Retirement Savings Bandwagon Gains Horsepower

Over the Labor Day weekend, the administration temporarily shifted its focus away from health care and provided its first insight into what is arguably as daunting a challenge for the American people — retirement savings. In President Obama’s weekly radio address on September 5, he outlined five proposals aimed at helping families save for retirement. And, in response to the president’s wave of the starting flag, the IRS released several supporting pronouncements under what it is calling its Savings Initiative campaign. Subsequent paragraphs in this brief will summarize the key points of the president’s speech and identify the corresponding technical guidance, but first — what do these initiatives mean for financial advisors?

• Successful practice management will become more dependent on retirement plan sales.

• This increased opportunity for retirement savings means increased need for client education.

• The mechanisms for saving for retirement are branching out and advisors will need to be tuned in to clients’ overall financial picture to be able to spot opportunities.

Retirement Savings Initiatives

1. Expand opportunities for automatic enrollment in 401(k)s and other retirement plans

In support of this first initiative, President Obama pledged that the administration would:

• Streamline the process for 401(k) plans to adopt automatic enrollment

• Make it easier to help increase retirement savings over time

• Allow automatic enrollment in savings incentive match plans for employees (SIMPLE) IRA plans

In response, the IRS issued Revenue Ruling 2009–30 and Notices 2009-65, 2009-66 and 2009-67.

Revenue Ruling 2009-30 provides plan sponsors with additional guidance on how they can include automatic enrollment and automatic deferral escalation features in their 401(k) plans. Examples are included — one involving a basic automatic contribution arrangement and the other an eligible automatic contribution arrangement (EACA).

http://www.irs.gov/pub/irs-drop/rr-09-30.pdf

In Notice 2009-65, the IRS provides two sample plan document amendments that 401(k) plan sponsors can use to add automatic enrollment features to their plans.  The first sample amendment can be used to add a basic automatic contribution arrangement with, if elected by an adopting employer, an escalation feature. The second sample amendment can be used to add an EACA with, if elected by an adopting employer, an escalation feature.

http://www.irs.gov/pub/irs-drop/n-09-65.pdf

IRS guidance is given in Notice 2009-66 regarding how to facilitate automatic contribution arrangements in SIMPLE IRA plans. This notice also contains a Department of Treasury and IRS request for comments on the need for future guidance regarding EACAs in SIMPLE IRA plans.

http://www.irs.gov/pub/irs-drop/n-09-66.pdf

Finally, Notice 2009-67 includes a sample amendment that SIMPLE IRA plan sponsors can use to add an automatic contribution arrangement. Only SIMPLE IRA plans that use a “designated financial institution” (i.e., a trustee, custodian or issuer for the SIMPLE IRA plan that must receive all contributions for the plan) can use the sample amendment.

http://www.irs.gov/pub/irs-drop/n-09-67.pdf

2. Make it easier for more families to save through their tax refunds

An estimated 100 million families receive tax refunds annually in the U.S.¹ In his speech, the president reminded taxpayers of their current ability to direct some or all of that refund to an IRA, and introduced a new option — to automatically purchase U.S. savings bonds with their refunds by checking a box on their tax returns. The bond-purchase program would be available in 2010.

3. Enable workers to convert their unused paid time off to retirement contributions

In Revenue Rulings 2009-31 and 2009-32, the IRS lays out examples of employer-sponsored retirement plans that allow current and former employees to convert the dollar equivalent of unused paid time off into retirement plan contributions.

http://www.irs.gov/pub/irs-drop/rr-09-31.pdf

http://www.irs.gov/pub/irs-drop/rr-09-32.pdf

4. Help workers and their employers better understand the available options for tax-favored retirement saving through clear, easy-to-understand language

In response to this initiative, the IRS and Treasury have collaborated on and issued several new pronouncements that offer investors comprehensible guidance that promotes retirement savings.

The newly issued guidance includes the following.

Rollovers from Employer Plans to Roth IRAs

http://www.irs.gov/pub/irs-drop/notice_2009-75.pdf

Life Events That Can Affect Retirement Savings

http://www.irs.gov/retirement/article/0,,id=211119,00.html

Rollover Chart

http://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Retirement Topics — Rollovers of Retirement Plan Distributions

http://www.irs.gov/retirement/participant/article/0,,id=211527,00.html

IRS Retirement Plans Navigator

The IRS has launched a Web page to help employers navigate through tax-favored retirement plan options and to make it easier for their employees to save for the future. It encourages small business owners to establish retirement plans by helping them choose the right plan for their business. The site also promotes compliance with tax law by providing information and resources on maintaining plans and correcting plan errors.

http://www.retirementplans.irs.gov/

Safe Harbor Explanation — Eligible Rollover Distributions

Recipients of eligible rollover distributions from qualified plans, 403(b) plans and 457(b) plans, by law, must receive a notice prior to the distribution that explains the rollover rules and, for amounts not rolled over, the applicable federal income tax withholding, tax treatment and consequences. Notice 2009-68 contains two safe harbor (or sample) explanations that plan sponsors may use to satisfy the rollover notice requirement.

http://www.irs.gov/pub/irs-drop/n-09-68.pdf

These new releases complement an already abundant existing IRS library of retirement savings-related information located at:

www.irs.gov/retirement/participant/index.html

Conclusion

The administration’s retirement savings initiatives, fuel-injected by the IRS’ tangible and actionable directives, make clear the government’s commitment to precision tune automatic savings and investing in employer-sponsored retirement plans. The effect will be that a large percentage of net flows to asset managers will come from retirement-related products and programs. If you’re not already on board, it may be time to consider jumping on the retirement savings bandwagon.

The Columbia Management Learning Center®

The Columbia Management Learning Center is a dedicated resource offering thought leadership in financial planning and retirement strategies. From regulatory and legislative issues to demographic and economic trends, we are committed to providing financial advisors and their clients with the latest research and most innovative financial solutions.

Advisors who want to take advantage of the Columbia Management

Learning Center may contact a Columbia Management Regional Sales Consultant at 877.894.3592.

¹ Retirement Security for American Families, September 5, 2009

This material is for educational purposes only. It cannot be used for the purposes of avoiding penalties and taxes.

Columbia Management does not provide tax or legal advice. Please consult a tax or legal advisor for individual needs.

Columbia Management Group, LLC (“Columbia Management”) is the investment management division of Bank of America Corporation. Columbia Management entities furnish investment management services and products for institutional and individual investors.

The Columbia Management Resource Desk is staffed by the Retirement Learning Center, a third-party industry consultant that is not affiliated with Columbia Management or any other Bank of America affiliate.

Any information provided is for informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs.

CRS-34/23903-0909 09/AR90748

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