A new IRA plan could simplify offerings for brokers, employers
If one leading academic has his way, there would be a new acronym for benefit providers to learn in the crowded concoction of employee benefits law and regulation. And his plan could mean a simpler set of guidelines and documentation for employee retirement plans.
Ron Rhoades, director of the financial planning program at Western Kentucky University where he’s also an assistant professor of finance, recently suggested the creation of a "New" Individual Retirement Account, or NIRA. As described by Rhoades, a NIRA would not only offer a simplified approach that features a single form to enroll in these plans, it would also eliminate annual filings, plan administrator fees, and as he describes, "tax traps for the unwary."
The plan, which he believes would be a boon to brokers and advisers, would replace the existing maze of defined contribution plans with its own regulatory framework. He argues that NIRAs would result in substantially lower fees, prohibit employee loans except when absolutely necessary and protect employers from undue liability.
“With tax reform now underway, the time has come to advocate simplifying both the law and regulations for defined contribution plans,” observes Rhoades, who also cites mounting concern about the effectiveness of the DC model.
He’d like to see a standardized plan document and summary plan description, as well as simple plan adoption forms akin to SIMPLE IRAs. Other suggestions include fully portable DC plan contributions alongside “greater flexibility to all plan sponsors as to the timing and amount of contributions, and their variance from year to year as business conditions change.”
Rhoades says the unique features of 401(k), 403(b) and 457 plans, as well as a Thrift Savings Plan, SIMPLE 401(k), SIMPLE IRA, Individual IRA, SEP IRA and Keough, often creates “tax traps for the unwary… and, at times, they create unnecessary administrative costs for employers.”
One example is plan administration fees, which he says cost at least thousands a year “even for small plans.”
There would be no plan administrator fees associated with NIRAs because Rhoades says plan administrators would no longer be needed. Recordkeeper and custodian fees would be a flat amount each year per account rather than on a percentage basis.
Within two years of NIRA legislation being enacted, all existing DC accounts would be rolled over into these new accounts. A company could start such a plan on behalf of its employees, in which case it would be considered a fiduciary along with any provider of recommendations.
In addition, payroll deduction must be permitted by all employers, while various auto-pilot features would be included unless employees opt out of coverage and a default investment option would be an age-appropriate target date fund. Advisory fees would be deducted directly from the NIRA account with a client’s consent, while fee disclosures would be required quarterly. An employer match would be permitted up to 25% of salary.
Under this approach, Rhoades predicts “a large expansion in the number of DC plans offered by private companies, with greater meaningful work for benefits brokers and advisers.”
He’s calling on the brokerage community, including various professional organizations, to promote the idea of a single savings vehicle “lest the ever-increasingly complexity of DC plan implementation and administration result in no DC plans at all in the tax reform efforts currently underway in Washington, D.C.” Another concern of his is that “the threat posed by state plans offered to private employers could arise anew.”
The academic’s proposal is receiving pushback from industry experts who dispute his premise.
While the myriad of DC plan vehicles may seem confusing, “employees only have one plan” at work, which is usually the “very popular” 401(k), according to Jan Jacobson, senior counsel for retirement policy at the American Benefits Council.
“The various choices employers have for determining what type of retirement plan to implement does not cause confusion for the participants and isn’t an impediment to overall retirement savings,” adds Judi Carsrud, director of government relations with the National Association of Insurance and Financial Advisors.
NAIFA is encouraging Congress to simplify instead current rules for employer plans, including passage of multiple employer plan legislation to help reduce administrative costs for small businesses.
She believes Rhoades’ plan is a step in the wrong direction because NIRAs would not include employer matching and have lower contribution limits, thus reducing overall retirement savings. “Any employee not offered or not eligible to participate in an employer-sponsored plan can easily find and purchase an IRA,” she says.
The biggest issue that needs to be addressed is a coverage gap, explains Jacobson. She urges brokers and advisers representing small employers to instead push for automatic IRAs for employees who don’t have a plan at work, which members of Congress have suggested in the past. Another problem with Rhoades’ NIRA plan is that it would eliminate the Roth IRA, which she says would actually cost the federal government money to implement.
Rhoades’ proposal reminds Jacobson of Guaranteed Retirement Accounts that labor economist Teresa Ghilarducci proposed years ago. One key difference is that her government-sponsored program called for 3% inflation-adjusted guaranteed returns.