Page 3 Profile
E. Thomas Foster Jr., Esq.
Go forth and save
by Carolyn S. Ellis
E. Thomas Foster Jr., Esq., is National Spokesperson for The Hartford's corporate retirement plans business. Foster, who is an ERISA attorney, works directly with The Hartford's financial advisor and plan sponsor clients to educate them on 401(k) plans and other qualified plan products. Tom travels and lectures extensively throughout the United States, speaking to trade organizations and working with financial advisors on new developments in retirement planning and how to build their practices.
L&HA: President Obama has announced initiatives to encourage increased retirement savings by American workers. Has the softer economy created urgency for these initiatives?
TF: The economic process that we are in right now has brought a more focused approach. If you look at our savings rate in this country, it's terrible. We have got to get more people to save. Over the years we have seen erosion from the typical defined benefit plans where employers took care of their employees to a new system where the government has asked employees be stewards of their own retirement well-being. The problem was that a lot of employees were not aware of what that meant. Of the Americans polled in a survey done for The Hartford in spring 2009, 34 percent say they have little or no understanding of their retirement plan and three out of four say they have less than a complete understanding.
L&HA: Tell us about the initiatives.
TF: One initiative will make automatic enrollment in a 401k plan the norm. Automatic enrollment is a great way to get people in and then require them to opt out. Small deposits by new, younger employees can grow over decades to add up to real money. It's more beneficial to younger employees, but even middle-aged and older Americans would have something. For the second initiative, the Internal Revenue Service (IRS) will change tax forms to allow refunds to be automatically deposited into retirement accounts. These will include individual retirement accounts (IRA) and 401k defined contribution plans.
L&HA: Can tax refunds actually go into a 401k plan? How would that work?
TF: It appears that they could, but we aren't sure of the process. We expect to have final guidelines from the IRS soon. For 401ks it would be a little more difficult because it really doesn't fit the classic way of having funds withheld to go into the plan.
L&HA: Are other types of accounts involved, SIMPLE, 403b, 457 plan, or SEP plans?
TF: We haven't got clarification on that. For any program with salary deferral, having refunds go in would create a similar problem. 403b is another big opportunity the government has expanded. In the past, with a 403b, there was really no oversight at the employer level. They could have 20 or 30 or 50 vendors in there. The government now wants to make 403bs look like 401ks, so starting this year there are going to be plan document requirements. The employer (the school) is going to be responsible for monitoring where these assets go. There'll be informational sharing agreements. You'll see a consolidation, and some employers might go to a single provider. This is a huge opportunity for advisors who are working in the K-12 market.
L&HA: Another initiative will allow workers to deposit pay for unused sick days and vacation days into retirement accounts. Will the new rules be an administrative nightmare?
TF: When the IRS establishes how the tax refunds are going to be facilitated, it will likely be perceived as a potential administrative burden. Once it's put into practice, working with the providers we'll be able to get over that pretty quickly. I expect it to be very similar to the Roth IRA and keeping track of the five years and the 591/2 requirement. Once we got into it and got clarification from governmental agencies, it has become a relatively simplified process. The same thing will happen here.
L&HA: What about a company's plan documents?
TF: Any time there is a change like this, the plan document will have to be amended. From an advisor's standpoint, there is a great opportunity to reach out to participants and plan sponsors, and say, "Let us help you understand what the benefits are and how we can assist you in the process."
L&HA: Where can advisors go to educate themselves?
TF: Online, www.irs.gov/retirement is a good website for an outline of President Obama's retirement initiatives. Once we have the final guidelines, we'll put together educational materials. The Hartford (and other vendors) takes the education of advisors very seriously because we don't sell direct to plan sponsors and participants. We sell through third-party intermediaries. Our regional sales directors will receive training on these various aspects. They're constantly in the offices of advisors. We'll do all we can to assist them in understanding what the opportunities are.
L&HA: Automatic enrollment into 401k plans with opt-out option sounds like a win-win. Would you agree?
TF: Absolutely it's win-win. It's going to help with participation rates and the testing burden. Not only is it going to help people who wouldn't otherwise have saved, it's going to help the higher compensated employees because if the average is up at the bottom, it will go up at the top. Employers might see this as a problem if they have a match and suddenly have twice as many employees automatically enrolled. The match is a variable. It's a perfect example of where financial advisors can step in and help employers through these changes. A lot of employers in today's environment can't afford a match or they will need to figure out how to keep the overall dollars contributed the same while having more employees in the plan.
L&HA: How will this play out for employers with Safe Harbor plans?
TF: Employers with Safe Harbor plans are already meeting their ADP (Actual Deferral Percentage) test. Employers have a Safe Harbor plan because they have had a problem with testing and want to make sure that no matter what employees do they are going to meet the test. There are two ways the employer can do this. They can do a three percent contribution across the board. In that case, everybody is in the plan. (Automatic enrollment is only for employers whose employees have not positively elected.) There is another form for situations where only some employees choose to participate. The employer matches 100 percent of the first three percent of compensation and 50 percent of the next two percent of comp. If an employer is using that form of Safe Harbor, automatic enrollment might have an effect on them.
L&HA: Saver's Credit encourages some employees at lower income levels to make contributions to their employer's retirement plan or to an IRA by qualifying for a tax credit of up to $1,000. Tell us about proposed changes.
TF: Here is another great opportunity. Every day I show advisors how to determine if an employer is having a problem with a test. We draw upon data bases to look at statistics about the plan. We tell advisors that if they find through these stats there is low participation, they can call an employer and say, "Have you ever had to return money to your highly compensated executives? Would you like to talk with us about things you can do so you will not potentially fail that test in the future?" That's a huge opportunity! Think of all the plans that have to return money because of the ending of matches and the cutting back of deferrals. The first question that I tell advisors to ask when they go in on a failed test is, "Do you have any additional money to put into the plan to solve this problem?" If the employer says no, that takes Safe Harbor off the table. The next thing I would say is, "Have you heard of Saver's Credit?" If the employer is not making a match, Saver's Credit gives employees an incentive to save. The limit on who qualifies for that credit is very low. Current proposals aim to raise the income levels and incrementally increase the amount of that credit. It would be a $100-a-year increase for a single person and a $200-a-year increase for a married couple (each year until 2020 and then it would revert to Cost of Living Adjustments).
L&HA: Are these initiatives geared to employers of a certain size?
TF: These initiatives are intended for all but are more beneficial for smaller employers, those with fewer than 100 employees.
L&HA: Does today's dark cloud have a silver lining?
TF: When we had a pension-dominant retirement system, many people became complacent. They figured their retirement was on auto-pilot, and basically it was. In a 401k environment employees are required to take better care of themselves. When 401ks were coming into their prime, investments were performing on a relatively level playing field. But recently retirement balances have taken a hit. People are saying, "I've got to become better educated. I have got to work closely with my advisor and my employer. I have to take control and reach out to people who can help me." I always tell plan sponsors and participants, "Don't try to do this yourself; reach out to experts in the field. Do what you do best, and that's run your business." The silver lining is that many more people now realize they have to pay attention.
L&HA: Change brings opportunity, but do you see a period of calm after the turmoil?
TF: It's a great time to bring calm to the waters. Advisors need to be sure they are surrounded with the proper team, people who understand plan design and consultative sales. The days of the plain vanilla plan are over. As financial advisors we have a duty to help people better their lives. If we can do that we all end up winning.