Articles

Oct 27 2020

Retirement Plan Industry Update – Q3 2020

October 27, 2020

Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®

To view and download a PDF of this commentary, click here.

Well-Known ERISA Plaintiffs’ Attorney Hit with $1.5 Million Fine for “Reckless” Fiduciary Claims

Jerome Schlichter, the leading plaintiffs’ attorney in numerous ERISA lawsuits, was recently sanctioned and ordered to pay up to $1.5 million by a U.S. District Judge for being “reckless”. In Obeslo vs. Great-West Life, Schlichter Bogard & Denton accused Empower Retirement of charging fees “so disproportionately large that (they) bear no reasonable relationship to the services rendered.”

In reviewing the case, U.S. District Judge Christine M. Arguello stated that Schlichter and his firm “recklessly pursued their claims through trial, despite the fact that they lacked merit”. The federal judge cited a number of concerns about the plaintiff’s case, including:

One of the plaintiffs’ attorney’s expert witnesses contradicted himself and had a “complete lack of credibility”
Schlichter’s firm placed an ad in a newspaper seeking individuals to join the suit, making the case appear to be “manufactured”
The evidence appeared to suggest that the decision to continue through trial was driven by the attorneys who had a far greater incentive than the plaintiffs who stood to gain a relatively small amount
- The named plaintiff testified at the trial that her retirement account, “was making money every time she looked at it. It kept going up, which is what she wanted.”

Judge Arguello found the attorneys personally liable for the defendants’ “excess costs, expenses, and attorney fees reasonably incurred from the period beginning on the first day of trial and ending on the date the defendants filed the motion for sanctions”. She said the total fees and costs shall not exceed $1.5 million.

The case underscores the incentive some law firms see in pursuing retirement plan litigation, despite valid issues.

(Moore, 2020) (Sullivan, 2020)

Department of Labor Provides a Safe Harbor for Electronic Disclosure – UPDATE

The Department of Labor (DOL) recently finalized the new rule regarding electronic delivery of required participant disclosures under the Employee Retirement Income Security Act (ERISA). These rules are designed to make the delivery of required notices more efficient and effective for both plan sponsors and plan participants.

Examples of covered ERISA disclosure notices include:

Quarterly participant statements
404(a)(5) participant fee disclosure notice
404(c) notice
Qualified default investment alternative (QDIA) notice
Automatic enrollment notice
Summary plan description
Summary of material modifications
Summary annual report
Blackout notice (applicable during mergers and transitions)

Who must receive the disclosure notices?

“Eligible participants” including active employees who are eligible for the plan, terminated employees with an account balance, and beneficiaries of deceased participants with an account balance

The initial notification requirements to obtain safe harbor protection include:

The plan must provide a paper notice to all eligible participants who will be receiving electronic disclosures. The notice must include:
- a statement that covered documents (see list above) will be sent electronically going forward
- the e-mail address that will be used
- a statement of the right to request a paper version, free of charge
- a statement of the right to opt out of electronic delivery and receive only paper copies
On an ongoing basis, there are two methods for electronic delivery:
- Attach the required disclosure directly in the e-mail
- Provide a link to the website and a description of the notice in the e-mail

(MassMutual, 2020)

IRS Releases 2021 Retirement Plan Limits

(John Hancock, 2020)

Industry Consolidation and Outsourcing Continue

Over the past decade, the retirement plan industry has seen enormous consolidation in the recordkeeping space. The top five recordkeepers' market share has increased from 43% in 2012 to more than 54% in 2019. And this trend continues, with several large acquisitions and outsourcing deals recently announced:

April 9, 2020 – Principal to acquire Wells Fargo’s retirement plan business
July 15, 2020 – Vanguard to outsource its retirement plan recordkeeping business to Infosys
September 8, 2020 – Empower to acquire MassMutual’s retirement plan business
September 9, 2020 – ICMA-RC to partner with SS&C to advance its recordkeeping platform
September 14, 2020 – Nationwide to partner with SS&C to transform its retirement plan business
September 28, 2020 – Empower to buy Fifth Third’s recordkeeping business

(Empower, 2020)

Update on the Department of Labor Lifetime Income Disclosures

Effective on September 18, 2021, the DOL will require that participant statements for defined contribution plans provide two lifetime income illustrations expressed as a single life annuity and a joint and survivor annuity.

The regulation requires the plan administrator to use the following assumptions for converting the participant’s account balance into lifetime income streams:

The monthly payments start on the last day of the statement period.
The participant and his/her spouse are 67 years old.
The interest rate is the ten-year Treasury.
The mortality table is the same one used for defined benefit lump sum payments.

Plan sponsors will receive safe harbor protection from liability if they use the required assumptions and provide the model explanation.

Concerning the new disclosure rules, the DOL is taking comments until November 17, 2020.

(Salkinand & Watson, 2020)

Works Cited

MassMutual (2020, October 7). Participant Disclosures Under ERISA. Mass Mutual. Retrieved on October 14, 2020 from http://wpbcphoenix.org/resources/Participant%20Disclosures%20Under%20ERISA%20RS-50184-00%20exp%202021-1231%202-per-page.pdf

Salkinand B. & Watson, R. (2020, September 28). DOL Lifetime Income Disclosure Regulation Explained. 401kspecialistmag.com. Retrieved on October 14, 2020 from https://401kspecialistmag.com/dol-lifetime-income-disclosure-regulation-explained/?utm_source=401k&utm_medium=email&utm_campaign=401k_enl_09292020

Moore, R. (2020, October 1). Well-Known ERISA Plaintiffs’ Attorneys Sanctioned for ‘Reckless’ Litigation. Plansponsor. Retrieved on October 14, 2020 from https://www.plansponsor.com/well-known-erisa-plaintiffs-attorneys-sanctioned-reckless-litigation/?utm_source=newsletter&utm_medium=email&utm_campaign=Newsdash

Sullivan, J. (2020, October 1). Schlichter Hit for $1.5 Million for ‘Reckless’ Fiduciary Claims. 401kspecialistmag.com. Retrieved on October 14, 2020 from https://401kspecialistmag.com/schlichter-hit-for-1-5-million-for-reckless-fiduciary-claims/

Empower (2020, June 11). Industry Consolidation: It’s a Scale Business. Great-West Life & Annuity Insurance Company

John Hancock (2020, October 20). 2021 Contribution and Benefit Limits. Retrieved October 26, 2020 from https://assets.jhnavigator.com/managed_assets/itemFiles/USA/22044-1020_2021_ContributionLimits_Update_Secured.pdf

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Sep 21 2020

Biden Tax Plan

September 21, 2020

Written by Bruce Paulson, CPA, JD, CFP®, Senior Client Advisor and Jennifer Arps, CFP®, Senior Client Advisor

The Biden tax plan, as you know, is released and receiving much commentary pre-election. Understanding that planning is difficult until we know the election outcome and the law, our comments on the tax plan are below. I hope you find the discussion useful, and we welcome any questions. Should you be interested, the MRA Associates (MRA) blog contains articles on many of these subjects.

Tax Law Changes

The proposed tax law changes include:

Increasing top individual tax rate on income > $400,000 to 39.6%
Social Security tax on income > $400,000 subject to 12.4% supplemental Social Security tax, evenly split between employers and employees
Dividends and all capital gains when income is > $1,000,000, taxed at 39.6%
Itemized deductions – Caps tax benefit of itemized deductions at 28%
Deduction of state-local taxes ($10,000 cap) - gone
Like-kind exchange (“1031 rollovers”) - repealed for income > $400,000
Top corporate income tax rate – increase from 21% to 28%
Estate taxes
- Exemption amount - unclear, but less than the current amount ($11.58M per person)
- Rate - no change: 40%
- Removal of income tax basis step-up -stated current plan is to tax unrealized asset appreciation at death

Family Wealth Planning Implications

Use of Estate Tax Exemption

Use it or risk losing it. Now is the time to talk to your advisors about making a gift before year-end, which could take different forms (e.g., direct transfer, transfer to a new or existing trust, or forgiveness of an intra-family/entity note receivable). The income tax tradeoffs that come with most gifts are important, especially for taxpayers who are older, hold assets with low-income tax basis, and live in high tax states, such as Minnesota.

Charitable Remainder Trusts (CRT)

Taxpayers making over $1,000,000 who receive payments from CRTs will pay higher income tax on the portion of their trust payments treated as dividend or long-term capital gain. As advisors know, distributions from a CRT are governed by so-called “tier rules” that cause trust distributions to consist first of ordinary income, then capital gains, followed by other income, and last, trust corpus. Thus, CRT portfolios are often managed to keep highest taxed income (e.g., ordinary income, short-term capital gains) low compared to lower taxed income (e.g., dividends, long-term capital gains), as highest tax rate income realized always comes out before lower taxed income.

If long term capital gains (LTCG) are a high percentage of the annual trust distribution, and the tax rate on LTCG increases, look at creating a separate account equity index (SAEI) solution outside the CRT to systematically harvest tax losses that will eliminate or reduce the tax upon the trust distribution. Perhaps better yet, look at placing the SAEI inside the CRT, where both the duration and benefit from tax loss harvesting could be far higher than if held outside.

Charitable Lead Trusts (CLT)

Charitably minded families who a) are in top federal/state income tax brackets, b) face the new 28% itemized deduction rate cap, and c) have assets that generate the highest taxed income may benefit from funding a non-grantor CLT, a new taxpayer. The trust, we believe, could be drafted to include in trust accounting income both realized short and long-term capital gains. This income, while taxable to the trust, should receive each year an offsetting income tax deduction for amounts paid to charity. State fiduciary laws, here, are important; they differ in defining what is and is not trust accounting income.

Income - Defective Grantor Trusts

The Biden Administration has not (yet) targeted the significant, long-term benefit of parents (grandparents) paying the income tax liabilities on assets residing in trusts that are sheltered from estate tax. If income is taxed at 43% plus and the investment (still) makes pre-tax sense, owning the asset in an income defective grantor trust rises in appeal if the grantor has the cash flow to pay the trust’s income tax liabilities.

Grantor Retained Annuity Trusts (GRATs)

There is nothing, to our knowledge, on the table to repeal or impact GRATs, but if the Democrats win the Senate, anything could happen. Families that are thinking of funding a GRAT might consider doing so now to avoid the risk of gift and estate tax laws changing to their detriment. While short-term (“rolling”) GRATs, for good reasons, are often favored, consideration might be given to funding a longer term GRAT to take advantage of record low interest rates and to eliminate the risk that GRATS could be repealed in coming years.

Installment Sale to Income-Defective Grantor Trust

As with GRATS, there is no proposal that we know of to repeal or impact this type of transaction. Recall, though, that President Obama’s budget proposal in 2015 included a provision that (in essence) attacked sales, exchanges, or comparable transactions between a grantor and his or her grantor trust, intending that these assets would be included in the grantor’s estate at death or subject to gift tax on certain events during the grantor’s life.

Again, families who are considering the installment sale may wish to do so before year end. Higher interest rates in the future pose investment challenges, but they create a potential estate tax opportunity. Remember, the seller holds a fixed rate note receivable, often interest only with a balloon payment at the end. If the seller dies before the note is paid off, the fair market value of the note is included in his or her estate. If interest rates have risen from the time of the transaction (e.g., from 1% to 4%), both Treasury regulations and case law hold that higher interest rates are one reason to value the note in the estate at an amount less than the outstanding principal balance.

Section 1031 Exchanges

Biden proposes to eliminate “like-kind” exchanges for investors with annual incomes of more than $400,000. A few thoughts:

If a family wishes to reduce real estate exposure, selling in 2020 may be appropriate if a plan exists, anyway, to sell real estate in the next several years (when the LTCG rate may be higher).
If a family wants to sell real estate and reinvest back into real estate, a 1031 rollover may or make not make sense. Remember, with a 1031 exchange comes carryover of income tax basis: hence, lower depreciation deductions in future years. If income tax rates rise, depreciation deductions (offsetting rental income) rise in value.
Opportunity zone investments and UPREIT transactions are two other ways to sell real estate and defer (or possibly eliminate) the income tax liability. Pros and cons exist with each and both involve fees – some not obvious or transparent.

Tax on Unrealized Gains at Death

This proposal raises a whole new can of worms. Most commentators do not feel this proposal will pass and exist side-by-side with an estate tax. With that said, families with grantor trusts that use their trust powers of substitution/acquisition to pull low-income tax basis assets back into their estate may think twice about this. Doing so (under the new law) could accelerate income tax on a deferred liability that, if left alone, could be deferred for many years. Instead, trust powers might be used to bring the highest basis assets back into an estate.

Pay Gift Taxes

Families who foresee: a) higher federal and state taxation of wealth and b) new laws that trim ways to reduce or shelter wealth from estate tax (e.g., GRATs, note sales, grantor trusts, valuation discounts, etc.) may look more seriously at paying gift tax. Doing so removes gift tax dollars from exposure to estate taxes, shelters future asset growth from estate tax exposure, and shelters assets from (under Biden proposal) earlier-than-desired payment of income taxes on unrealized capital gains. Grantor trusts would seem natural recipients of large taxable gifts, allowing the grantor to continue paying income taxes for the trust beneficiary. The income tax basis of the gifted asset should receive an upward adjustment for gift taxes paid (up to the market value of the asset), but families should check with their tax advisor on this, especially when the asset lands in a grantor trust.

Corporate Stock Redemptions

Private business owners that are or may be redeeming corporate stock in 2021 may wish to accelerate taxable stock redemptions into 2020. We mention this because whether the corporation is taxed as a C corporation or S corporation, distributions that are taxed as either dividends or long-term capital gain face an increase in tax under the Biden administration from 23.8% to 43.40%.

Investment Implications

Hedge Funds

Hedge fund investors with income above $1,000,000 will see their tax on LTCGs rise dramatically from 23.8% to 43.4%. Most impacted will be funds where the taxable turnover is high and mostly long term in character. Active investment managers (funds or other) whose tax-control efforts rest solely on holding stocks more than 12 months to capture LTCG treatment may need to revisit their stock selection and trading policies to support any claim of being tax-efficient. Please see Exhibit A.

Two old, but still relevant points merit mention:

Look at the benefits of pairing tax-generating hedge funds with SAEI solutions that harvest tax losses, which offset otherwise taxable long and short-term capital gains.
Own tax-generating hedge funds in tax-friendly locations (e.g., IRAs, grantor trusts, other trusts) across the family balance sheet.

Active vs. Passive Equity (Net After-Tax)

The oft-vociferous debate continues, as most active managers continue to underperform their respective benchmarks. If dividends and long-term capital gains are taxed at 39.6%, most active managers who favor dividend-paying securities and (to repeat) freely realize LTCGs will need to generate a higher pre-tax return to earn their keep when compared to most passive equity solutions, at least where deferral of income tax is measured over a long (e.g., ten years plus) period of time.

Separate Account Equity Index (Value of Systematic Tax Loss Harvesting)

For investors with income above $1,000,000, the value of systematic tax loss harvesting that comes from using a separate account equity index portfolio increases in potential value[1]. It could be families who use mutual funds or exchange-traded funds to capture passive equity exposure would benefit from selling these funds and starting their own separate account equity index portfolio. Whether this makes sense or not will depend upon different factors. Please see Exhibit B.

Families with: a) appreciated assets that might be sold in the near future, b) actively managed portfolios generating either short- or long-term capital gains, and c) an upcoming capital gain event (e.g., sale of a business or stock redemption), could well benefit from creating their own, separately managed equity index portfolio to harvest tax losses that, carried forward, would eliminate or reduce tax at 43.40% (vs. 23.8% under current law).

Actions to Consider Before Year End

In terms of actions to consider before year-end, a few come to mind for families who may be impacted by the Biden tax proposals:

Income Tax

Accelerate tax on long-term capital gains into 2020 IF:
- Your taxable income is greater than $1,000,000
- You “otherwise” will realize this gain and pay income tax in the next several years

Re-evaluate the timing of charitable contributions into 2020
- Would your tax rate benefit be higher before or after a tax law change?
- 100% AGI “cap” for cash contributions to “qualified charities” ends this year
- Biden plan would “cap” the rate benefit to 28%

Re-evaluate the timing of certain state tax payments
- Defer payment of fourth quarter estimated tax payments into 2021
- Defer payment of property taxes (as possible) into 2021

Consider ROTH IRA conversion
- Multi-year income analysis is even more valuable
- The value of a ROTH IRA conversion increases for a taxpayer anticipating a future estate tax liability

Employee-related equity-compensation elections
- If an opportunity exists to accelerate vesting of restricted stock income into 2020, and receipt of same in 2021, 2022, 2023, etc. will push income above $1,000,000 threshold, consider doing so.
- If elections exist before year end to defer 2020 bonuses into future years, and receipt of income (in 2021) would cause income to be above $1,000,000, look at doing so. Deferral of 2020 bonuses gets tricky and depends upon the facts.

Estate Tax

Use “at-risk” estate tax exemptions.
- Look at different ways to do this
- Make sure you understand the income tax trade-offs
- Do not wait until November to start your planning

Consider certain proactive actions, preparing for “the worst” tax outcome.
- GRATs - If otherwise under consideration, look at funding before year end
- Installment Sales – Likewise, if under consideration, look at the transaction more carefully before year end
- Grantor trusts
  - Evaluate now where you want highly appreciated assets to reside across the family balance sheet (e.g., If Biden built-in-gain tax comes to pass)
  - If trusts are not grantor trusts, look now at the pros and cons of making them so before year end

Exhibit A – Hedge Funds

If we assume 10% gross return, 1% fee, 15% net incentive, .40% other costs, and 100% taxable turnover and all of it being long term in nature, you see below how a long-long short manager is impacted even if gains are long term in nature. A taxable turnover number of 100% is unrealistic, as is 100% of that turnover being long term in nature. It is offered to illustrate a point: keeping gains long term in nature, alone, is no longer enough for an active manager to claim he or she is tax efficient.

Exhibit B – Value of Tax Loss Harvesting

Current Tax Law

Biden Tax Proposal – Taxpayers with taxable income > than $1,000,000

The tax loss numbers are estimates. They should not be relied upon in making any decision. Please read footnote one (Aperio article) for discussion of how the Biden tax proposal impacts tax loss harvesting.

[1] If you aren’t clear on what a separate account equity index is and how it differs from a retail index fund (or exchange-traded fund), I encourage you to read this piece, https://www.mraassociates.com/do-tax-harvesting-solutions-deserve-a-place-in-your-passive-or-active-portfolio, and the excellent recent piece by Aperio Group, https://www.aperiogroup.com/blogs/impact-of-bidens-capital-gains-proposal-on-the-performance-of-loss-harvesting-strategies.

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Jul 21 2020

Retirement Plan Industry Update – Q2 2020

July 21, 2020

Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®

To view and download a PDF of this commentary, click here.

Coronavirus Aid, Relief, and Economic Security Act (CARES) - Update

On March 27, 2020, Congress overwhelmingly passed, and the President signed, the CARES Act. This fiscal stimulus package was designed to help businesses and families get thorough the unprecedented impact of the coronavirus (COVID-19). The Act also provided enhanced distribution and loan options for affected retirement plan participants.

Following the original guidance on who met the criteria of a “qualified individual,” the IRS issued additional guidance which clarified and expanded the list of who can qualify for taking a coronavirus-related distribution and/or loan. Bolded below are the changes to the original guidance:

Is diagnosed with COVID-19 by a CDC-approved test or whose spouse or dependent was so diagnosed, or
Due to COVID-19, experiences adverse financial consequences or whose spouse or member of the household experiences adverse financial consequences as a result of:
- Being quarantined, furloughed, laid off, or having work hours reduced
- Being unable to work due to lack of childcare
- Having a reduction in pay (or self-employment income)
- Having a job offer rescinded or start date for a job delayed
- Closing or reducing of hours of a business that one owns or operates
- Other factors determined by the Treasury Department

* A member of the individual’s household is someone who shares the individual’s principal residence.

(IRS, 2020)

Retirement Plan Participants Remain Calm During the Recent Stock Market Volatility and Impact of COVID-19

Portfolio Evaluations, Inc. surveyed a number of leading recordkeepers and found that 70% of plan sponsors adopted the coronavirus related distribution (CRD) provision, allowing “qualified individuals” to take a distribution of up to $100,000 of their vested account balance from their retirement plan. It reported that 47% of plan sponsors adopted the coronavirus related loan (CRL) provision that allows a participant to borrow up to $100,000. Portfolio Evaluations, Inc. also found that that the majority of plan sponsors (71%) are allowing participants to suspend their loan payments through the end of 2020.

T. Rowe Price reported that participant usage of CRDs was very low, with an average of 1.7% of participants initiating a distribution. It reported that industries hardest hit by COVID-19 (e.g., leisure and hospitality, retail trade, transportation) saw the largest usage, ranging from 3–7% of participants taking a CRD.

T. Rowe Price reported that only 1.2% of participants have taken a CRL.

In recently released research, The CARES ACT: One Month Later, Vanguard reported that only 0.9% of participants had initiated a CRD and less than 0.1% of participants initiated a loan based on the expanded loan limits. Vanguard did report that only 2% of participants with an existing loan requested to delay repayments for a year.

(Portfolio Evaluations, Inc., 2020) (The Vanguard Group, Inc., 2020)

Department of Labor Provides a Safe Harbor for Electronic Disclosure

On July 27, 2020, the Department of Labor’s (DOL) safe harbor for electronic disclosure rule goes into effect. Historically, plan sponsors have been required to provide hard copies of many disclosure notices to all eligible participants annually.

If certain conditions are met, electronic delivery can become the default.

HOW IT WORKS

The plan sponsor collects email addresses for all eligible plan participants.

Electronic addresses can be employer provided if used for other employment related purposes.

The plan sponsor (or designee) sends an initial paper notice containing required information.

The notice must be individualized and include the electronic address for each recipient.
The safe harbor permits two methods for electronic delivery:
Direct delivery by email: After sending the initial paper notice, covered documents can be sent directly by email or smart phone to eligible participants via an attachment or in the content.
Notice and access on a website: After sending an initial paper notice, covered documents can be posted on a website. In order to post required disclosures to a website, a notice of internet availability (NOIA) must be furnished for each covered document and must be sent to the electronic address identified in the initial paper notice. Each required notice posted on the website must be maintained on the website for one year or until superseded.

Covered documents include:

Summary plan description (SPD)
Participant disclosure notices – safe harbor, QDIA, auto enrollment, participant fee disclosures
Fund action notices

PARTICIPANT PROTECTIONS

Participants must be notified of their right to receive paper delivery of the individual notices at no cost
The plan sponsor (or designee) must monitor receipt of the NOIA and take steps to remedy “bounce backs” or switch to paper delivery
- If employer-provided electronic addresses are used, the plan sponsor must take steps to update the electronic address for terminated participants or switch to paper delivery

(Fidelity Investments Institutional Operations Company LLC, 2020)

The Department of Labor Issues New Guidance on ESG Investments

On June 23, 2020, the DOL issued a 62-page document clarifying its position on offering socially responsible investments in Employee Retirement Income and Security Act (ERISA) covered retirement plans. A summary of the proposed rule states that the objective of the document is “to confirm that ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action”. The Secretary of Labor, Eugene Scalia added that “private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan. Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

In short, the proposed changes will continue to require plan fiduciaries to evaluate an investment solely on its expected risk-adjusted returns and not on “unrelated objectives” (e.g., social causes) that may sacrifice investment returns and/or add additional risk. The proposed rule would permit an investment option that screened for environment, social, and governance (ESG) if the fiduciary used only “objective risk-return criteria” and documented compliance with that requirement.

The deadline for comments on the proposed rule is July 30, 2020.

(Manganaro, 2020) (Employee Benefits Security Administration – Federal Register, 2020)

Private Equity Investments in Defined Contribution Retirement Plans

On June 30, 2020, in response to an inquiry from Pantheon Ventures, the DOL issued an information letter confirming that ERISA does not prohibit participant-directed retirement plans (e.g., 401(k), 403(b)) from offering asset allocation funds (e.g., target date, target risk, balanced funds) that included a private equity allocation. The DOL clearly states that the plan fiduciaries should be aware of some of the differences between private and public equity investments, including the complex nature of a private equity investment, lack of liquidity, fee structure, and difficulty in valuing the investments.

The DOL provides an outline that responsible plan fiduciaries should consider when evaluating the risks and benefits of having a private equity investment in an asset allocated option, including:

Do the fiduciaries have the skill, knowledge, and experience to evaluate the fund?
Do the investment managers of the fund have the capabilities, experience, and stability to manage the asset allocation fund that includes private equity?
How does the inclusion of private equity impact the fund’s expected return net of fees?
How does the fund handle valuation issues?
Does the fund provide liquidity to permit participants to initiate distributions?
Is the fund net expense ratio reasonable?

(Campagna, 2020)

Works Cited

IRS. (June 19, 2020). Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act – IRS Notice 2020-50. Retrieved on July 13, 2020 from https://www.irs.gov/pub/irs-drop/n-20-50.pdf

Portfolio Evaluations, Inc. (July 14, 2020). DC Industry Insights: Adoption and Usage of CARES Act Provision. Retrieved on July 20, 2020 from https://porteval.com/resource-center/adoption-and-usage-of-cares-act-provision/

The Vanguard Group, Inc. (July 2, 2020). The CARES Act: One Month Later. Retrieved on July 20, 2020 from https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvComCARESActOneMonth

Fidelity Investments Institutional Operations Company LLC. (June 11, 2020). Department of Labor: Electronic Disclosure Safe Harbor for Retirement Plans. Retrieved July 20, 2020 from https://nb.fidelity.com/bin-public/070_NB_PreLogin_Pages/documents/email/MECB2B/W371143-05JUN20_DOL.pdf?ccsource=em_b2b_oft_md_adv_W371344-05JUN20_061620_ruleSummary_link&ccvid=0035000000TdmLtAAJ

Manganaro, J. (June 24, 2020). DOL Proposes Stricter Rules About ESG Investing in Retirement Plans. Retrieved July 20, 2020 from https://www.planadviser.com/dol-proposes-stricter-rules-esg-investing-retirement-plans/

Employee Benefits Security Administration – Federal Register. (June 30, 2020). Financial Factors in Selecting Plan Investments. Retrieved July 20, 2020 from https://www.federalregister.gov/documents/2020/06/30/2020-13705/financial-factors-in-selecting-plan-investments

Campagna, L. (June 3, 2020). Information Letter 06-03-2020. Retrieved on July 20, 2020 from https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020

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Jul 06 2020

2020 Election Year Planning: A Window of Opportunity

July 6, 2020

Written by Jennifer Arps, CFP®, Senior Client Advisor and Mary Ann Hennelly-Favata, CFP®, Senior Client Advisor

To view and download a PDF of this commentary, click here.

Uncertainty is pervasive these days. However, we are all familiar with Benjamin Franklin’s quote, “…nothing can be said to be certain, except death and taxes.”

With the 2017 tax law changes in the Tax Cuts and Jobs Act (TCJA), the amount of assets that someone can leave to his/her heirs without incurring estate tax increased significantly. Thus, individuals with an estate less than $11.4M may not be worried about incurring estate taxes at present. However, this generous lifetime exclusion is due to sunset in 2025 and, absent Congressional action, it will revert to approximately $6.8M ($5.49M inflation adjusted for eight years) effective January 1, 2026.

In today’s political environment, perhaps the one thing we can all agree on is the unpredictability of what will come next. It is conceivable that a change in national leadership could accelerate the terms under the sunset provision, and new legislation could reduce the estate and gift tax exemptions as quickly as they were increased.

To illustrate the impact of the estate tax sunset provision, an unmarried individual with an estate of $11.4M who has made no prior gifts and leaves all assets to his/her children on December 31, 2025, under the current law would have $0 estimated federal estate tax. The same unmarried individual leaving all $11.4M to children on January 1, 2026 would pay $1.84M in estate tax, and the children would share the after-tax remaining amount of $9.56M.

Considering the pending sunset provisions, we encourage all individuals who might have taxable estates in 2026 to proactively review their estate plans and formulate contingency plans. There is an opportunity in the short term, or over a period of years, to efficiently manage the use of the exemption amount currently available.

It is generally advisable to look at your estate planning documents every five years to ensure that your plan still works as you expected in view of changing tax laws and evolving family situations. The SECURE Act in December 2019 made sweeping changes to the beneficiary distribution rules for IRAs and qualified plans. It is especially important to review the beneficiary designations you have on file for your IRA. If you have named a trust as the beneficiary of your IRA, changes may be warranted to your trust document to ensure that required payouts can be tax-efficiently managed.

Many estate plans in the 1990s or 2000s relied on mechanisms such as an A/B or QTIP trust to utilize both spouses’ estate tax exemptions. However, with the federal use of “portability” of one spouse’s unused exemption to the other spouse, the terms in those prior plans may not be the best option, considering current federal and state tax laws.

A current benefit of the existing federal estate tax law is the “date of death step-up” in tax cost basis of appreciated property included in one’s estate. Conversely, assets gifted prior to someone’s death retain their tax cost basis, and the gift recipient pays income tax on all the appreciation when the asset is sold. When weighing whether to gift assets during one’s lifetime versus gifting assets at death, many aspects must be considered. The amount of gift appreciation, the time horizon of the donor’s life expectancy, the timing of the recipient’s desire to sell the asset, as well as current and estimated future income tax rates all factor into the equation. A numerical analysis is helpful in quantifying the benefits and weighing the different factors. When analyzing such considerations, it is paramount to understand an individual’s entire balance sheet, as well as the tax cost basis of each asset. What may be the right decision for one family could be completely different for another family.

Estate Tax Management Examples

If you have a large estate, now is the time to consider locking in the high exclusion amount before it could be reduced. Many have wondered what would happen if they utilized their high exclusion amount before it reverted to a lower amount. The IRS has confirmed that anyone who uses his/her lifetime exclusion after 2017, and prior to a new tax law change, is not at risk of a “claw back”.

Most individuals are hesitant to gift away assets that they might need in the future. There are strategies to explore which could allow a married couple to retain access to assets that one spouse gifted away. A spousal lifetime access trust (aka SLAT) created for the benefit of a donor’s spouse and children could be funded using a donor’s lifetime exclusion. This would allow a spouse to have access to the assets as a source of cash flow to support the couple’s lifestyle. This strategy works best with couples in long-term happy marriages.

An individual who does not currently have a taxable estate might be concerned that a particular asset could increase significantly over time, thereby creating a taxable estate in the future. A decent sized portfolio with a reasonable growth rate could grow into a taxable estate in the future. There are planning strategies that could be utilized to transfer “asset appreciation” out of your estate while utilizing little-to-no lifetime exclusions. A grantor retained annuity trust (aka GRAT) is a powerful tool that is best utilized in low interest rate environments like today. Assets are transferred by a donor to a GRAT in exchange for an annuity payment. The annuity payment is equal to the value of the asset transferred to the trust plus an IRS-prescribed interest rate return. The IRS-prescribed interest rate as of July 2020 is at a historically low rate of .6%. If the assets transferred into the GRAT appreciate at a rate greater than .6% (in this case), the excess appreciation grows outside of the taxable estate, and it is effectively transferred to beneficiaries without estate tax. The donor would have to survive the annuity term for this to be successful.

Integrated Income Tax Planning

It is widely anticipated that income tax rates could go up across the board with a change in administration. If you do not have estate taxes to worry about, you should be considering income tax planning in your estate plan. One opportunity is to plan for a “double income tax basis step-up” at the passing of each spouse on trust assets.

IRAs, 401ks, and other retirement plan assets have impending income tax liabilities due from you and/or your heirs. While the estate tax is susceptible to political changes, the income tax is even more so, and retirement assets are subject to both taxes.

The implementation of the SECURE Act (Setting Every Community Up for Retirement Enhancement) in December of 2019 greatly reduced the IRA stretch provisions. Inherited IRA beneficiaries are no longer able to defer required minimum distributions (RMDs) over their lifespans. The mandatory payout period for an inherited IRA has been curtailed to a maximum of 10 years, significantly shortening the deferral period. Therefore, this is a good time to consider a potential IRA conversion to a Roth IRA. Roth IRAs grow income tax free, and the original IRA owner does not have RMDs.

The CARES Act (Coronavirus Aid, Relief, and Economic Security), which passed in March of 2020, suspended the need for IRA RMDs for calendar year 2020. With lower mandated income requirements, an individual might opt to convert (some or all) IRA assets to a Roth IRA. This could be additionally advantageous if one expects income tax rates to increase in the future. Another consideration for individuals who are likely to have a taxable estate is the benefit of paying the income tax on the IRA Roth conversion. The income tax payment on the Roth conversion would reduce the assets in your taxable estate and, thus, reduce estate taxes.

No planning should be done in a vacuum. If your estate plan includes some level of charitable giving, an IRA asset is an ideal asset to gift to charity. Gifting IRA assets (pre-tax money) could save on income taxes and estate taxes. Depending upon your charitable intent and the size of your IRA, you might consider gifting some of your IRA assets to charity and converting some of your IRA to a Roth IRA. There are many options to consider.

Now is the time for you to prepare before any potential tax law changes are implemented. To properly assess your options, you will need an updated balance sheet. Schedule meetings with your trusted professionals (attorney, tax advisor, and wealth manager) to review your existing estate plan in concert with your updated balance sheet. Address recent tax law changes as well as anticipated future changes to determine if there are strategic steps that you should make while the opportunity exists.

Deciding on the implementation of an estate or gift planning strategy includes integration with your overall financial plan. The appropriate plan efficiently balances the funding of your lifestyle, managing your tax liabilities, and planning your family’s legacy. MRA offers a variety of wealth management services, which we are happy to discuss in more depth if you so desire.

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Apr 22 2020

Retirement Plan Industry Update – Q1 2020

April 22, 2020

Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®

The CARES Act: Relief for Retirement Plan Participants

On March 27, 2020 Congress overwhelmingly passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This fiscal stimulus package is designed to help businesses and families get through the unprecedented impact of the coronavirus (COVID-19). The act also provides enhanced distribution and loan options for affected retirement plan participants.

Coronavirus-Related Distributions

The CARES Act allows an eligible participant from a 401(k) plan (or 403(b) plan) to request a penalty-free distribution of up to $100,000 for qualifying coronavirus-related reasons¹. Distributions processed anytime in 2020 can qualify. The following is a summary of the enhanced provisions:

There are no age limitations to be eligible.
The 10% penalty on early withdrawals is waived.
The 20% federal tax withholding requirement at time of distribution is waived.
The distribution if not repaid within three years, is taxable income, but individuals can spread their tax liability in equal installments over a period of up to three years.

The table below compares a distribution for an individual prior to 2020 to the CARES Act provisions:

Increased Loan Limits and Payment Postponement

The CARES Act expands the availability of plan loans and provides payment relief for qualifying coronavirus-related reasons¹.

A participant can take a loan for up to $100,000 or 100% of his or her vested balance.
For new and existing loans, payments that are otherwise due between March 27, 2020 and December 31, 2020 can be postponed for up to a year. Interest continues to accrue, but the postponement can extend the otherwise applicable five-year cap on repayment.

Responsibilities for Tracking

Coronavirus-related distributions and expanded loans are available as pre-approved transactions that are self-certified by participants.
Plan sponsors are not required to review or approve these transactions.

Implementation and Plan Amendments

The CARES Act provisions highlighted above are optional. For those plan sponsors who choose to adopt these provisions, plan amendments are required by the end of the 2022 plan year.

¹ Qualifying coronavirus-related reasons include:

The participant must be diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; or
The participant’s spouse or dependent must be diagnosed with such virus or disease by a test approved by the Centers for Disease Control and Prevention; or
The participant must experience adverse financial consequences as a result of being quarantined, being furloughed, laid off, or having work hours reduced due to such virus disease, or being unable to work due to lack of childcare due to such virus or disease.

(Hoefer & Reay, 2020)

Retirement Plan Participants Remain Calm During the Recent Volatility of the Stock Market

According to a recent Morningstar study of more than 635,000 retirement plan participants, only 5.6% of participants changed their asset allocation during the first quarter of 2020. This is remarkable considering that the S&P 500 index was down 31% at one point in March.

Morningstar reported that the median 401(k) plan balance was down 11.2% during the first quarter. Morningstar also reported that 2.4% of plan participants in target date funds made an asset allocation change and 10.8% of participants “self-directed investors” made a change.

Empower Retirement, a leading retirement plan recordkeeper, reported that only 16% of plan participants checked their balances over the 30 days starting on February 24^th.

(Steverman, 2020)

Works Cited

Hoefer, D. & Reay, L. (2020). DWC News Update - The CARES Act: Federal Coronavirus Relief. Retrieved on April 21, 2020 from https://www.dwc401k.com/blog/cares-act-federal-coronavirus-relief-dwc-news-update

Steverman, B. (2020). U.S. Retirement Savers Stayed Calm While Stock Markets Plunged. Retrieved on April 14, 2020 from https://www.bloomberg.com/news/articles/2020-04-16/u-s-retirement-savers-stayed-calm-while-stock-markets-plunged

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Apr 16 2020

COVID-19 Security Awareness

April 17, 2020

Written by Zack Feldman, Technology Manager and Alberto Zazueta, Technology Intern

In what has become an all too typical scenario, a new source of money creates a new opportunity for scammers to cheat people. Due to the COVID-19 pandemic, malicious scammers are on the rise. A recent opportunity arises from the Economic Impact Payments to be distributed from the IRS to eligible individuals. These are the $1,200 per eligible taxpayer plus $500 per eligible dependent payments, authorized to be paid under the recently passed CARES Act.

Many of the scams promise individuals expedited payment if they provide their banking information. They can contact you in many ways, including through text messages, email, and phone calls. Our intention with this commentary is to share with you some information that can be helpful when trying to filter out the top scams around COVID-19.

What types of scams should you look out for? Below, we have compiled a list of the most frequent COVID-19 scams today.

Fraudulent Text Messages

Scam text messages come in many forms, so it is important to stay vigilant. For example, you may receive a text that states “Free Netflix”, “Goodwill Government Payments”, or “Mandatory Online COVID-19 Testing”. The common theme is each of these messages will usually contain some sort of link in them, prompting you to click. DO NOT click on the links. Be sure to analyze all links sent via text. Below is one example.

(Bisson, 2020)

If you closely analyze the link, you will see that it is not from a valid Netflix site. Netflix.com is the proper site. Most of these messages will come from unknown numbers; however, some can be sent from people in your contact list. In either case, the best course of action is to not click on the link and instead go directly to the website to see if that offer is available to you.

Fraudulent Emails

Emails are another channel with which scams are sent. The theme and content in the emails are very similar to fraudulent text messages. The fake email will offer some sort of incentive to click the link, or it may provide fake news/alarming content in general.

Things To Check

Senders email: Check that the sender is a trusted sender by verifying the sender’s email address. You can do this in many ways but, in most cases, you can hover over the sender’s name on your computer or by tapping the name if on mobile.
Signature: Check that the email signature matches a prior email received from the sender.
Grammar: A vast majority of phishing emails contain spelling, punctuation, and grammar errors.
Links: Look out for the links to websites or downloads. Hover over the link without clicking it. This should tell you exactly where it will send you if you click it. Before you click, also double check that the site is a legitimate website. For example, mraassociates.com might have an extra letter or a missing letter and look like this: mraasociates.com. It may also have .net instead of .com. These differences inform you that the email is fraudulent.

If anything seems incorrect, count it as a red flag, and do not interact with the email. Best practice is to immediately delete the email from your inbox.

Fraudulent Phone Calls

Fraudulent phone calls have also been circulating. Do not give out any personal information over the phone. Keep a lookout for robotic or automated phone calls. Automated phone calls will urge you to press a number on your keypad in order to interact or be transferred to a human representative. It is best not to interact with the call or representatives on the call in any way.

Applications

A series of fraudulent mobile/computer applications have also been distributed. Typically, the applications come in the form of COVID-19 case tracking apps. Some apps have gone as far as to claim that downloading the application will prevent you from getting sick by using some sort of anti-virus software. None of these are real.

IRS Communication Specifically

Remember, the IRS will never call, text, email, or contact you on social media with a request for personal or bank account information, to demand immediate payment using a credit or debit card, or with threats of law enforcement action. Do not respond if you receive one of these communications.

For more information you can visit the following websites:

https://www.irs.gov/newsroom/tax-scams-consumer-alerts

https://www.irs.gov/newsroom/avoid-scams-know-the-facts-on-how-the-irs-contacts-taxpayers

https://www.irs.gov/newsroom/suspicious-e-mails-and-identity-theft

As always, if you have any questions or concerns please reach out to one of your MRA team members.

Works Cited

Bisson, D (March 30, 2020). COVID-19 Scam Roundup – March 30, 2020. Retrieved on April 13, 2020 from https://www.tripwire.com/state-of-security/security-awareness/covid-19-scam-roundup-week-of-3-23-20/

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