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Fed report: simplify retirement savings incentives
Old 09-10-2010, 08:40 PM   #1
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Fed report: simplify retirement savings incentives

Eight ways to fix the U.S. retirement crisis Robert Powell - MarketWatch

The story starts with this bit of understatement :
BOSTON (MarketWatch) -- Paul Volcker and his troupe, the President's Economic Recovery Advisory Board, are unlikely to appear on the "America's Got Talent" stage any time soon.....
Soon enough, though the author gets to the eight bullet points in the Volcker report related to Simplifying Savings and Retirement Incentives:
  1. Consolidate Retirement Accounts and Harmonize Statutory Requirements
  2. Integrate IRA and 401(k)-type Contribution Limits and Disallow Nondeductible Contributions
  3. Consolidate and Segregate Non-Retirement Savings
  4. Clarify and Improve Saving Incentives
    • Make the Saverís Credit a Match
    • Expand Automatic Enrollment in Retirement Savings Plans
  5. Reduce Retirement Account Leakage
  6. Simplify Rules for Employers Sponsoring Plans
  7. Simplify Disbursements
  8. Simplify Taxation of Social Security Benefits

I briefly read through the section of the report covering these retirement issues. While I didn't find every recommendation to my personal benefit, most of the ideas make sense. For example, #1. There's little logic to the fact that my wife and I have IRA, inherited IRA, Roth IRA, 401(a), 401(b), and 457(b) accounts, all with slightly different rules for contributions, withdrawals and tax treatment.

Full report here:
http://www.whitehouse.gov/sites/defa...orm_Report.pdf

There are other sections on capital gains taxes, corporate taxes and other hot-button topics if you're inclined.

Prediction: there's little chance any of it will be read, much less implemented.
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Old 09-10-2010, 09:36 PM   #2
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Unfortunately the report already fails the stupid test. They put tables in it at a 90 degree format from the text. In a computer readable document that is simply stupid
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Old 09-10-2010, 09:44 PM   #3
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Old 09-10-2010, 09:47 PM   #4
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Unfortunately the report already fails the stupid test. They put tables in it at a 90 degree format from the text. In a computer readable document that is simply stupid
What's next, a critique of sentence syntax, spelling and grammar?
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Old 09-10-2010, 10:02 PM   #5
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While simplification is good, I don't think it's going to fix the retirement crisis (is there even a crisis? I don't really see one).

Personally, I would like to see restrictions on the maximum expense ratio that could be charged. My previous employer had hideous options, sometimes 2-3 the cost of vanguard (many around 1%).
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Old 09-13-2010, 09:43 AM   #6
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As a practical planning matter for people on this forum, I'd say that Bush also had a commission that made recommendations about simplifying tax preferred savings. IIRC, none of them became law. Each complexity in the system benefits somebody, so they are hard to eliminate.

As a utopian statement, I think all of our tax-preferenced savings account systems could be replaced by a single Tax Deferred Savings Account system. I'd have a dollar limit on annual contributions, one Required Minimum Distribution rule, and no penalties for early withdrawal. I think that would satisfy any public policy goals that I care about.
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Old 09-13-2010, 10:34 AM   #7
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Originally Posted by photoguy View Post
While simplification is good, I don't think it's going to fix the retirement crisis (is there even a crisis? I don't really see one).

Personally, I would like to see restrictions on the maximum expense ratio that could be charged. My previous employer had hideous options, sometimes 2-3 the cost of vanguard (many around 1%).
Much of this will depend on who administers the 401k. A 401k is not as simple as an IRA to administer.

An IRA can be "set it and forget it"... send $416/mo and you max out for the year each year and are done. You don't need to worry about what I contributed or what your annual profit was or similar.

A 401k (or other workplace retirement plan) is much more complex. The government does not want the rich executives using the 401k to shelter income from taxes, so to prevent this the government has created various conditions to make sure the worker bees have a certain level of assets in the 401k before the richer executives shield income from taxes.

Because of outsourcing, very few people inside even really large companies know these rules. So choices fall into this

1) hire a company to administer your 401k
2) hire a broker of some sort to administer 401k
3) have an internal employee administer this with a cost of $X to employer ($X is the cost of salary, benefits and similar for the person doing this)

There is most risk with 3) (because of continuing education and unemployment)

If you hire a company to do it (maybe a company like Hewitt or similar) there is a cost to that transaction. My 401k is thru Hewitt, my employer has 400,000+ employees, so our expense ratios are around .2%. A different company with fewer people might get same funds with higher ERs (our funds are institutional, so no tickers exist- but each prospectus lists the indexed the funds track).

If you are "sold" a 401k by a broker, that broker manages all the paperwork, but that broker will be compensated. Here are the options as I understand them:

1) load fees (5.75%)- just because loaded funds are in 401k does not mean a load is paid
2) 12b1 trailer fees (if funds have a 12b1 fee, that could be a means of compensating a broker)
3) assets under management (so expense is a 1% or similar fee assessed to each account each year).

Many loaded funds have moderate expense ratios, so any good broker will probably want 1% per year (option 3) and waive the loads. YMMV. Every situation and broker is different though.
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Old 09-13-2010, 10:46 AM   #8
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Unfortunately the report already fails the stupid test. They put tables in it at a 90 degree format from the text. In a computer readable document that is simply stupid
That's why there is a page 90-degree rotate button on Adobe

On my monitor, it shows up quite well....
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Old 09-13-2010, 02:31 PM   #9
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Originally Posted by rescueme View Post
That's why there is a page 90-degree rotate button on Adobe

On my monitor, it shows up quite well....

LOL... I was thinking the same.... but didn't want to post... glad someone else did...
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Old 09-13-2010, 02:34 PM   #10
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Originally Posted by jIMOh View Post
Much of this will depend on who administers the 401k. A 401k is not as simple as an IRA to administer.

An IRA can be "set it and forget it"... send $416/mo and you max out for the year each year and are done. You don't need to worry about what I contributed or what your annual profit was or similar.

A 401k (or other workplace retirement plan) is much more complex. The government does not want the rich executives using the 401k to shelter income from taxes, so to prevent this the government has created various conditions to make sure the worker bees have a certain level of assets in the 401k before the richer executives shield income from taxes.

Because of outsourcing, very few people inside even really large companies know these rules. So choices fall into this

1) hire a company to administer your 401k
2) hire a broker of some sort to administer 401k
3) have an internal employee administer this with a cost of $X to employer ($X is the cost of salary, benefits and similar for the person doing this)

There is most risk with 3) (because of continuing education and unemployment)

If you hire a company to do it (maybe a company like Hewitt or similar) there is a cost to that transaction. My 401k is thru Hewitt, my employer has 400,000+ employees, so our expense ratios are around .2%. A different company with fewer people might get same funds with higher ERs (our funds are institutional, so no tickers exist- but each prospectus lists the indexed the funds track).

If you are "sold" a 401k by a broker, that broker manages all the paperwork, but that broker will be compensated. Here are the options as I understand them:

1) load fees (5.75%)- just because loaded funds are in 401k does not mean a load is paid
2) 12b1 trailer fees (if funds have a 12b1 fee, that could be a means of compensating a broker)
3) assets under management (so expense is a 1% or similar fee assessed to each account each year).

Many loaded funds have moderate expense ratios, so any good broker will probably want 1% per year (option 3) and waive the loads. YMMV. Every situation and broker is different though.
I agree with your first part, but not the second. I work for a small company and we have a plan with Fidelity and pay a flat rate per person.. the current ratio for out costs is .09%. We do not have a load fund in our options and few have 12b1 fees.
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Old 09-13-2010, 02:56 PM   #11
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What's next, a critique of sentence syntax, spelling and grammar?
Only if they affect comprehension. 90 degree tables in a PDF web product are simply stupid and incomprehensible.
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Old 09-13-2010, 02:57 PM   #12
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LOL... I was thinking the same.... but didn't want to post... glad someone else did...
It rotates the whole document, not the page. if you can read the page rotated, you can put it in the document rotated.
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Old 09-13-2010, 04:06 PM   #13
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Originally Posted by jIMOh View Post
If you are "sold" a 401k by a broker, that broker manages all the paperwork, but that broker will be compensated. Here are the options as I understand them:

1) load fees (5.75%)- just because loaded funds are in 401k does not mean a load is paid
2) 12b1 trailer fees (if funds have a 12b1 fee, that could be a means of compensating a broker)
3) assets under management (so expense is a 1% or similar fee assessed to each account each year).

Many loaded funds have moderate expense ratios, so any good broker will probably want 1% per year (option 3) and waive the loads. YMMV. Every situation and broker is different though.
Not quite true. if the plan has over $1 million in it, the 401K plan through a mutual fund like American or Franklin Templeton and others gets NAV pricing. The advisor's firm gets a flat 1% "finder's fee" and the advisor is compensated at 25 bp every year, which is built into the mutual fund share class. Where companies get screwed is when companies like Principal come in and "wrap" all their fees into the plan through annuity unit pricing whereby most top execs don't even know what they are paying (could be 2% or more).

It is difficult for a broker to charge 1% fee on a 401K because the costs are transparent that way. Small plans can get screwed sometimes, though.......
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Old 09-13-2010, 06:56 PM   #14
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A 401k (or other workplace retirement plan) is much more complex. The government does not want the rich executives using the 401k to shelter income from taxes, so to prevent this the government has created various conditions to make sure the worker bees have a certain level of assets in the 401k before the richer executives shield income from taxes.

.
Notice how simplification could help on this. Suppose the maximum contribution limit for all tax deferred savings accounts is $16,000 per year, including any employer contributions. Then there is no reason to have different rules for individual or employer sponsored, and no need to have special top-heavy tests.
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Old 09-13-2010, 07:03 PM   #15
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$16k really isn't that much even when compounded over long periods of time.

With the retirement reality beyond reach of way too many, I believe that the last thing they need to do is to throttle back qualified thresholds.

If anything they should open up the thresholds.
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Old 09-13-2010, 10:37 PM   #16
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$16k really isn't that much even when compounded over long periods of time.

With the retirement reality beyond reach of way too many, I believe that the last thing they need to do is to throttle back qualified thresholds.

If anything they should open up the thresholds.
I'm not following, MB.

$16k x 30 years at 5% compounding and 0% taxes gets you to $1.1 million or so. That's a SWR of $40k per year.

(I've ignored both inflation effects and indexing of the max contribution, for simplicity. Also SS income. The precise math isn't critical to my post.)

$16k per year represents 16% of gross for an individual making $100,000 per year, which probably represents the top 10% of earners. Or 30% of gross for someone earning $50k per year, which is probably still above the median earnings of full-time workers. That's a big bite.

My point is "beyond the reach of way too many" and "they should open up the thresholds" appear to be in conflict when it comes to the bulk of the citizenry's actual ability to save more than $16k per year.

The report cites the current disproportionate usage of tax-deferred accounts by the highest earners. As a matter of policy, then, I don't see how raising the tax-deferred maximums will benefit the "many" who need to save more. If a high-income individual (or motivated ER want-to-be) wants a bigger pot, it can always be saved in taxable accounts.

Seems to me that a steady tax-deferred $16k savings level that produces a retirement pot that can produce a post-retirement income somewhere near the median earner's wages is just about right. Especially considering the deficit outlook, providing additional retirement account tax benefits would not be a top priority if I was the king.
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Old 09-14-2010, 08:47 AM   #17
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Originally Posted by jIMOh

A 401k (or other workplace retirement plan) is much more complex. The government does not want the rich executives using the 401k to shelter income from taxes, so to prevent this the government has created various conditions to make sure the worker bees have a certain level of assets in the 401k before the richer executives shield income from taxes.
Notice how simplification could help on this. Suppose the maximum contribution limit for all tax deferred savings accounts is $16,000 per year, including any employer contributions. Then there is no reason to have different rules for individual or employer sponsored, and no need to have special top-heavy tests.
Simplification helps big mega corps and crushes the small business owner. There are years when small business does good, they need to be able to set aside more than the 16k a salaried megacorp worker puts aside. Because in a bad year, they may not be able to put anything aside.

Once size fits all works for aprons, but not for retirement planning IMO
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Old 09-14-2010, 10:00 AM   #18
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Simplification helps big mega corps and crushes the small business owner. There are years when small business does good, they need to be able to set aside more than the 16k a salaried megacorp worker puts aside. Because in a bad year, they may not be able to put anything aside.

Once size fits all works for aprons, but not for retirement planning IMO

The small business owner can put the money in a taxable account... and the next year when earnings are not that great, move the money to a tax sheltered account... done...


I do not see allowing someone to put more than $16K aside is good for everybody... Heck, I read about a lawyer who started a retirement plan and put away over $100K because of a loophole in the rules... not sure what it was...

So, IMO the $16K sounds good... if you want to make it $20K... great... a catchup, great...


Also remember there are tax deferral methods that are not available to all of us... if you were a top executive when I was at mega.... you could tell them to 'hold' your bonus, or a percent of your bonus.... they would invest it for you... and you could defer it until you retired and then they would start to pay you... this was only available to people who made over $250K...
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Old 09-14-2010, 11:03 AM   #19
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I'm not following, MB.

$16k x 30 years at 5% compounding and 0% taxes gets you to $1.1 million or so. That's a SWR of $40k per year.

(I've ignored both inflation effects and indexing of the max contribution, for simplicity. Also SS income. The precise math isn't critical to my post.)

$16k per year represents 16% of gross for an individual making $100,000 per year, which probably represents the top 10% of earners. Or 30% of gross for someone earning $50k per year, which is probably still above the median earnings of full-time workers. That's a big bite.

My point is "beyond the reach of way too many" and "they should open up the thresholds" appear to be in conflict when it comes to the bulk of the citizenry's actual ability to save more than $16k per year.

The report cites the current disproportionate usage of tax-deferred accounts by the highest earners. As a matter of policy, then, I don't see how raising the tax-deferred maximums will benefit the "many" who need to save more. If a high-income individual (or motivated ER want-to-be) wants a bigger pot, it can always be saved in taxable accounts.

Seems to me that a steady tax-deferred $16k savings level that produces a retirement pot that can produce a post-retirement income somewhere near the median earner's wages is just about right. Especially considering the deficit outlook, providing additional retirement account tax benefits would not be a top priority if I was the king.
I'll agree.
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Old 09-14-2010, 06:17 PM   #20
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I'll agree.
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