The retirement planning market will explode over the next decade, and the federal government intends to stoke the fire. Thats the message from two different meetings on the topic held simultaneously in June--the SAVER Summit in Washington, D.C., and the Securities Industry Associations Savings, Retirement and Estate Planning conference in Denver.
Meanwhile, the newest, hottest retirement planning option--the Roth IRA--has brokers increasingly befuddled.
Theres really a bipartisan piling on [in Washington, D.C.] to have a war in favor of savings, just as there was a war on drugs, said SIA President Marc Lackritz via phone to attendees of the SAVER Summit, a government-sponsored meeting June 4. What is truly remarkable is the amazing consensus on the magnitude of the problem. Lackritz was one of 250 delegates to the summit, mandated by legislation in 1997 as a way to address retirement income issues beyond Social Security.
Lackritz participated in a working group that drew together labor leaders, mutual fund executives, consumer advocates and broker/dealers. Despite the diverse interests, the group concluded that the public needs better incentives for saving, such as simplified regulations and broader tax advantages.
A report with specific recommendations is due by the end of the summer. However, whether regulators will go along with the groups ideas is unknown. The SEC was almost excluded from participation in the summit, Lackritz said. Two more SAVER Summits will be held in 2001 and 2005.
Right now, however, a fair amount of confusion grips those in the retirement planning industry. SIA conference participants were frustrated at how complex planning has become for firms and brokers. Their favorite target: Roth IRAs.
IRA business is growing so fast that firms cant find enough operations staff to get accounts opened without delays, attendees complained. Some said they had to handle conversions to Roth IRAs manually. A.G. Edwards IRA business doubled in the first half of 1998, compared with the same period a year ago. Mark Tulley, the firms manager of IRA retirement plan services, said about 10% of IRAs convert to Roth accounts.
Morgan Stanley Dean Witter has seen a 20% conversion rate, said Maryanne Elias, the firms IRA marketing director.
Attendees said they were troubled by brokers continuing lack of knowledge about Roth IRAs despite the educational materials available to them. We have a lot of brokers who dont know the basic rules, Tulley said. We run into misunderstandings most often about the tax consequences of distributions for college education and home mortgages.
Elias said her firm is experiencing operational headaches from brokers who move IRAs in and out of Roth accounts. She said the brokers convert IRAs into Roths, then unconvert them, wait for a market move that would give a more favorable valuation to achieve better tax consequences, then convert back to a Roth again.
Regardless of the confusion, SIA conference speakers expect that Roth IRAs are here to stay given the consensus on savings in Washington, D.C. However, they do anticipate some technical adjustments to the Roth regulations in the next few months.
More retirement planning-friendly laws might be on the horizon, SIA conference speakers predicted. Washington has fallen in love with defined contribution plans, said David Wray, president of the Profit Sharing/401(k) Council of America. Legislation is working its way through the House and Senate to enhance the countrys retirement planning system. One provision would increase the annual 401(k) contribution level to $15,000, he said.
It will take years for the bill to pass, but theres a strong chance it will, Wray said. The only negative is that regulators are looking for a role in the defined contribution system. The trend is toward less regulation, but the Department of Labor still wants an active role and has been making an issue of how fees are charged to participants.
Larger 401(k) investments might push participants to seek investment advice, Wray said. In general, 401(k) plans now generate about $10 billion in new cash each month, with most of it going to the equities market. Theres a $90, 000 average account balance among plans that have been in place at least 15 years, he added.
You now have secretaries with $200,000 in these plans and as non-executives they dont get financial advice as a perk, Wray said. When people see a lot of money in their plan, theyll be willing to pay for advice, especially once the market gets choppy.