Retirement Planning Review
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What were the major reforms instituted by the Employee Retirement Income Security Act of 1974 (ERISA)?
ERISA has four distinct Titles. The first protects an employee's right to collect benefits. Title II amended the Internal Revenue Code, setting forth the necessary requirements for special tax treatment. Title III created the regulatory and administrative framework necessary for ERISA's ongoing implementation. Title IV established the Pension Benefit Guaranty Corporation, an agency that insures pension benefits.
What have been the post-ERISA legislative trends with regard to the following areas? 
a. maximum deductible contributions
b. limiting tax deferral
c. parity between various business entities
Maximum deductible contributions— Throughout the 1980s and 1990s, the trend was to lower the maximum deductible contribution for highly compensated employees. However, the 2001 tax law changed direction by allowing larger contributions for individual employees. This new direction is intended to encourage small businesses to establish plans and to encourage a higher level of qualified plan savings.
Limiting tax deferral— Code Section 401( a)( 9) was introduced in 1986, requiring that distributions from all tax-sheltered plans begin at age 70 1/ 2 (or, in some cases at actual retirement, if later). These minimum-distribution rules affect any retiree receiving qualified plan, 403( b), or IRA distributions.
Parity— Over the years, the trend has been toward giving all types of business entities equal access to retirement plan vehicles. With a few minor exceptions, today C corporations, S corporations, sole proprietorships, partnerships, and even limited liability companies (LLCs) are all on the same footing.
Funding— Over the years, a number of law changes increased required employer contributions and PBGC insurance premiums to shore up the financial status of the PBGC.
Simplification— After years of more and more complexity, in 1996 there was true pension simplification. Administration of 401( k) plans became easier after this law change. The simplification trend continued in 2001 with several rules that simplified administration of 401( k) plans.
What effect does new legislation in the retirement area have on the financial services professional?
Legislative changes require a lot of effort by the financial services professional. After studying the new law, clients have to be informed of the changes and notified of the effect of the new law on their particular plan design. Many law changes also require plan amendments. Even though new laws require a lot of work, they can also provide for new opportunities to help clients meet their particular needs.
What is the role of the Internal Revenue Service with regard to the retirement market?
The IRS plays the most prominent role of all the bureaucratic agencies: It (1) supervises the creation of new retirement plans (in pension parlance, initial plan qualification), (2) monitors and audits the operation of existing plans, and (3) interprets federal legislation, especially with regard to the tax consequences of certain pension plan designs.
Your client, Dr. Sandra Scalpel, would like to fund her qualified money-purchase plan using 50 percent of her retirement account to purchase universal life insurance. As the rule currently stands, the IRS allows 50 percent of the account balance to be used to purchase whole life insurance and only 25 percent of the account to be used to purchase term insurance. The IRS has informally indicated that universal life policies are subject to the 25 percent (not the 50 percent) funding limitation. No regulations or other formal guidance is dispositive on this issue.
What can be done to solve this uncertainty in the law that would enable Dr. Scalpel to use 50 percent of her retirement account to purchase universal life insurance?
The case as stated is an accurate interpretation of the law. The benefits community adheres to the informal statement limiting universal life insurance to 25 percent of the account balance. If Dr. Scalpel wanted to pursue the issue, the financial services professional involved could secure a private letter ruling from the IRS asking that the IRS resolve the apparent conflict and allow 50 percent funding with universal life insurance. If the IRS acquiesced in Dr. Scalpel's case, the private letter ruling would be binding on the IRS in only that situation; theoretically, it could not be used by others in deciding the same issue (although this is often done).
What is the role of the Department of Labor in the pension process?
Through its office of Employee Benefit Security Administration (EBSA), the DOL (1) ensures that plan participants are adequately informed through enforcement of some of the reporting and disclosure rules, (2) polices the investment of plan assets, (3) monitors the actions of those in charge of the pension plans (fiduciaries), and (4) interprets legislation.
What are the types of organizations involved in providing consulting and investment services to retirement plans?
The organizations that provide plan services include consulting houses, actuarial firms, insurance companies, administrative consultants, and software companies. In the financial market, there are trust companies, commercial banks, investment houses, asset-management groups, and insurance companies.
What resources are available to assist the financial services professional with technical research and to help the financial services professional keep abreast of changes in the pension field?
The most important sources are the primary ones, that is, the Internal Revenue Code, ERISA, and other statutory law, as well as regulations and other regulatory guidance. Books and periodicals can shed light on the meaning of the rules and so can loose-leaf services that are updated regularly. Many commercial sources of information are also available on the Internet, and the primary sources have never been easier to access for free, as they are posted on governmental Web sites.
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