IRS Proposes Changes to Tables Used in RMD Calculations

The purpose of any such updates would be to increase the effectiveness of tax-favored retirement programs by allowing retirees to retain sufficient retirement savings in these programs for their later years, the IRS says.

The IRS has issued a notice of proposed rulemaking providing guidance relating to the life expectancy and distribution period tables that are used to calculate required minimum distributions (RMDs) from qualified retirement plans, individual retirement accounts (IRAs) and annuities, and certain other tax-favored employer-provided retirement arrangements.

An Executive Order signed on August 31, 2018, directed the Secretary of the Treasury to examine the life expectancy and distribution period tables in the regulations on RMDs from retirement plans and determine whether they should be updated to reflect current mortality data and whether such updates should be made annually or on another periodic basis. The purpose of any such updates would be to increase the effectiveness of tax-favored retirement programs by allowing retirees to retain sufficient retirement savings in these programs for their later years.

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The life expectancy tables and applicable distribution period tables in the proposed regulations reflect longer life expectancies than the tables in the existing regulations. For example, a 70-year old IRA owner who uses the Uniform Lifetime Table to calculate RMDs must use a life expectancy of 27.4 years under the existing regulations. Using the Uniform Lifetime Table set forth in the proposed regulations, this IRA owner would use a life expectancy of 29.1 years to calculate RMDs.

The life expectancy and distribution period tables in the proposed regulations have been developed based on mortality rates for 2021. These mortality rates were derived by applying mortality improvement through 2021 to the mortality rates from the experience tables used to develop the 2012 Individual Annuity Mortality tables (which are the most recent individual annuity mortality tables).

The life expectancy tables and Uniform Lifetime Table under these proposed regulations would apply for distribution calendar years beginning on or after January1, 2021. Thus, for example, for an individual who attains age 70½ during 2020 (so that the RMD for the distribution calendar year 2020 is due April 1, 2021), the final regulations would not apply to the RMD for the individual’s 2020 distribution calendar year (which is due April 1, 2021), but would apply to the RMD for the individual’s 2021 distribution calendar year (which is due December 31, 2021).

The document includes proposed amendments to the income tax regulations under section 401(a)(9) of the Internal Revenue Code (Code) regarding the requirement to take RMDs from qualified trusts. They also apply with respect to the corresponding requirements for individual retirement accounts and annuities described in section 408(a) and (b), and eligible deferred compensation plans under section 457, as well as section 403(a) and403(b) annuity contracts, custodial accounts and retirement income accounts.

A public hearing is scheduled for January 23, 2020, and the IRS is requesting comments on its proposals. Text of the notice of proposed rulemaking is here.

Fee Compression Is Old News for Recordkeepers, Fund Managers

Fee compression hit recordkeepers first, then asset managers. Advisers are next, experts agree, but they can learn some important lessons from their service provider partners.

Patrick Murphy, CEO of John Hancock Retirement, recently sat down with PLANADVISER for a wide-ranging discussion about the retirement planning and advice industry.

The occasion for the interview was John Hancock’s release of the 2019 Financial Stress Survey, which puts a price tag on workplace financial stress and shows more than half of employees worry at least once a week about personal finances while on the job, causing distraction and loss of productivity.

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During the conversation, Murphy also talked about the role of retirement plan specialist advisers, zooming into the critical and evolving topic of fee compression. In short, he encourages advisers to study the history of recordkeeper fee compression and the significant merger and acquisition (M&A) activity that has characterized the space in recent years. He expects the advisory industry will follow a similar pattern, noting the rush of acquisitions made this year by Hub International as a case in point.

“Advisers today face some similar challenges to recordkeepers,” Murphy says. As a result, they should be “thinking about scaling their services efficiently, finding the best ways to value and communicate their services, and selecting which markets to focus on. The general story in this industry has been that fee compression hit recordkeepers first, then the investment managers, with the move to passive funds and exchange-traded funds. Now, the trend is hitting advisers.”

Plan sponsors’ changing behaviors are making advisers work harder and add more services, Murphy says, leading to a decrease in firms’ net revenue. At the same time, transparency is improving, consumers are becoming more cost-conscious and the advice industry is transitioning to a more traditional professional service model—one that resembles the legal or accounting professions more than a sales-based profession. 

While talking through these issues with advisers, Murphy says, he gets two common questions: “How do we make our lives easier while clients are demanding more and more for the same fee? And, how do we use technology to serve all our customers at scale?” Part of John Hancock’s answer, Murphy says, has been the creation of a new adviser managed account program, built in collaboration with Morningstar.

“Advisers are very excited about this opportunity,” Murphy explains. “Previously, we have offered managed accounts where Morningstar was providing the models or our own internal investment management team was providing models. Now, we are rolling out the ability for advisers to provide the investment models for their retirement plan clients, with the thinking being that they can be tailored for individual plan populations.”

Murphy adds that advisers want to be able to offer such services, but they have neither the expertise nor the resources to develop the required technology infrastructure. “And so, we are working with advisers to create a solution that is very scalable and presents a means for them to cost effectively deliver personalized portfolio services to everyone they want to,” he says. “This is the type of solution that will become increasingly important to advisers’ businesses moving forward, we expect.”

Taking a step back and reflecting on some 30 years of industry experience, Murphy says the future is about “high-value services, not just high-touch.”

“The old way we all grew up talking about this business was about the importance of high-touch services,” he reflects. “Today, we are learning that what really matters is high-value service. Valuable service doesn’t just mean sitting down right in front of somebody to talk about investments once or twice a year. Sure, that’s important in some cases, but it’s not enough.”

Murphy says recordkeepers have learned that they can have an important influence on a participant through well-timed digital outreach and by providing them simple, digitally enabled next steps. He says advisers can and must take the same lessons to heart.

“We must understand that consumer expectations have shifted,” he says. “People aren’t judging their retirement plan experience against other retirement plans. They aren’t judging advisers against one another. No, they are judging the quality of service and the ease of use against entities like Netflix or Google, or the next greatest application on their phone. We all have to adapt to this.”

Lessons from Asset Managers

The recently published fourth quarter 2019 issue of The Cerulli Edge – U.S. Institutional Edition, details the impact of fee compression on asset managers’ risk budgets, pricing structures and product strategies. While not speaking directly to the adviser audience, the report offers some food for thought in terms of how different fund managers are responding to fee compression.

According to Cerulli, during the past three years, the growth of institutional assets under management in passively managed strategies has outpaced those of actively managed options, which is indicative of institutions’ desire to cut costs by paying lower management fees. This has led to many active managers experiencing extensive fee compression, Cerulli finds, and in response, asset managers have implemented various strategies, including more aggressive fee negotiation and internal pricing structure optimization.

“Managers increasingly rely on fee negotiation in order to attract new assets and retain current assets,” explains Chris Swansey, an analyst at Cerulli. “Because many institutions are under pressure to meet challenging investment goals, and most institutional pricing is based on negotiation, they often have an incentive to cut costs by bringing down fees.”

Asset managers employ several different strategies when handling fee negotiations. For large asset managers, the vast majority will employ a pricing committee, which typically includes department heads from the institutional sales, finance, investment and legal teams.

“This kind of structure has the potential to boost synergies between teams, aid in thoughtful decision making, and increase transparency,” Swansey says. “However, these committees can become burdened by the number of discounting discussions, and the process of going through a committee can take longer than some quick pricing negotiation turn-around times.”

Many smaller firms that do not use a committee give their direct sales professionals the flexibility to offer a standard pre-approved discount, Cerulli finds. If a discount is required beyond that limit, the request is escalated to one or two key leaders within the firm.

Like on the advisory side, Cerulli finds the discounting strategy that managers employ is typically indicative of the manager’s pricing philosophy.

“Smaller managers that are eager to gain business and lack the resources for frequent committee meetings will employ a method that allows them to act fast,” Swansey says.

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