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Vol. 74, No. 2, March 2020
FOCUS ON Retirement & Financial Planning
A Financial Comparison of Nonqualified Deferred-Compensation Arrangements
David K. Smucker, CPA, CLU, ChFC, MSM
This article compares and contrasts four approaches to defined-contribution nonqualified deferred-compensation arrangements funded with cash value life insurance. The author briefly reviews the traits of each approach, then using life insurance illustrations, provides a mathematical comparison of them. Then, the author reviews some of the nonmathematical considerations to each approach. Finally, the author briefly reviews how three of the alternatives might mitigate or completely avoid the 21 percent tax imposed on compensation paid to employees in excess of $1 million by the newly passed IRC Section 4960.
401(k) Plan Distributions: Rollover or Retention of Plan Proceeds
Keith R. Fevurly, MBA, JD, LLM (Taxation), CFP
Paul L. Camp, PhD, CFP, CMFC
Participants in 401(k) plans who are nearing retirement must decide whether to allow retirement funds to remain within the structure of the 401(k) plan sponsored by the current employer or to roll the proceeds over into a self-directed IRA. This decision is often made absent any real impartial guidance on the factors influencing this decision, and despite the fact that these account balances often represent the largest single sums most workers will receive in their lifetimes.
This paper adds to the existing literature by exploring the various rollover options as well as factors supporting and against the rollover decision. In addition, the proper mechanics of accomplishing the rollover transaction are explored and the current state of the regulatory environment is considered with respect to the “rollover or retain” decision.
Limitations of Retirement Planning Software: Examining Variance between Inputs and Outputs
Rachel (Qianwen) Bi, PhD, CFP, MBA
Lukas R. Dean, PhD, CRC, RFC
Jingpeng Tang, PhD
Hyrum L. Smith, PhD, CFP, CPA
The present study examines the variability of inputs and outputs from five of the most widely used retirement planning calculators used by U.S. consumers. Results indicate that due to differences in assumptions and inputs, the calculators produce outputs that vary dramatically for even very simple client situations, with greater variance for lower socioeconomic households. The results suggest that even for simple scenarios, American consumers would need a high level of financial literacy to successfully input and/or interpret the output without the help of a professional advisor.
Buy-Sell Planning with Third-Party Ownership
April Caudill, JD, CLU, ChFC, AEP
The need for buy-sell planning in small- to medium-sized businesses transcends industry, nationality, and economic barriers. In most businesses, a succession plan can be implemented with either cross-owned or entity-owned life insurance, but complex buy-sell planning sometimes requires a third-party buy-sell structure. A business continuation general partnership can manage the ownership of policies and provide tax advantages. The new 2019 transfer-for-value regulations require additional analysis, particularly for satisfying the “substantial financial relationship” test, but they appear to include language that will accommodate buy-sell planning scenarios.
Thirty Examples Illustrating How the SECURE Act Will Enhance Retirement Plans and Retirement Planning
Kenn Beam Tacchino, JD, LLM
If you work in the retirement plan market or the retirement planning field, the only constant is change. New law was adopted at the end of 2019 that enables individual clients to improve their prospects for retirement planning, entices small business clients to adopt a retirement plan, and promotes extra savings opportunities for clients who sponsor existing retirement plans.
Accounting & Taxation
IRS Issues Important Regulations on Reportable Policy Sales and Clawback
Thomas F. Commito, JD, LLM, CLU, ChFC, AEP
In late 2019, the IRS finalized two important regulations that impact financial advisors. The first dealt with clarifying the “reportable sales rules” that impact reporting in life settlement sales. The second regulation addressed the clawback problem inherent when a lifetime transfer is made when the exemption is higher and then the client dies in a future year when the exemption is lower.
Opportunity Zones—Congressional Behavior Modification
Mark R. Parthemer, Esq., AEP
The new Internal Revenue Code—Sections 1400Z-1 and 1400Z-2—comprise the entire statutory provision for qualified opportunity zones (QOZ). At their core, QOZ taxation reflects the use of the tax code to encourage certain behavior. Should your client take advantage of this opportunity?
Hackers and Scammers and Rogues, Oh My!
John N. Migliaccio, PhD, RFG, FGSA, MEd
Financial elder abuse has been an ongoing challenge for older adults, families, financial professionals, and law enforcement. In recent years it has become more challenging, complex, and sophisticated as technology has made it easier to contact consumers. Financial professionals play a key role in preserving and protecting billions of dollars of client assets from abuses of trust from multiple sources.
In the Client’s Best Interest
Regulatory and Ethical Concerns
Richard M. Weber, MBA, CLU, AEP (Distinguished)
What do New York, Massachusetts, New Jersey, and California have in common? Politically, they’re typically “blue states.” In financial services, they account for almost 25 percent of insurance premiums in the United States. These are also the states having already adopted (New York and New Jersey) or are likely next in line to adopt laws requiring suitability and client’s sole interest for licensed insurance agents. As the trend increases toward elevated standards of care for the sale and service of insurance and financial products—especially life insurance—the Journal of Financial Service Professionals is pleased to initiate its newest column to inform and offer guidance to its readers: “In the Client’s Best Interest.”
Insurance & Risk Management
The Risk of Being Risk Averse—and What to Do about It
Steve Parrish, JD, RICP, ChFC, CLU, RHU, AEP
Clients who have an aversion to risk represent a challenge for financial advisors. This column discusses the risks associated with these clients’ fears and suggests the challenges and opportunities for advisors to work with such individuals. Using behavioral finance principles, it addresses who is a risk-averse client, what are the issues related to this aversion, and tangible steps an advisor can take to help.
Social Security Planning
How Congress Might Slow the Growth of Social Security Benefits
Bruce D. Schobel, FSA, MAAA, CLU, CEBS
Congress has a long menu of ways to reduce the growth of Social Security’s future benefit costs. These include increasing the full retirement age, means testing benefits, reducing cost-of-living adjustments (COLAs), and modifying the benefit formula. Choosing from that long menu is totally a political matter, without obvious right and wrong answers. Something must be done before too long to solve Social Security’s financial problems.