The Bruce Sallan Radio Show With Jim Scheinberg

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Bruce Sallan Radio Show With Jim Scheinberg

Jim and Bruce draw connections between family issues and money.

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New ERISA Disclosure Contracts Are Coming: What You Need to Know and Do

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Legislative Outlook for the Public and Private Retirement System

Congress BuildingAs the 112th Congress convened in January, it was clear that a substantial part of the legislative agenda for the next few years will be to address our nation’s long-term fiscal challenges which arose from our mounting Federal debt. Although dramatic reforms are not expected this year, it is likely that the current economic conditions will result in significant changes to the tax code. These revisions could diminish many of the tax incentives in retirement plans that we have long taken for granted. If so, this will likely hinder workers and their ability to adequately save for retirement.

Tax Reform and Simplification of Private Retirement System

A familiar approach to addressing the federal deficit is tax reform. In a recent speech, President Obama called on Congress “to undertake comprehensive tax reform that produces a system which is fairer, has fewer loopholes…”  While much of Washington differs on whether to lower tax rates or raise additional income without increasing rates, most seem to agree that to “broaden the base” (restrict or eliminate current income exclusions so that additional income may be subject to taxes) would greatly increase federal tax receipts.

Broadening the income subject to federal taxes would result in activities that have preferential tax treatment to no longer enjoy a favored position in the Internal Revenue Code (IRC). One area where a significant impact might be felt is on tax deductible contributions of qualified retirement plans (by both employers and employees). The private retirement system is a large target to those that support this approach as it is projected to be the largest “tax expenditure” in the IRC by 2013.

There have already been several recommendations put forward by multiple organizations including the National Commission on Fiscal Responsibility and Reform and the President’s Economic Recovery Advisory Board to address reform of the private retirement system. Among the proposals is the consolidation of the multiple types of retirement plan coupled with a reduction and targeted approach to the tax incentives inherent to them. This recommendation included the fusion of different retirement account types into a single plan design with an annual additions limit of 20% of compensation or $20,000. This limit would represent a significant reduction from the current Section 415 limit of $49,000 for defined contribution plans. The proposal further suggested simplifying qualified plan non-discrimination testing.

Social Security

Congress, the Administration and the opposing political parties may wrestle over the many peripheral issues in the budget, but the 800 pound gorilla in the room is entitlement programs such as Social Security. If, once and for all, Social Security’s issues could be addressed in a meaningful way, it would have a sizable impact on the reduction of long-term deficits and to improve the future security of America’s retirees. In 2010, Social Security paid out more in benefits than it took in through payroll taxes. This disparity and the risk of insolvency create concern for workers over what will be available for them in the future. Addressing these public retirement system challenges would go a long way to restoring the public’s confidence in our nation’s finances.

Over the years, dozens of proposals have claimed to provide a solution to Social Security’s financial ills. Some of the more substantial recommendations gaining attention include:

  • Indexing the full retirement age beyond 67 years old to improvements in longevity
  • Switching to an inflation adjustment that rises more slowly than the current rate (CPI) used to calculate the annual cost-of-living adjustment
  • Increasing the taxable wage base that exposes the amount of earnings subject to payroll tax (and the basis for benefits) to about $180,000 from the current $106,800
  • Subjecting both employer and employee premiums for group health insurance to payroll and income taxes


Given the new balance of power in Washington, there may be uncertainty as to how any future efforts to address our fiscal challenges will affect our public and private retirement system. Many believe the private retirement system could come under attack as a means to alleviate the mounting federal budget deficit. Those that wish to effect changes to the private retirement system often neglect to reveal the many facts and successes of the current system, namely:

  • The exclusion of retirement savings is a deferral not a permanent write-off like other deductions and exclusions. Further, deductible employee and employer dollars contributed to a plan are taxed in the future when withdrawn.
  • Tax savings resulting from plan contributions is critical to encouraging small employers to establish and maintain a qualified plan.
According to the National Retirement Risk Index, about “51% of households are at risk of not being able to maintain their pre-retirement living standards after retirement.” Qualified retirement plans have been very successful at encouraging workers of all income levels to set aside current income for the future. North Pier emphatically believes that the availability of employer-sponsored plans should be expanded, not curtailed.

Defined Contribution Trends Indentified in Callan’s Survey

Callan Associates’ 2011 DC Trends Survey, Defined Contribution Trends Survey: Positioning the DC Plan for the Future, was published in January 2011. Approximately 90 US companies, comprised of mostly large plan sponsors (80% had over $100 million in assets) were surveyed. The following findings were among the most relevant:

  • The outlook for employer contributions to defined contribution plans is looking brighter. 58% of plan sponsors that had reduced or eliminated company contributions over the last two years plan to reinstate them over the next year. 75% of those have already reinstated their contributions to the same level prior to the reductions. Additionally, not one of the sponsors surveyed said they planned on reducing or eliminating the company match in the future.
  • Plan sponsors continue to adopt plan automation features. Utilization of automatic enrollment and automatic escalation of contributions increased to about 51.3% and 46% in 2010 from approximately 44% and 34% respectively.
  • Unbundled plans (where the recordkeeper and trustee are independent from one another) appear to be gaining in popularity. The use of fully unbundled plan arrangements increased from approximately 30% in 2009 to nearly 35% in 2010.
  • A key area of focus for defined contribution plan sponsors continues to be fees. About 85% of the respondents claim they have calculated their plan fees within the past year and about 84% of those that performed the calculation went on to benchmark their plan fees as a result of their findings
  • Inflation ranked as a high concern for plan sponsors. Real return and TIPS mutual funds were the most frequently added plan investment choices in 2010.
  • Plan sponsors were still not comfortable with the fiduciary issues surrounding guaranteed income products. Despite sponsors’ desire to help their employees manage income in retirement, utilization of guaranteed income products has gained little traction.
  • The use of investment consultants is becoming more prevalent with nearly 72% of the respondents using them versus the approximated 65% last year.
  • Nearly 50% of plans maintain Roth contribution options (up from 28% in 2008).
  • The growth in target date funds appears to be stagnating. While roughly 70% of the plans offer target date funds as its default investment choice, growth appears to have stalled.

Appellate Court Approves Class Status for Defined Contribution Participants

A Federal appellate court ruled that it may be appropriate for a class of defined contribution plan participants to file a suit for relief under ERISA. In January 2011, Circuit Judge Diane Wood released the opinion from a three judge panel of the 7th US Circuit Court of Appeals calling for the courts to re-examine relief provisions available under ERISA.

In 2008, the US Supreme Court decided that individual plan participants can seek relief under ERISA, although it was unclear if a class of participants can do the same. Judge Wood concluded that there are cases where the plan as a whole is injured at the same time as an individual employee. For example, this can happen when the entity responsible for investing the plan’s assets charges unreasonably high fees or when there had been reckless selection of investment options for participants.

Decision on New Fiduciary Rules Delayed

Securities Exchange CommissionThe SEC has delayed establishing new rules that would level the playing field for broker dealers and other investment advice providers. A decision had been expected to mandate both types of entities to operate under a common fiduciary standard. The SEC stated that a decision on the final regulation will not be available until later this year, instead of the projected timeline of spring to early summer.

The Dodd-Frank financial regulatory reform law called for SEC commissioners to extend a fiduciary duty requirement to broker dealers to protect investors confused by the different standards advisers and brokers are currently subject to. Studies found that the average investor has no understanding of the distinction between advice providers or that only registered investment advisers have a legal obligation to act in the client’s best interest.