Saturday, January 14, 2017

A Proposal: One Defined Contribution Account (NIRA) To Rule Them All

As I've written before, some regulation - such as the DOL fiduciary rule - is simple, elegant and possesses substantial benefits not only for individual Americans but for corporations and the U.S. economy.

But, at times, undue complexity reigns in our statutory law and the regulations that follow. Often this is due to a mishmash of legislation adopted over time, amplified by the regulations that follow.

A perfect example is defined contribution plans. Look at what we have today for defined contribution plans ... 401(k) plans, 403(b) plans, 457 plans, Thrift Savings Plan, SIMPLE 401(k), SIMPLE IRAs, Individual IRAs (traditional), SEP IRAs, Keoughs, and many more.

Each type of plan is similar, as to its ability to contribute funds to a "retirement account" and receive a tax deduction for same, ongoing tax deferral, followed by required minimum distributions. Yet, each plan also has its unique features. Often these create tax traps for the unwary.

And, at times, they create unnecessary administrative costs for employers. An example is "plan administration" fees - often thousands of dollars a year, at a minimum, even for small plans.


Call it the "New Individual Retirement Account" or "New IRA" or "NIRA."

All existing defined contribution accounts to be rolled over into NIRAs within 24 months of enactment of legislation.

Who can establish?
   - Any person with earned income, or who desires rollover into a NIRA.
       - One-page form to establish.
   - A company, on behalf of its employees. One-page form to "adopt a NIRA for employees."
       - No annual filings, tax or otherwise.
       - Plan sponsor is fiduciary. Any provider of recommendations to plan sponsor must be a fiduciary, as well.

Corporate stock permitted in NIRAs?
   - Yes, but not to exceed 15% in value of any participant's account.
   - If corporate stock permitted and it exceeds 15% in value, participant has 6 months to reduce down to 15% level.
   - ESOPs not permitted any longer.

Who is custodian of the NIRA accounts?
   - Bank or brokerage firm (qualification standards exist)
   - Selected by employer, if the employer desires
   - Otherwise, selected by employee

Payroll deduction:
   - Must be permitted, by all employers (large or small)
   - Auto-enrollment, unless employee "opts out"
   - Auto-escalation, unless employee "opts out," wherein 1/2 of any wage/salary increase is dedicated to increasing the contribution to the NIRA account (employee may select 0% to 100% of wage/salary increases to go to NIRA account)
   - Default investment option is age-appropriate target date fund (employee may select other investments)

Advice providers to NIRAs as to investment recommendations - requirements:
   - Advice-providers must always possess fiduciary status. (No waivers, disclaimers.)
        - Fiduciary status, once acquired for NIRA, extends to all accounts of the client upon which advice is provided (qualified or non-qualified accounts)
   - Prudent investor rule applies to all advice provided.
   - Fees are paid directly by client. Must be reasonable fee. No commissions or other third-party compensation of any kind permitted to be paid to fiduciary advisers or their firms. Fee methods include:
        - Fixed fee for discrete (one-time) advice
        - Subscription fees (monthly)
        - Annual flat fee
        - Asset management fee (AUM fees)
   - Advisory fees can be deducted directly from the NIRA account, with client consent. Includes fees paid for investment management advice, as well as for financial planning advice.
   - Self-directed NIRAs permitted, in which no advice is provided. Information on products is permitted, with disclaimers that no advice is provided. General education about investments and financial planning is permitted, but no specific investment recommendations may be provided, nor may specific asset allocation recommendations be provided (other than through the use of target-date funds)
   - No proprietary products are permitted to be recommended by advice providers.

  - 100% immediate, for both employer and employee contributions.

Employer match?
  - Whatever the employer wants to do, maximum of 25% of salary.
  - Can do zero.
  - Can vary from year to year, based on profitability.
  - Can do through "bonuses" each year, as opposed to each pay period.

Maximum contribution?
  - Up to lesser of: (a) 35% of wage/salary income that year; and (b) $60,000 a year, to be adjusted for inflation.
  - No "nondeductible contributions" permitted

Ability to take loans against?
  - None. See loosening of early distribution provisions, below.

Early distributions permitted without any penalty?
  - 4% maximum per year, at any age. Regardless of whether working or not working.
  - May "turn on" and "turn off" early distributions at any time.
  - Distributions above 4% permitted, but subject to 5% additional tax (penalty) on top of regular income tax due for such distribution.

Required minimum distributions for owner:
  - Starting the year you turn age 75, and each year thereafter: 4% per year minimum, no maximum
  - If owner continues to work, the 4% per year minimum may be reduced by the amount of the salary/wage income that year.
  - Alternatively, at age 55 or thereafter, a NIRA owner - regardless of whether employment continues or not - may annuitize all or a portion of the NIRA over the owner's lifetime, or (if married) over lifetime of owner and owner's spouse (with ability to designate that spouse receives a lesser percentage annuity payment, or 100% of the primary NIRA's benefit amount). Any amount of the NIRA not annuitized remains subject to new RMD rules.

Required minimum distributions for heirs:
  - Spouse may rollover into his/her own NIRA, if done within 12 months of death of the IRA owner.
  - If spouse does not rollover, must be distributed within 5 years of death of NIRA owner. At any time during that period of time.
  - For all other heirs, must be distributed all within 5 years of death of NIRA owner. Up to heir when this is done.
  - If not an individual heir (such as a charity), must distribute all within 12 months of death of the NIRA owner.
  - Inherited NIRAs are subject to claims of creditors.
  - Use of irrevocable trusts for distributions of inherited NIRAs permitted, but distributions to same must all occur within 5 years of death of NIRA owner.

Protection from creditor claims:
  - For U.S. bankruptcy law purposes, up to $2,000,000 total for all accounts (to be adjusted for inflation), regardless of whether "contributory" or "rollover"
  - For state law purposes (outside of bankruptcy context)), exemptions are dependent upon state law

Roth IRA option:
  - None. U.S. Treasury loses far too much money by providing the Roth IRA tax benefit. We need to "balance the budget."
  - Existing Roth IRAs grandfathered during life of participant, but must be fully distributed to heirs within 12 months of death of the participant.

Transfers (rollovers):
  - Permitted at any time, into any NIRA account established by NIRA owner (or by NIRA owner's employer)
  - No limits on how many transfers/rollovers may be done in any year.
  - Must be done via direct custodian-to-custodian transfers
      - Custodian-to-custodian transfers, electronically; or
      - If check issued by prior custodian, must be payable to new custodian

Fee disclosures:
  - Required quarterly.
  - Each investment must have ongoing annual fees estimated, and provided in the statement for the account. Such as in one-line summary following the listing of each specific investment.'
  - Since no third-party compensation to brokers, custodians, permitted, there will be no commissions, payment for shelf space, soft dollar compensation, etc. to disclose.
  - The annual expense ratio must include an estimate of the anticipated brokerage costs for transactions within the mutual fund or ETF or other pooled investment. And anticipated (estimated) securities lending revenue must also be included in the annual expense ratio.
  - Advisory fees must also be included - either in custodial statement, or in separate statement, quarterly.
  - Fee disclosures must include this statement (or something similar): "Academic research has revealed that, for highly similar investments, higher fees and costs translate to lower returns for investors. You should always ascertain if a lower-fee-and-cost investment option is available, as to investments that are substantially similar to each other."

Plan administrator fees.
  - None, because plan administrators are no longer needed.

Recordkeeper and custodian fees:
  - Per account basis, only. Flat fee per year, per account. No percentage fees.
  - May be deducted from the account, or paid by the employer (if an employer-sponsored NIRA)
  - Fee must be disclosed on custodial statements (quarterly minimum), or on separate quarterly document furnished by record keeper
  - Negotiated by the account owner, or in the case of an employer-sponsored NIRA by the employer (aided by the investment adviser, if one exists)


This proposal for "New IRAs" or "NIRAs" will substantially lower the fees and costs of employer-associated retirement plans. It will eliminate tax traps for the unwary. It will prevent employees from taking loans from their NIRA accounts except when absolutely necessary. It will protect employers from undue liability, since only fiduciary investment advisers may provide recommendations to employers, and these fiduciary advisers can be held to account.

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