December 28, 2009 (PLANSPONSOR.com) – An analysis of retiring participants from one public pension plan suggests they do not understand the value of life annuity payments.
John Chalmers from the Lundquist College of Business, University of Oregon, and Jonathan Reuter from the Carroll School of Management, Boston College, analyzed data on Oregon Public Employees Retirement System (PERS) retirees who must choose between receiving all of their retirement benefits as life annuity payments or receiving lower life annuity payments coupled with a partial lump sum payout… [Looking] at variation in the value of the incremental life annuity payments arising from how PERS calculates retirement benefits, the researchers found evidence that demand for lump sum payouts is higher when the forgone life annuity payments are more valuable.
Chalmers and Reuter also found that demand for lump sum payouts is higher when the lump sum payout is "large," and when equity market returns over the prior 12 months are higher.
"Collectively, these findings suggest that retirees value incremental life annuity payments at less than their expected present value, either because they do not know how to accurately value life annuities or because they have strong demand for large lump sum payouts," the researchers wrote in a working paper for the National Bureau of Economic Research (NBER).
The researchers did find that those with poor health at retirement more consistently utilized "value-maximizing decision-making."
According to the NBER working paper, the Oregon PERS data showed that the higher the money’s worth of the incremental life annuity payments, the more likely the retiree is to choose the partial lump sum option over the full life annuity option. "This (robust) finding suggests that retirees facing more valuable incremental life annuity payments either attach greater value to the lump sum payout or … underestimate the value of the incremental life annuity payments," the researchers wrote. …
The research findings suggest that the fraction of retirees demanding a lump sum is associated with the returns on the prior 12-month returns to the S&P 500 index. …
The researchers also found that demand for the partial lump sum option is lower for retirees earning high salaries, and speculate that this is because these retirees are less financially constrained or more financially literate.
To order a copy of HOW DO RETIREES VALUE LIFE ANNUITIES? EVIDENCE FROM PUBLIC EMPLOYEES, go to http://www.nber.org/.
Rebecca Moore
editors@plansponsor.com
Tuesday, December 29, 2009
Analysis Suggests Participants Don’t Understand Value of Annuities
PLANSPONSOR.com
Monday, December 28, 2009
Clock Ticks On Estate Tax
Financial Advisor Magazine
(Dow Jones) As Congress appears ready to let the federal estate tax lapse on January 1, a dramatic question is what a repeal will do to millions of less affluent taxpayers.
Many who now would owe neither estate nor capital gains tax on inherited assets will owe significant capital gains. And that's just one of the troubling aspects of a repeal.
There are also serious questions about how families with ailing relatives would be affected--a subject of gallows humor since a one-year repeal of the tax was first envisioned for 2010 years ago. …
Under current law, the estate tax disappears for a year in 2010 and then is reinstated in 2011…
For many advisors, the most striking aspect of a repeal is that, along with the estate tax itself, a step-up in cost basis for income tax purposes would go away. …
So, at a relative's death, "families that would not have had to pay the estate or capital gains tax now may have to pay a capital gains tax on assets that have appreciated in value during the deceased person's lifetime," said Warren Racusin, chair of the trusts and estates practice at law firm Lowenstein Sandler in Roseland, N.J.
Racusin mentioned a client whose parents gave him Microsoft Corp. stock when he was younger, purchased for relatively little, that is now worth $6 million. If the man were to die in 2009, his family would not owe capital gains tax on the appreciation. And, with good estate planning by the man and his wife, there might be no estate tax due either, because a couple can shelter up to $7 million from federal estate tax.
If the man were to die on January 1, 2010, however, his wife could owe capital gains of around $340,000 on the $6 million, figuring in a $3 million exemption for spouses, and another $1.3 million exemption for whoever inherits.
As for a retroactive tax, it would likely raise some complications if lawmakers wait too long to enact it. Relatives of some people who die in a prospective estate-tax-free period--after the end of the year but before a new tax is enacted--would surely not be pleased. Quite certainly, some would challenge the constitutionality of the tax, according to tax analysts.
Nonetheless, both the lower courts and the Supreme Court historically have defended retroactive taxes. …
Copyright (c) 2009, Dow Jones. For more information about Dow Jones' services for advisors, please click here.
Monday, December 21, 2009
Affluent households ignore 529 plans, study says
Investment News
Despite tax breaks, report says the market is under-penetrated
By Charles Paikert
June 14, 2009, 6:01 AM EST
Two-thirds of affluent parents with children under 18 aren't using Section 529 college savings plans, according to a report by The Phoenix Cos. Inc. …
“I was really surprised at the extent to which the high-net-worth segment is not using 529 plans,” said Walter Zultowski, senior vice president of research and concept development for Hartford, Conn.-based Phoenix and author of the report. “529s should be a no-brainer for them.” …
Jeff Coghan: "We are still early in the life cycle of this product."
“I would think that 529s would be part of financial planning for affluent parents, especially with the tax benefits,” said JoLynn Free, senior vice president and financial consultant in Austin, Texas, for RBC Wealth Management of Minneapolis. “We certainly recommend them, and as a vehicle, I've found them to be solid gold.” …
In addition to the tax benefits of 529 plans, Ms. Free said that affluent clients like the fact that parents, not children, remain owners of the account. What's more, 529 accounts appeal to high-net-worth parents and grandparents because they can easily transfer cash into a tax-protected account, she added. …
E-mail Charles Paikert at cpaikert@investmentnews.com.
Social Networking And Advisors
Financial Advisor Magazine
Advisors are barely scratching the surface in their use of social networking.
By Andrew Gluck
Of all the social networking Web sites, LinkedIn is the one financial advisors use most. …
Not a lot of reliable data are available yet on the business use of social networking applications. We don’t have much demographic data about who is on each social network or the business benefits of tweeting on Twitter versus connecting on LinkedIn or friending on Facebook. But here are some thoughts that might be valuable as you decide which sites to use for growing your advisory firm and exchanging ideas with other professionals.
They’re Not Just for Kids. According to a study released by Anderson Analytics, SPSS and LinkedIn, the number of C-level executives on LinkedIn numbered 2.2 million worldwide last summer, while there were 1.9 million executive vice presidents and senior vice presidents on the network. Some 4.5 million users said they were senior management, while 5.2 million said they were middle management. About half of the users worldwide are in the U.S., and the base was growing last year at a rate of 2 million a month.
By contrast, Twitter users are overwhelmingly young, according to a study by Pew Research Center released in February. However, … Twitter is not dominated by the youngest of young adults. Indeed, the median age of a Twitter user is 31. In comparison, the median age of a MySpace user is 27, while it’s 26 for a Facebook user and 40.5 for a LinkedIn user, according to the Pew study.
… In the U.S., users between the ages of 55 and 64 made up 10% of Twitter’s total, which is nearly the same figure for those users between ages 18 and 24, who accounted for 10.6%. So you are seeing older Americans adopt social networking at an astounding rate.
Say Something Nice. Unlike traditional marketing, social networking is totally based on being nice to other people and not just selling your services. The key to successful marketing is giving valuable information to your target market. For instance, an advisor trying to market to doctors might post a blog offering a case study of changes he made to a doctor’s financial plan after the market meltdown of last year, and then tweet about that. … Another nice thing to do is establish a group on LinkedIn for doctors in a particular geographic area in need of financial and business management advice. …
Target, Target, Target. Just as the old adage emphasizes “location” as crucial to real estate values, it’s also crucial to target your marketing when you’re social networking. The more focused you are, the more likely you are to find an underserved niche that needs you and the less likely you are to encounter competitors. … I recently gave a Webinar in which I explained how to automatically tweet your Google alerts. It makes sense to tweet such information because Twitter is good for distributing news. LinkedIn, meanwhile, is better for networking and creating groups.
Find Prospects. Both LinkedIn and Twitter are good ways to find prospects, and though one fishing strategy is not very nice, you should know about it anyway—and that’s looking into your competitors’ networks. While LinkedIn lets you hide your own network from the public and Twitter lets you block people you don’t know from receiving your tweets, the public (and competitors) can still see who is in your network even when you make your updates to Twitter private. So you may want to avoid connecting with clients on Twitter and only use it for prospecting.
To find prospects on LinkedIn, you can search its vast database, clicking “search,” and then narrowing that search on the pull-down menu to “search companies.” …
To find prospects on Twitter, you can search site profiles using some of the new Twitter search engines popping up, including: Tweepsearch, Twellow, Twubble and Mr. Tweet. Also check out a promising new registry for business-to-business searches on Twitter called Twibs. …
Compliance. Regulators offer little guidance about how advisors can use the new tools of social networking, apart from referencing existing advertising rules. …
To be sure, existing regulations are clear on many aspects of social networking. Still, it could save broker-dealers and RIAs a lot of money if the SEC and FINRA would offer more guidance, because then technology systems could be built to accommodate the rules. …
In the meantime, registered reps are clearly at a disadvantage, since some B/Ds are simply banning the use of certain social networking sites. Many have forbidden the use of Twitter or blog-writing by their reps.
Look Before Rolling Over a Business Startup
WebCPA.com
(December 15, 2009)
By William Brighenti
Promoters have been marketing on the Internet the use of 401(k) funds to purchase franchises or startup businesses, which normally require up-front material sums of monies to launch.
The procedure typically involves the creation of a C Corporation by the business owner, then the setup of a retirement plan for its employees, followed by the rollover of the new business owner-employee's 401(k) funds into this new plan, and ultimately the exchange of corporate stock for the funds in the plan.
Hence, the acronym ROBS: roll-overs as business startups. … A recent memo issued by the Internal Revenue Service characterized the rollover for a business startup as a "scheme" in the marketplace to access retirement funds to evade income taxes and the withdrawal penalty of 10 percent on their premature distribution. …
Logo of Internal Revenue Service, USA (Photo credit: Wikipedia)
If your clients are already sold on this procedure and nevertheless wish to pursue it, here are a few recommendations that may help them:
1. Hire an appropriate attorney to prepare the new retirement plan document. Avoid using the M&P (master and prototype) plan provided by the franchise seller. A number of promoters of ROBS transactions are on the IRS's watch list.
2. Have an objective valuation of the stock of the new corporation prepared with supporting detailed analysis. … The lack of a bona fide appraisal would raise a question as to whether the entire exchange is a prohibited transaction.
3. Before purchasing a franchise through promoters charging fees out of the proceeds of the stock purchase, consider whether they can be construed by ERISA or the IRS as "fiduciaries" rendering "investment advice" or administering the plan. If a fiduciary receives a payment from the plan assets, it may constitute a violation of the Tax Code.
4. Enable future employees to acquire employer stock. … In order for the plan to not discriminate in favor of highly compensated employees, an extension of the stock investment option must be afforded to non-highly compensated employees to be hired in the future.
5. Establish the plan as permanent; do not discontinue it within a few years after its adoption.
6. Never pay purely non-business expenses from the plan.
7. Communicate in writing the existence and availability of the plan to all new employees; otherwise, your plan will be in violation of Treasury regulations and may result in its failure.
The consequences of entering into any prohibited transactions and of carelessly setting up a ROBS are staggering penalties of 110 percent or more of the amounts involved in the transactions or the roll over itself. On Nov. 5, 2008, the IRS issued the following warning to all business owners contemplating the implementation of a ROBS arrangement:
Pension (Photo credit: Frederik Seidelin)
“For these reasons, we intend to scrutinize ROBS arrangements. … We believe that ROBS arrangements may endanger the qualified status of otherwise tax-qualified employee plans and may be prohibited transactions, requiring complete undoing of the transaction, and imposition of excise taxes.”
So tread carefully, and your clients should obtain the necessary legal, accounting and other professional advice before adopting a ROBS arrangement. Or perhaps they should even consider other alternatives, such as borrowing from their 401(k) plan.
William Brighenti, CPA, is a Certified Valuation Analyst and Certified QuickBooks ProAdvisor, who operates Accountants CPA Hartford in Hartford, Conn. He writes the blog Accounting and Taxes Simplified.
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