Compliance April 8, 2016

FINRA Releases Q&A About IRA Distributions

FINRA has published an investor alert about required minimum distributions in traditional IRAs.
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The Financial Industry Regulatory Authority (FINRA) has issued an investor alert that answers common questions about advisers and their clients have about required minimum distributions (RMDs) in traditional IRAs. 

The publication explains the amounts individuals must withdraw annually from a traditional retirement savings plan once they reach the mandatory age for making withdrawals. For traditional IRAs, the IRS says individuals must take their first RMD by April 1 of the year following the calendar year in which they reach 70.5 years of age.

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“Our alert is designed to provide basic information and answer a number of vital questions about RMDs,” says Gerri Walsh, senior VP of Investor Education at FINRA. “Making a mistake can result in tax penalties, so it’s important to be informed.”

The alert answers questions about how to calculate RMDs, the reporting obligations of brokerage firms and what to do in the event of a mistake, among other issues. 

The full Q&A is available here.

Data & Research April 7, 2016

Biases May Lead to Savings Procrastination

People with present bias may delay saving for the future, while those with exponential-growth bias may underestimate the returns on savings, a study finds.
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Just how much do biases affect retirement savings? According to a study, “The Role of Time Preferences and Exponential-Growth Bias in Retirement Savings,” present bias and exponential-growth bias in particular can wreak havoc on future funds.

Present bias is the tendency to focus on the present rather than the future; and exponential-growth bias is the tendency to neglect compounding investment returns. People who have present bias may intend to save more for the future but never do, or they may procrastinate enrolling in a tax-deferred savings plan. A person with exponential-growth bias tends to underestimate the returns on savings and the costs of having debt. Those who are unaware of these biases tend to save less money for retirement, the study found.

If biases are eliminated, however, it can result in a retirement savings increase anywhere from 12% to 70%.

The researchers from Stanford University, the London School of Economics and Political Science, the University of Minnesota and Claremont Graduate University tested the association between a direct measure of self-awareness about these biases and the economic outcomes of them.

As part of the study, they asked respondents questions including whether (and when) they would be willing to complete an hour of paperwork to change their retirement plan based on their company’s new matching contribution (they would also get a $50 bonus for completing the paperwork).

Researchers found that if they gave a deadline for completing the paperwork, it increased the chances that respondents would change their contributions by 8.3 percentage points. If they didn’t give a deadline and just provided a cash incentive, the chances only increased by 4.3 percentage points.

The survey also asked questions about the value of an asset. For example, what would the value of an asset be after 20 periods if it experienced growth at an interest rate of 10% each period? The study found that overconfidence regarding exponential estimation has an additional negative effect on retirement savings.

Present bias and exponential-growth bias therefore have a profound effect on an individual’s retirement savings, the study concluded.

The full study report can be downloaded here.

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