These are really more like musings but I needed a word
that was alliterative. There
is so much on the qualified plan horizon for 2010 that I figured my first post of the new year should be a rundown of what we can expect in the coming months.
Beginning in 2010, the AGI limitations on converting a
traditional IRA to a Roth IRA are lifted so that individuals of all income
levels can avail themselves of Roth accounts. Notwithstanding the diverse opinions on whether Roth conversions makes
financial sense, there is a great deal of buzz.
While not directly a pension issue, this has an indirect
impact on plans. Since average
account balance is often a factor in setting fees, plans that see the
in-service distribution of large account balances for conversion could
experience fee increases for the remaining participants. I’ve seen one 40-something business
owner actually terminated both his DB and 401(k) plans, because that was the
only way he could get to those dollars to convert. Bummer for the other employees!
Given the potential downside to plan participants, there is
a movement afoot on Capitol Hill to level the playing field by allowing in-plan
Roth conversions. Some are in
favor for policy reasons, and others like the idea because it raises tax
revenue to pay for things like healthcare reform. Others are opposed to Roth in general and prefer to level
the field by repealing the IRA conversion rules. Time will tell.
This is the first year we actually have final
regulations covering two of PPA’s new creations – the Eligible Automatic
Contribution Arrangement (“EACA”) and the Qualified Automatic Contribution Arrangement
(“QACA”). Interestingly, there is a recent studies from the Center
for Retirement Research noting that employer matching contributions are as
much as seven percentage points lower in auto enrollment plans compared to
“traditional” 401(k) plans. While not a terribly surprising conclusion, it is a departure from the recent conventional wisdom that auto enrollment leads to increased benefits.
The DB(k) Plan a/k/a Eligible Combined Plan a/k/a 414(x)
Personally, I like 414(x) Plan the best. It just has a good ring to it. This is another PPA creation first
available in 2010. The original
concept was to allow a single plan to do whatever separate DB and 401(k)
plans could do. The actual result
is much more limited. Employers must provide a mandatory DB accrual AND a
mandatory match or nonelective contribution. The 401(k) must include automatic enrollment, and neither cross-testing nor permitted disparity is allowed. There are no regulations and
no pre-approved plan documents. Basically,
this is a plan with none of the flexibility and more than the cost of two
separate plans. There aren’t too many scenarios in which I could recommend this to a client and keep a clear conscience.
Well, I’m just getting warmed up, and this post is already longer than I prefer. There is much
more fun and frivolity to cover, so stay tuned for
Pension Prognostications, Part 2.