Client Service September 30, 2021

PANC 2021: Tax Rates, RMDs and Retirement Income Planning

Just as retirement savers use investment diversification for accumulating assets, they need tax diversification for retirement income planning.

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Speaking at the virtual 2021 PLANADVISER National Conference (PANC), Keith Gredys, chairman and CEO of Kidder Advisers Inc., said that although there are dividing lines in financial planning because every adviser has his own expertise, tax planning needs to be factored into financial planning. “A person can have the most efficient financial plan but it might not be the most effective for reaching their goals if it doesn’t include tax planning,” he said.

Dave Alison, chief operating officer (COO) and founding partner at C2P Enterprises, said consumers expect to receive financial advice separate from tax advice, but his company earns new business these days by offering customers one place to get all aspects of financial planning. Alison contended that advisers are not meeting the best interest standard if they are not at least coordinating with other professionals for holistic financial advice. “Tax planning and financial planning is pairing good, modern nutrition to get an optimal outcome,” he said.

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Keith Huber, investment adviser, retirement services, with Fiduciary Plan Advisors, a OneDigital company, said if there is a fence that divides good financial advice and tax planning, it needs to be torn down.

When talking about tax-efficient investing to a client, advisers should explain not just how he should allocate his retirement savings, but what vehicles to invest in, including Roth and pre-tax, Huber said.

“We need tax diversification. We have to prepare for inevitable changes and prepare for unknowns,” Huber said. “We know what taxes are going to be in the next several years, but clients need different vehicles to be prepared for age 65 and beyond.”

Michael Webb, senior financial adviser at CAPTRUST and the panel’s moderator, said, “If someone has all their savings in pre-tax accounts, they’re making a bet, and if everything is in Roth accounts, they’re making a bet. Account diversification is hedging bets.”

Gredys suggested that retirement savers need to build a plan that is flexible because they don’t know what the future holds. “Tax planning is a different form of diversification,” he said. “Everyone will have their own design based on what they want to be done.”

Tax planning is complex because there is no one-size-fits-all solution, Alison noted. When deciding whether to save in a Roth account or a pre-tax account, clients should consider their goals for future generations, among other factors, he added.

Alison said the conversation about Roth versus pre-tax centers not on a client’s tax bracket, but on their marginal tax rate. As an example, he said a married client filing jointly currently could have $81,000 in taxable income before they move from a 12% to a 22% tax bracket. Roth creates an opportunity because if that couple has $70,000 in taxable income, they have $11,000 in taxable income to go before they move into a higher tax bracket. Alison said it makes sense to take the $11,000 and pay 12% in taxes today before moving into a higher tax bracket.

Alison added that another time when “Roth shines” is when thinking about taxes on a spousal beneficiary.

“People don’t understand how taxes go up on the spouse of a deceased person; taxes go up exponentially,” he said. “Having savings in a Roth is incredibly helpful in that situation. We can also think about whether children or grandchildren are in a higher or lower tax bracket than the client. That’s where an adviser helps; when thinking of the client’s long-term goals and objectives.”

When considering Roth conversions for clients, Alison said the best time to pay taxes is when they are low, and right now taxes are low with government debt rising, so they will probably increase in the future. He said it might not make sense to convert all savings to a Roth account, but it might make sense to convert some.

“If the client’s capacity is for a 22% or 24% tax bracket, it makes sense to convert some savings to a Roth account, but unless they are going to be in a high tax bracket for rest of their life, they shouldn’t covert all,” he explained.

Considerations for RMDs

Retirement income planning must also take into consideration required minimum distributions (RMDs), the panel experts agreed. Webb noted that the RMD age has increased from 70.5 to 72 and is confusing to many people. Meanwhile, legislation has been introduced to move it gradually to age 75.

Alison said he thinks RMDs should go away. “The reality is that most people don’t save enough for retirement and will need distributions,” he said.

However, when helping clients with RMD planning, Alison suggested advisers determine which account they’ll draw from. “We suggest clients never take RMDs out of growth accounts because we want to lower sequence of return risk,” he explained.

Huber said many people don’t do financial planning because they don’t realize what they don’t know, and he is in favor of forced RMDs for this reason. “People miss RMDs because they aren’t aware of the rules,” he said. “Advisers can turn on this service for individual and plan sponsor clients.”

Gredys noted that retirement plan participants may have money in individual retirement accounts (IRAs) as well as more traditional retirement plans, so advisers can help them pull everything together. He added that stretch IRAs are no longer allowed, so some people will need help with estate planning. Advisers can help them check whether the language in their wills and trusts complies with the new rules.
Compliance September 30, 2021

Dismissal Motions Fail in Allstate ERISA Lawsuit

The ruling breaks from other district court orders that have held ERISA plaintiffs lack Article III standing to bring claims regarding funds in which they did not personally invest.

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The U.S. District Court for the Northern District of Illinois, Eastern Division, has issued a ruling in a consolidated Employee Retirement Income Security Act (ERISA) lawsuit filed against Allstate.

The ruling comes in response to two originally separate complaints filed against Allstate, both alleging various breaches of fiduciary duties and prohibited transactions in the provision of retirement plan investments to its own employees. Though none of the companies are named as defendants, the complaints also included allegations involving the actions of Northern Trust, Financial Engines and Alight Financial Advisors.

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The first complaint was filed in November, and the second complaint was filed in January. Given the substantial similarities in the lawsuits, the court combined the complaints and has now ruled on them collectively. The order rejects the defense’s motions to dismiss the consolidated matter and permits the complaint to proceed to discovery, setting the stage for either settlement or trial.

Specifically, the ruling first considers the general matter of whether the plaintiffs have sufficiently alleged that they have Article III standing under the U.S. Constitution to sue Allstate. It then considers the defendants’ motions to dismiss for lack of standing under Rule 12(b)(1), and for failure to state a claim under Rule 12(b)(6). For context, a Rule 12(b)(1) motion contests the court’s subject-matter jurisdiction, while to survive a motion to dismiss under Rule 12(b)(6), a plaintiff must allege facts that “raise a right to relief above the speculative level.”

“All plaintiffs have sufficiently alleged Article III standing,” the ruling states. “The plaintiffs claim that they lost retirement savings because the defendants breached their fiduciary duties, either by selecting and retaining the suite of Northern Trust funds or by causing the plan to pay excessive fees. ERISA makes fiduciaries personally liable for breaches of their fiduciary duties and authorizes recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account. The plaintiffs have alleged that the defendants caused a concrete and particularized injury for which the law provides redress. Article III requires no more.”

The ruling notes that some courts have held that ERISA plaintiffs lack Article III standing to bring claims regarding funds in which they did not personally invest, but this ruling concludes otherwise.

“In [this court’s view], Article III does not provide a basis to edit the details of a fiduciary-breach claim when each plaintiff has sufficiently alleged standing as to that claim,” the ruling states. “The standing inquiry is about whether a plaintiff brings a real dispute to court. The defendants do not contest that the plaintiffs have done so. Once that threshold is crossed, the proper scope of the plaintiffs’ claims become a matter for the merits, not whether there’s a case or controversy. The plaintiffs allege breaches of duty that harmed them, and that opens the courthouse door. This is not a case involving alleged misconduct in the sale of a product that a plaintiff did not buy; in those cases, there is no injury unless the plaintiff bought the product, because the only concrete harm was in the transaction for the product. Here, that the breaches of duty may have impaired the value of other funds does not mean that the plaintiffs have no stake in the duty breach—they do, because they were allegedly harmed by the same breach.”

The court’s analysis of rules 12(b)(1) and 12(b)(6) is fairly short and straightforward, again siding with the plaintiffs and determining that former participants may bring claims for benefits to which they are entitled and that these rules “do not provide a means to excise portions of a claim.”

The full text of the order is available here.

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