019 contains many more provisions that address a host of retirement saving issues. Some would offer greater latitude in when employer plans can be established and plan design changes made. Others would address the insolvency of the insurance program for defined benefit pension plans, limit pre-retirement leakage from plans, and make it easier to successfully terminate 403(b) plans.

For a more complete description of RESA 2019 provisions—which mirror those contained in RESA 2018—see the March, 2018, Ascensus Washington Pulse and watch Ascensus.com News for the latest developments.

Click here for the printable version.