Comment Re: Doggett's Proposal to Kill Cross-Testing

[Andy the Actuary]

FYI. I sent the following to my Congressman.

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I am an Enrolled Actuary who does not practice in the defined contribution arena. Nonetheless, I urge you to oppose Congressman Lloyd Doggett’s (D-TX) proposal that would eliminate retirement benefits for many workers.

Under present law, individual account retirement plans are permitted to provide older workers with higher benefits to facilitate their catching up on their retirement savings. Such plans are generally required to provide all workers with a minimum contribution of five percent of pay.

Certainly, the concern is that owner-employees tend to be older and often when they retire, the business ends. Nonetheless, a contribution of five percent of pay is a significant benefit even if accrued over a period shorter than the employee's remaining working career. Five percent is certainly more significant than 0% which is where the employee will be at if law destroys the incentive for the employer to sponsor such a plan.

Please contact Acting Chairman Sander M. Levin (D-MI) or Ranking Member Dave Camp (R-MI) and ask them to oppose the Doggett proposal. Simply put, this proposal is a retirement plan killer that would result in millions of Americans losing their valuable retirement benefits

[Dougsbpc]

Good letter

I also sent one to our congressperson. I localized mine by reminding her that in addition to the idle rich, our area is comprised almost entirely of small businesses, many of which will terminate their plan if this legislation goes through. I kept it concise but felt like rambling on about the increased pressure down the road to reduce or eliminate public employee retirement benefits when so few private sector employees will have any retirement benefits. I know she is very close with public employees.

[drakecohen]

Didn't send a letter but after thinking about it:

http://blog.nj.com/njv_johnbury/2010/05/lobbying_fools.html

[david rigby]

Hmmm, just what is a target benefit plan?

[Jim Norman]

Didn't send a letter but after thinking about it:

http://blog.nj.com/njv_johnbury/2010/05/lobbying_fools.html

Guess John didn't get the memo about gateway requirements.

[Mike Preston]

Yeah, and he administers "a lot" of cross-tested plans. Sorry, I mean a lot of disqualified cross-tested plans.

John article makes it clear that he doesn't understand how private sector retirement plans work. If he takes that same level of competence into his primary area of expertise, public plans, those plans would be better served to find a different champion.

[drakecohen]

Normally I wouldn't respond but since there might be newbies out there I would point them to:

"Coverage and Nondiscrimination Answer Book - Poje, Bitzer and Topazio,Q 11:24,What is an age-weighted plan?

The age-weighted plan was the first of the new breed of hybrid plans designed in response to the cross-testing provisions of the Treasury regulations. In an age-weighted plan, the employer's discretionary contribution is allocated in a manner that considers both the participant's age and compensation. The plan's allocation rate is backed into, therefore, as a matter of mathematical necessity; the theoretical accrual rate or effective accrual rate (see Q 11:12) is generally the same for each participant. Each rate group will generally have the same test results, and no adjustments to the rate groups are necessary to satisfy Code Section 401(a)(4). In short, nondiscrimination with respect to contributions and benefits becomes a natural extension of the allocation formula. An age-weighted plan also passes the "broadly available allocation rate" test (see Q 11:38), and therefore would not have to provide a minimum allocation gateway contribution as required for plan years beginning in 2002 (see Q 11:42)."

So you see the last two comments were examples of petty quibbles (that happened to be mistaken anyway) designed to divert from the main point of the blog.

[rcline46]

First, Mr. Bury is correct in his calculations - for a correct population an age-weighted plan is 'better' than a new comp plan. What is overlooked is that a defined benefit plan can produce the same same results as a new comparability plan (love the term 'arcane') but at a much higher cost to the employer. YOu must have an Enrolled Actuary and lots of regulation, and no flexibility.

I guess Mr. Bury has not heard of Cash Balance plans! Gee - a super new comparability plan, but with the drawbacks of a defined benefit plan.

Mr. Bury supported the Dogget proposal last year also with the same arguements. He apparently does not listen to his clients. If he so dislikes the plans, why does he sell and support them? If he is ethically against them, then he should not do them.

[david rigby]

What is overlooked is that a defined benefit plan can produce the same results as a new comparability plan (love the term 'arcane') but at a much higher cost to the employer.

Much higher cost? to what do you refer?

- Administrative cost of a DB plan vs a DC plan? Yes, there is some, but it's not as high as manay believe.

- Regulatory oversight? almost every section of the IRC that applies to DB plans also applies to DC plans.

- Value of benefit delivered? Not likely. A DB plan will (almost) always deliver more dollars to retirement income than a DC plan. See definition of "leakage".

Often overlooked is the central point: the sponsor gets to decide his/her goal(s) for sponsoring a plan in the first place. This is the first step in designing a retirement program.

[Mike Preston]

Only a dodo bird would implement an age-weighted plan in most circumstances today. At the very least, it locks the plan sponsor in to much higher contributions for those who are not many years younger than the highly compensated employees. John's understanding of tax incentives and plan implementation is so woefully misguided that it would take much more time than I have available to respond to everything. Hey, John, how about picking on coverage while you're at it (you know, the 70% rules)? Or maybe vesting. Surely you think that vesting is yet another scam, don't you?

Did it ever dawn on you that the benefits provided by your age-weighted plans are actually higher than the benefits that could be provided through a defined benefit plan? Could you be said to be arguing against cross-tested defined contribution plans just so you can increase your universe of clients, by selling them a defined benefit plan? I won't do that, because I understand what your intent is, and that is to complain about disparity in benefits and argue that the government should be made more efficient so that it has no desire to offer plan sponsors an incentive vis-a-vis retirement funding.

Similarly, those who have a basic belief that retirement security is better served through the exact opposite, that is, the private sector, shouldn't be tarred with the marketing brush when what they are doing is true to their beliefs.

But you see a scam and a scam artist lurking everywhere. Your paranoia denigrates your argument's efficacy.

[Mike Preston]

Often overlooked is the central point: the sponsor gets to decide his/her goal(s) for sponsoring a plan in the first place. This is the first step in designing a retirement program.

When John invokes the phrase "discriminates based on salary", as he does on his blog at one point, all hope for a rational discussion is lost.

[drakecohen]

To the charge of hypocrisy here's how I responded on actuarialoutpost:

"It's separating what I do from being able to see the truth. I'm sure there are lawyers, CEOs, politicians and other professionals who are playing the game based on the rules in place recognizing the damage they do to the greater good but keep quiet about it (even defend it passionately) because of how much they personally benefit. I also do a lot of 401(k) plans with safe-harbor matches where only the principals benefit and it's perfectly fine under the rules we've lobbied for.

It's kind of like lawyers taking 40% (or more ) of some jury award or those investment guys who made millions off CDOs and MBSs. They must have realized what a warped system it is that allows them to profit so handsomely from the pain/loss of others but they're silent about it because they can use that money to run for elected office.

For the record, I also feel integration is a scam since the idea that people making over the TWB would need to 'make up' what they would be losing in Social Security benefits is a farce."

To elaborate here: I don't see actuaries as villains except for those who refuse to admit that cross-testing (like 401(k)) plans is not good retirement policy and it's only there to benefit pension sellers and the principals who buy their services. The villains in this piece are the the event-planners in congress and their staff who buy into the spiel because they are too dense (or lazy) to do their jobs. It happens at the local level much more often, and blatantly, but you would think that somebody somewhere would have noticed the cross-testing flaw per this example:

http://blog.nj.com/njv_johnbury/2009/12/pe..._betrayals.html

[Mike Preston]

Why is it a farce?

[K2retire]

What is a cross tested IRA? Clearly the people responding to the article have no idea what they're talking about.

[drakecohen]

Why is it a farce?

It would help if this merged somehow with actuarialoutpost (or PIX, is that still around?). That was brought up there and here's what I answered:

"If you argue for 401(l) you also have to argue that Social Security is a valuable benefit and people should be demanding to pay taxes on their salaries in excess of the TWB. They're not. Though the limit on pay kind of equalizes out the discrimination."

[Mike Preston]

Why is it a farce?

It would help if this merged somehow with actuarialoutpost (or PIX, is that still around?). That was brought up there and here's what I answered:

"If you argue for 401(l) you also have to argue that Social Security is a valuable benefit and people should be demanding to pay taxes on their salaries in excess of the TWB. They're not. Though the limit on pay kind of equalizes out the discrimination."

This is a non-sequitur. The fact that the benefit is substantial in relation to compensation up to the wage base is completely unrelated to whether a hypothetical benefit based on compensation above the wage base would be substantial in relation to compensation above the wage base. The way Social Security works, the benefits are skewed in favor of those whose compensation is less. I would think this would appeal to your socialistic leanings. If we were to just eliminate the cap, the net effect would be to increase a person's social security benefit by the third tier of the bend point calculation. I assume you are familiar with it. If not, go look it up. Surely that is a good enough reason for a sane individual to not demand to pay taxes on their salaries in excess of the TWB.

For someone who is quick to challenge the mathematical abilities of governmental representatives, I'm amazed at your attempt to bend mathematical reality in this instance.

[Andy the Actuary]

The general reality of life is that professional and small business owners do not start their businesses solely so that others can have jobs. Whether or not the owner values his employees as an asset, they are there to help him make money. If they don't, they are not carried.

As such, if an action doesn't benefit the owner, he's virtually unlikely to take it. In short, if you don't appeal to his own savings needs, he won't spend money on his employees.

While there may be age-weighted plans or cross-tested plans that use the 3 times gateway, the wager is that most of the cross-tested plans employ the 5% gateway. This is not so the administrator can be better compensated for dealing with a more difficult technical problem but so that the owner can contribute the maximum for himself while minimizing the cost for his employees. This philosophy is neither illegal nor immoral. It's simply business and like it or not, that is the truth.

If you kill cross-testing (which I suspect would ultimately mean age-weighted plans as well), many employees will lose benefits. No employer will make a 25% profit sharing contribution for his employees just so he can max himself out.

[Bird]

Sigh. I must not have enough to do...

I sell and administer cross-tested plans. That said, I always saw it as a temporary gift to my business, although it's lasted a lot longer than I thought it would. I don't believe that Congress has ever put anything in the Code authorizing cross-testing; I think the history is that the IRS first demonstrated that different types of plans could be "comparable" in Rev Rul 81-202, and then gave a road map for "new" comparability in the proposed and final 401(a)(4) regs. I'm actually kind of surprised that Congress hasn't acted already; I suspect it's just the uber-arcane nature of the discussion that has kept the status quo.

Looking at the scales from a societal point of view, there are a lot of things to consider. Cross-tested plans probably have expanded coverage, I'd say definitely have, but if we're being honest, 3% or a little more, 5% tops, is not a gigantic contribution rate, especially when the owner is 55 or 60 and the plan is of limited duration, and claiming expanded coverage as a great victory is probably an exaggeration. And it does come at a cost, tax revenue - it is Congress' job, not mine, to determine whether that cost is worth the benefit of expanded coverage. I do feel that any argument that only considers expanded coverage is incomplete.

Philosophically, "defined benefit" plans promise certain benefits and guarantee them. "Defined contribution" plans define the contributions going into the plan and let the benefit chips fall where they may. I do have to wonder about whether "comparability" analysis fully considers the guaranteed nature of DB plans. Target benefit plans had a certain logic in that the contributions, while based on projected benefits, were at least required.

I don't mean to argue against cross-tested plans, because I'm sure at least some plans wouldn't exist without that feature. But I can't get too indignant about it. And, the gorilla in the room being federal budget deficits, I have to think there will eventually be a tidal wave washing out a lot of "tax expenditures" and as far as the greater picture, this one will be like a flea on a rock at low tide.

FWIW.

[Andy the Actuary]

The value of money is relative. $100,000 means very little to A-Rod (about .3% of his compensation or the equivalent of $600 for someone making $200,000) but means a lot to me. $1,500 has modest meaning for me but to someone making $30,000/year, it's rather significant. Even with flat salary of $30,000, a 5% contribution means $7,500 over 5 years and it is unlikely the person (unless a complete Spartan) would have been able to accumulate such a sum on his/her own.

[Ron Snyder]

Scam? Farce? The rhetoric went beyond that which was required. It is apparent that those who oppose cross-tested plans do not fully understand them or the clients who adopt them and who will not be providing benefits to their employees if they are taken away.

[jpod]

I can see both sides of the philosophical issue. However, I am not grasping the distinction between DB and DC which some on this Board are making. There are plenty of DBs set up by business owners in the age 55+ category with no intention of keeping them around for more than 5-10 years.

[Ron Snyder]

Congress has used qualified retirement plans as its whipping boy since 1982, when Ronald Reagan submitted the "largest tax increase of all time" (to balance the 1981 Kemp-Roth bill that was the "largest tax reduction of all time"), the greatest source of projected tax revenues was from the changes to retirement plans.

After spending many years doing qualified plans, I came to the conclusion that they don't really do clients a favor. Qualified plans don't generate tax savings, only tax deferrals. And the chance of our clients being in a lower tax bracket a few year from is very small.

Company provided retirement benefits were to have been the second leg of the 3-legged stool (along with personal savings and social security). How are we doing on the other 2 legs? Social security is no longer solvent like it was at the end of the Clinton Administration (Congress actually believed that it had "solved" Social Security at the time until 2029, a ridiculous claim).

Anything that makes employer-provided retirement benefits less desirable will put an inordinate amount of political pressure on Congress to expand Social Security as an ever-increasing number of retired Americans attempt to live on Social Security plus an insufficient amount of savings.

[david rigby]

... 1982 ... the "largest tax increase of all time" ...

TEFRA = Tax Every Fiscally Responsible American

[Andy the Actuary]

I can see both sides of the philosophical issue. However, I am not grasping the distinction between DB and DC which some on this Board are making. There are plenty of DBs set up by business owners in the age 55+ category with no intention of keeping them around for more than 5-10 years.

The distinction is perceptual. Just like it's perceptually okay to terminate a DB plan but not to convert it to a cash balance plan which still credit benefits.

[Peanut Butter Man]

Anyone know why this is coming up again? I checked Thomas.gov and there is nothing new with H.R. 4126. Thomas.gov still says it was introduced on Nov. 19, 2009 and sent to the House Committee on Ways and Means where it sits.

Along with the elimination of cross-testing, H.R. 4126 also changes 410(b)(6) for part-time and less than full time employees. I'm still trying to understand that provision.

My 2 cents is that the industry went along with the IRS on Rev. Proc. 2007-44 and the 5-year and 6-year plan document cycles. If H.R. 4126 becomes law, or another version of H.R. 4126 that eliminates cross-testing becomes law, many of those brand new EGTRRA documents will need to be amended (again).

[blue]

Does anyone know if they have voted on this bill yet and if not when they are scheduled to vote?

[david rigby]

According to Thomas, the only action on HR 4126 is referring it to the Ways and Means Committee, November 2009.

I found no mention of it on the W&M committee website.

[Bird]

Anyone know why this is coming up again?

ASPPA sent an e-mail to all members that Doggett is working on a new proposal.