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E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 5, No. 6: March 25, 2004
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Publisher: LSN Employment, Labor, Compensation & Pension Journals
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Editor: PAMELA PERUN
Urban Institute
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Copyright: SSEP, Inc. 2004. All rights reserved.
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Topic of This Issue:
Savings Issues
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"Guidelines for Naming a Trust as the Beneficiary of an IRA"
Estate Planning, Vol. 30, No. 10, p. 502, October 2003
ANDREW R. LEE
The Lee Law Group, PLLC
"State College Savings and Prepaid Tuition Plans: A Reappraisal
and Review"
Journal of Law and Education, Vol. 32, p. 475, 2003
MICHAEL A. OLIVAS
University of Houston Law Center
"A Review of Major Influences on Employee Retirement Investment
Decisions"
Journal of Financial Services Research, Vol. 23, No. 2, pp.
149-165
JOHN R. NOFSINGER
Washington State University - Department of Finance
MICHELE O'NEILL
University of Idaho
College of Business & Economics
JEFFREY J. BAILEY
University of Idaho
"Save More Tomorrow: Using Behavioral Economics to Increase
Employee Saving"
Journal of Political Economy, Vol. 112, No. 1, pp.
S164-S187, February 2004
SHLOMO BENARTZI
University of California at Los Angeles
RICHARD H. THALER
University of Chicago
Graduate School of Business
National Bureau of Economic Research (NBER)
WORKING PAPERS
"Tax Policy and Education Policy: Collision or Coordination? A
Case Study of the 529 and Coverdell Savings Vehicles"
SUSAN M. DYNARSKI
Harvard University
John F. Kennedy School of Government
National Bureau of Economic Research (NBER)
"Has the 2001 Tax Act Eliminated the Benefits of the Money
Purchase Pension Plan"
JOSEPH R. POZZUOLO
Pozzuolo & Perkiss, P.C.
LISA M. LASSOFF
Pozzuolo & Perkiss, P.C.
"The Adequacy of Investment Choices Offered by 401K Plans"
EDWIN J. ELTON
New York University
Department of Finance
MARTIN J. GRUBER
New York University
Department of Finance
CHRISTOPHER R. BLAKE
Fordham University
Graduate School of Business
S S R N I N F O R M A T I O N
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Guidelines for Naming a Trust as the Beneficiary of an IRA"
Estate Planning, Vol. 30, No. 10, p. 502, October 2003
BY: ANDREW R. LEE
The Lee Law Group, PLLC
Contact: ANDREW R. LEE
Email: Mailto:alee@leelawgroup.com
Postal: The Lee Law Group, PLLC
100 W. Long Lake Road, Suite 240
Bloomfield Hills, MI 48304 UNITED STATES
Phone: (248) 646-4200
Fax: (248) 642-0625
ABSTRACT:
Individuals, through their estate planning documents, often set
ages at which their children can get access to assets following
their death. However, IRAs are frequently overlooked as part of
the estate planning process, with account owners often simply
listing their children as the outright beneficiaries. This may
be contrary to the planning in the account owner's Will and/or
Trust, where the account owner had established guidelines for
when the children could get access to the Trust corpus and how
much they could get. Considering IRAs can be one of an
individual's largest assets, failing to plan for IRA
distributions after death could lead to an incomplete or an
inconsistent estate plan.
This article discusses the concept of naming a Trust as the
beneficiary of an IRA as a mechanism to provide for the account
owner's planning goals after his or her death and to ensure that
these goals are consistent with the planning as provided in his
or her Will and/or Trust. However, special attention needs to be
paid when naming a Trust as a beneficiary of an IRA. As long as
certain requirements are met, the IRS will allow the Trust to be
looked-through, to the Trust's beneficiaries, in order to
determine who is a Designated Beneficiary. Yet, depending upon
the terms of the Trust, there may not even be a Designated
Beneficiary, and therefore the IRA assets might not be eligible
for a payout over one or more individuals' life expectancies.
The article discusses some possible pitfalls and planning
considerations with regard to also having charitable
beneficiaries or having beneficiaries of varying ages named in
the Trust, which could have an impact on the timing and amount
of Required Minimum Distributions to the beneficiaries. It also
discusses some recent Private Letter Rulings concerning how the
IRS currently contends that the IRA account and Trust need to be
set up in order to allow for each individual beneficiary to use
their own life expectancies when determining Required Minimum
Distributions following the death of the account owner.
The article focuses on different types of Trusts which could
be the beneficiary of IRAs, and compares the use of a standard
Revocable Living Trust to the use of a stand alone Trust created
specifically to be the beneficiary of an IRA. Furthermore, the
article discusses the use of conduit Trusts versus accumulation
Trusts and the impact of the type of Trust on the Required
Minimum Distribution rules.
In addition, the article focuses on how using a Trust can
ensure the "stretch-out" of the Required Minimum Distributions
after the account owners death and/or how the Trust can allow
for post mortem decisions to be made to allow for the funding of
the account owner's Applicable Exemption Amount, or to provide
for Generation Skipping planning.
______________________________
"State College Savings and Prepaid Tuition Plans: A Reappraisal
and Review"
Journal of Law and Education, Vol. 32, p. 475, 2003
BY: MICHAEL A. OLIVAS
University of Houston Law Center
Contact: MICHAEL A. OLIVAS
Email: Mailto:MOLIVAS@UH.EDU
Postal: University of Houston Law Center
100 Law Center
Houston, TX 77204-6060 UNITED STATES
Phone: 713-743-2078
Fax: 713-743-2085
ABSTRACT:
The growth of state prepaid plans and state savings plans (529
plans, named for the IRS Code section) has been nothing short of
phenomenal, with several states having billions of dollars in
their 529 reserves, and a number of states selling tens of
thousands of contracts each year. Florida's prepaid plan is
among the nation's premier programs, with over 750,000
beneficiaries and almost $5 billion in assets. Every state now
has a savings plan, and 18 have both a saving plan and prepaid
plan. This growth, spurred by generous federal tax legislation,
has brought exceptional professionalization into play, with
several national financial organizations such as TIAA-CREF,
Fidelity, and others providing services to states.
The advantageous tax treatment has given rise to many states
offering multiple programs with generous provisions and helpful
features.
That said, a number of policy issues have surfaced, including
federal tax treatment of the plans, financial viability during
unstable economic periods, system complexity that makes it
difficult to evaluate plans or comparison-shop, and
understanding the proper role of states in a federal financial
aid system.
For example, a number of states have privatized these
programs, setting up shops with turnkey elements. A small number
of states have given full faith and credit protection to 529
plans, raising the possibility that a state's general fund
resources will be used to bail out losing programs.
Several issues of state and federal taxation remain unclear,
such as how 529 plans count in federal aid determination, and
why gains on prepaid plans are included in the Expected Family
Contribution, while proceeds from savings plans are not included
in the EFC. Until Congress extends the 2011 sunset provision,
parents or other potential purchasers may be reluctant to
purchase 529 plans, even though it is likely that Congress will
act to extend the tax treatment before that cutoff date.
Finally, there remain important equity, institutional, and
legislative policy implications. Among these are the extent to
which these plans exacerbate the gap between the well to do and
the financially-needy, the extent to which prepaid plans will
distort the admissions process and need-blind financial
aid/admissions, and the likelihood that enormously successful
529 plans may restrict needed tuition increases or trade off
against legislative appropriation levels. There is evidence to
support all these equity concerns. Additional questions that
have not been addressed include the extent to which generous tax
treatment actually stimulates additional family savings for
college, or simply re-directs family investment strategies. At
the end of the day, prepaid plans are popular vehicles for the
more advantaged, but their success has within it a number of
policy concerns that deserve attention by scholars, legislators,
and families.
______________________________
"A Review of Major Influences on Employee Retirement Investment
Decisions"
Journal of Financial Services Research, Vol. 23, No. 2, pp.
149-165
BY: JOHN R. NOFSINGER
Washington State University - Department of Finance
MICHELE O'NEILL
University of Idaho
College of Business & Economics
JEFFREY J. BAILEY
University of Idaho
Contact: JOHN R. NOFSINGER
Email: Mailto:john_nofsinger@wsu.edu
Postal: Washington State University - Department of Finance
College of Business and Economics
Pullman, WA 99164 UNITED STATES
Phone: (509) 335-7200
Co-Auth: MICHELE O'NEILL
Email: Mailto:moneill@uidaho.edu
Postal: University of Idaho
College of Business & Economics
Moscow, ID 83944-3174 UNITED STATES
Co-Auth: JEFFREY J. BAILEY
Email: Mailto:jbailey@uidaho.edu
Postal: University of Idaho
Moscow, ID 83844 UNITED STATES
ABSTRACT:
The recent retirement plan debacle of the Enron employees has
caused regulators and lawmakers to think about new ways to
protect and help retirement plan participants. When
investigating participant investment decisions, researchers have
traditionally studied the retirement plan characteristics and
employee characteristics. More recently, some researchers have
extended the analysis to social influences, such as social norms
and peer affects. Others have expanded into behavioral finance
and examined the role of various psychological biases. This
paper combines and summarizes these four sets of influences so
that researchers and policy makers can better understand all the
influences affecting an employee when making retirement plan
contribution and investment decisions.
______________________________
"Save More Tomorrow: Using Behavioral Economics to Increase
Employee Saving"
Journal of Political Economy, Vol. 112, No. 1, pp.
S164-S187, February 2004
BY: SHLOMO BENARTZI
University of California at Los Angeles
RICHARD H. THALER
University of Chicago
Graduate School of Business
National Bureau of Economic Research (NBER)
Contact: SHLOMO BENARTZI
Email: Mailto:sbenartz@ucla.edu
Postal: University of California at Los Angeles
D410 Anderson Complex
Los Angeles, CA 90095-1481 UNITED STATES
Phone: 310-206-9939
Fax: 310-267-2193
Co-Auth: RICHARD H. THALER
Email: Mailto:RICHARD.THALER@GSB.UCHICAGO.EDU
Postal: University of Chicago
Graduate School of Business
1101 East 58th Street
Chicago, IL 60637 UNITED STATES
ABSTRACT:
As firms switch from defined-benefit plans to
defined-contribution plans, employees bear more responsibility
for making decisions about how much to save. The employees who
fail to join the plan or who participate at a very low level
appear to be saving at less than the predicted life cycle
savings rates. Behavioral explanations for this behavior stress
bounded rationality and self-control and suggest that at least
some of the low-saving households are making a mistake and would
welcome aid in making decisions about their saving. In this
paper, we propose such a prescriptive savings program, called
Save More Tomorrow (hereafter, the SMarT program). The essence
of the program is straightforward: people commit in advance to
allocating a portion of their future salary increases toward
retirement savings. We report evidence on the first three
implementations of the SMarT program. Our key findings, from the
first implementation, which has been in place for four annual
raises, are as follows: (1) a high proportion (78 percent) of
those offered the plan joined, (2) the vast majority of those
enrolled in the SMarT plan (80 percent) remained in it through
the fourth pay raise, and (3) the average saving rates for SMarT
program participants increased from 3.5 percent to 13.6 percent
over the course of 40 months. The results suggest that
behavioral economics can be used to design effective
prescriptive programs for important economic decisions.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Tax Policy and Education Policy: Collision or Coordination? A
Case Study of the 529 and Coverdell Savings Vehicles"
BY: SUSAN M. DYNARSKI
Harvard University
John F. Kennedy School of Government
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=517663
Paper ID: KSG Working Paper No. RWP04-011
Date: February 26, 2004
Contact: SUSAN M. DYNARSKI
Email: Mailto:Susan_Dynarski@Harvard.Edu
Postal: Harvard University
John F. Kennedy School of Government
79 John F. Kennedy Street
Cambridge, MA 02138 UNITED STATES
Phone: 617-496-2077
Fax: 617-496-2554
ABSTRACT:
529 saving plans and Coverdell Educational Savings Accounts are
marketed as attractive vehicles for college savings. The main
finding of this paper is that college savings plans can actually
harm some families. The joint treatment by the income tax code
and financial aid system of college savings creates tax rates
that exceed 100 percent for those families on the margin of
receiving additional financial aid. Since even families with
incomes above $100,000 receive need-based aid, the impact of
these very high taxes is quite broad. I find that an
aid-marginal family with funds in a Coverdell is worse off than
if it did not save at all. Simulations show that $1,000 of
pretax income placed in a Coverdell for a newborn and left to
accumulate until college will face income and aid taxes that
consume all of the principal, all of the earnings and an
additional several hundred dollars. This perverse outcome is the
product of poor coordination between the income tax code and the
financial aid system.
______________________________
"Has the 2001 Tax Act Eliminated the Benefits of the Money
Purchase Pension Plan"
BY: JOSEPH R. POZZUOLO
Pozzuolo & Perkiss, P.C.
LISA M. LASSOFF
Pozzuolo & Perkiss, P.C.
Contact: LISA M. LASSOFF
Email: Mailto:lisa@pozzuolo.com
Postal: Pozzuolo & Perkiss, P.C.
2033 Walnut Street
Philadelphia, PA 19103 UNITED STATES
Co-Auth: JOSEPH R. POZZUOLO
Email: not available
Postal: Pozzuolo & Perkiss, P.C.
2033 Walnut Street
Philadelphia, PA 19103 UNITED STATES
ABSTRACT:
The Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA) has made it unnecessary for businesses with cyclical
profits of having a mandatory money purchase pension plan in
place to reach the maximum contribution limit in profitable
years and has eliminated the administrative burden and
significant costs associated with the maintenance of two
qualified retirement plans, such as the cost of annual returns,
record-keeping and accounting fees, etc.
EGTRRA has raised the deductible contribution limit from
fifteen (15%) percent to twenty-five (25%) percent for
profit-sharing plans, thereby eliminating the need to combine a
profit-sharing plan with a money purchase plan to reach the
twenty-five (25%) percent maximum contribution limit. In
addition, money purchase plans are precluded from containing a
401(k) feature as compared to profit-sharing plans. Therefore,
the available deduction under a 401(k) profit-sharing plan now
exceeds the maximum deductible contribution that can be made to
a twenty-five (25%) percent mandatory contribution money
purchase pension plan or a combination money purchase pension
plan and profit-sharing plan. Furthermore, retirement savings
opportunities have been enhanced with a profit-sharing plan
because employee elective deferrals are no longer treated as
employer contributions for purposes of the deductible
contribution limit.
EGTRRA has also raised the annual additions limitation, which
sets forth the amount of contributions that can be allocated to
a participant, and has increased the maximum amount of
compensation that can be taken into account in computing
deductible contributions from One Hundred Seventy Thousand
($170,000.) Dollars to Two Hundred Thousand ($200,000.) Dollars.
EGTRRA has changed the definition of compensation, which for tax
years commencing in year 2002 means gross pay (i.e. before
amounts are deducted from participants' pay for elective
deferrals, cafeteria plan contributions and tax-free
transportation fringe benefits). In summary, these changes have
increased the amount of deductible contributions plan sponsors
can make to a profit-sharing plan and still stay within
deduction limits and have eliminated the need for a mandatory
contribution money purchase pension plan.
The Internal Revenue Service has ruled that the conversion or
merger of a money purchase pension plan into a profit-sharing
plan does not result in a partial termination of the money
purchase pension plan and does not require the full vesting of
benefits. However, the cessation or reduction of benefit accrual
under the money purchase pension plan requires a notice to plan
participants of such cessation or reduction.
The conversion or merger of the money purchase plan into the
employer's profit-sharing plan will eliminate some of the rigid
requirements of the money purchase pension plan, such as the
minimum funding rules and the employer's need to make required
contributions even if there are no profits or the business
suffers temporary financial or cash flow problems. Therefore,
employers should consider a conversion or merger of their money
purchase pension plan into a profit-sharing plan to take
advantage of the above changes under EGTRRA and to maximize
business, tax and retirement savings opportunities.
______________________________
"The Adequacy of Investment Choices Offered by 401K Plans"
BY: EDWIN J. ELTON
New York University
Department of Finance
MARTIN J. GRUBER
New York University
Department of Finance
CHRISTOPHER R. BLAKE
Fordham University
Graduate School of Business
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=489942
Date: October 2003
Contact: MARTIN J. GRUBER
Email: Mailto:mgruber@stern.nyu.edu
Postal: New York University
Department of Finance
Ste 9-190
44 West 4th Street
New York, NY 10012-1126 UNITED STATES
Phone: 212-998-0333
Fax: 212-995-4233
Co-Auth: EDWIN J. ELTON
Email: Mailto:eelton@stern.nyu.edu
Postal: New York University
Department of Finance
Ste 9-190
44 West 4th Street
New York, NY 10012-1126 UNITED STATES
Co-Auth: CHRISTOPHER R. BLAKE
Email: Mailto:cblake@fordham.edu
Postal: Fordham University
Graduate School of Business
Lowenstein Building
113 West 60th Street
New York, NY 10023 UNITED STATES
ABSTRACT:
Defined-contribution plans represent a major organizational form
for investors' retirement savings. Today more than one third of
all workers are enrolled in 401K plans. In a 401K plan,
participants select assets from a set of choices designated by
an employer. For over half of 401K-plan participants, retirement
savings represent their sole financial asset. Yet to date there
has been no study of the adequacy of the choices offered by 401K
plans. This paper analyzes the adequacy and characteristics of
the choices offered to 401K-plan participants for over 400
plans. We find that, for 62% of the plans, the types of choices
offered are inadequate, and that over a 20-year period this
makes a difference in terminal wealth of over 300%. We find that
funds included in the plans are riskier than the general
population of funds in the same categories. We study the
characteristics of plans that are associated with adequate
investment choices, including an analysis of the use of company
stock, plan size, and the use of outside consultants. When we
examine one category of investment choices, S&P 500 index funds,
we find that the index funds chosen by 401K-plan administrators
are on average inferior to the S&P 500 index funds selected by
the aggregate of all investors.