22 July 2018

Complexity Coming to Retirement Investing

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2015 will be the year of confusion for many when it comes to determining where they should save for their retirement. New plans, products and proposals mean that we are likely to see massive changes to our tax-advantaged retirement system in the future, whether it be from state governments or federal. The president’s State of the Union address and budget include several proposals for change. Over the next year, new accounts, proposed tax changes will likely cause confusion over where savers should put their retirement dollars.

While many of the new proposals worth applauding, the majority of what is coming and proposed for retirement investors will add to the current confusion of how to finance a retirement. Below are a few of the good, the bad, and the disappointing new plans, proposals, and changes over the last year:

 The Good 

  • Auto-IRAs. IRAs and Roth IRAs provide individuals with maximum flexibility and choice over their retirement savings. While many pundits are pushing for less choice in plans, there are often target-date funds that are appropriate (if not ideal) for those who do not want to choose their own investment mix.
  • After-tax rollovers to Roth IRAs. For years, what to do with after-tax contributions to employer plans was a gray area of planning. In 2014 the IRS blessed the direct rollover of after-tax contributions.

 

The Bad 

  • State-sponsored 401(k) plans. Many states are looking at options to sponsor 401(k) plans, and unfortunately the plans so far seem to place the 401(k) product ahead of the need for financial advice. These plans will require millions of dollars for attorneys, investment committees, and staff, rather than outsourcing these functions to established investment firms.
  • Elimination of tax benefits. Proposals to eliminate stretch IRA benefits, backdoor Roth IRA conversions, Net Unrealized Appreciation (NUA) of company stock, and the exemption of required minimum distributions on Roth IRAs are not eliminating loopholes, but add new taxes on retirement savers.


The Disappointing   

  • No current proposal simplifies our current system, makes retirement contribution amounts equal for all Americans, or fixes the nuances with employer-based retirement accounts that disallow full contributions to part-time, seasonal, or laid-off workers.
  • While there are many more solutions being proposed to fix the retirement savings crisis, the financial planning process has yet to even be proposed. The retirement savings problem isn’t one of products, it is a problem of a lack of personalized advice and planning. So far every solution I have seen makes no provision for working with an advisor (that is, every plan except for some traditional 401(k) and 403(b) plans).

While automatic enrollment with opt-out provisions like the auto-IRA can help savings rates, many who do not have a financial plan cash their accounts out as soon as they are able, often for no good financial reason.

Click here to access the full article on Forbes.com

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