1. Retirement Plans and Mutual Funds
Chapter 11
Retirement Plans and Mutual Funds

2. Session Overview
Selling funds through retirement plans is a multi-step process.
Retirement plans provide significant tax benefits.
Defined contribution plans and individual retirement accounts have become key components of the U.S. retirement savings system.
Target date funds provide an asset allocation that becomes less risky as investors near retirement.
The U.S. retirement system faces challenges in the decades ahead.

3. Service Providers

4. Selling Fund Shares through a Retirement Plan
Employees choose one or more of the funds available.
Plan administrator provides employees with information on the options.
Employer chooses funds to include as investment options.
Plan administrator (often a fund sponsor) works with employer to establish a plan.

5. Retirement and the Fund Industry
Retirement savings play a key role in the fund industry.
They make up nearly 40% of industry assets.
Funds play a key role in retirement savings.
More than half of all retirement plan assets were invested in mutual funds.
About 60% of assets in 401(k) plans and IRAs were invested in mutual funds.

6. Source of Retirement Income
For current retirees, what % of retirement income is derived from Social Security?

7. U.S. Retirement Market

8. Retirement Income Sources

9. Funding Retirement

10. IRA Assets

11. Tax Benefits of Qualified Retirement Plans
Employee contributions can generally be made on a Pre-tax basis
Employer contribution is deductible for employer.
Participants (= employees in the plan) don’t pay tax on employer contributions.
Participants can contribute some pre-tax income into the plan.
Earnings on contributions accumulate tax-free.
Vested contributions remain an employee not employer asset
DC assets are protected fro bankruptcy
In short, participants pay taxes only when they withdraw money from the plan.

12. The Value of Tax Deferral to Employees

13. Qualified Plans To qualify for tax benefits, plans must:
Cover all employees meeting minimum age and length of service standards.
Provide benefits that don’t favor highly-paid employees.
Cap the level of contributions and benefits per employee.
Vest employee rights to benefits within a specified period.
Provide benefits for the employee’s spouse under certain circumstances.

14. Traditional IRAs vs. Roth IRAs
Contributions pre-tax
Earnings accumulate tax-free
Withdrawals are taxed
Roth
Contributions after-tax
Withdrawals are not taxed
Traditional IRAs may be converted to Roth IRAs.

15. Limits on IRA Contributions
Roth contributions: Limited to workers with incomes below a specified amount.
Deductible IRA contributions: Limited to workers with incomes below a specified amount.
These income limits do not apply if neither the worker – nor the worker’s spouse – is covered by a retirement plan at work.
Workers may make non-deductible contributions to traditional IRAs, which still benefit from tax-free income accumulation.
Overall limit: Total contributions to Roth and traditional IRAs (both deductible and non- deductible) are capped.

16. Defined Benefit vs. Defined Contribution
Defined Benefit (DB)
Traditional pension plan.
Employer bears risk of making fixed benefit payments.
No portability; specific to company providing plan.
Becoming less common, especially with private employers.
Defined Contribution (DC)
401(k) plan is most common type.
Employee bears risk. Payout based on investment earnings.
Assets move with the employee.
Becoming more common.

17. DB – DC Shift

18. Source: Investment Company Institute
401(k) Plan Assets
Source: Investment Company Institute

19. 401(k) Plan Contributions
Types of contributions to 401(k) plans:
Elective: Voluntary contributions by workers.
Usually in the form of salary reduction.
Matching: Employer contributions that match elective contributions.
Usually capped at a flat dollar amount or percentage of salary.
Non-elective: Contributions made by the employer to all participants.
Catch-up: Additional elective contributions for workers over age 50.

20. Limits on 401(k) Plan Contributions
Total annual contribution -- from elective, matching and non-elective contributions -- is capped for all workers.
The cap may be lower for highly-compensated employees if the plan fails antidiscrimination tests.
These tests ensure that the highest-paid workers don’t benefit from the plan disproportionately.

21. Contribution Limits

22. Recent Pressures

23. Sources of Rollover Information

24. Number of Investment Options in 401(k) Plans
Most plans have at least 3 options,
to avoid liability for investment choices made by employees

25. Impact of Choice

26. Target Date Funds Also known as life cycle funds.
Have experienced rapid growth.
Designed for retirement planning.
Investors choose a target date, which is roughly equal to their planned retirement date.
Gradually change asset allocation, reducing risk as they approach the target date.
The expected asset allocation is call the glide path.

27. Plan Administration Plan administrators must be able to:
Accept and keep track of different types of contributions.
Handle different types of distributions.
Calculate required minimum distributions.
Keep records of beneficiary provisions.
Process loans.
Provide reports to plan sponsors.
Accommodate non-mutual fund investment options.
Plan administrators may be fund sponsors or third parties.

28. IRA Assets
48% held in Mutual Funds

29. Individual Retirement Account Assets by Type of Investment
Source: Investment Company Institute, 2016 Investment Company Fact Book

30. IRA Assets
Rollover IRAs hold assets that have been transferred from – or rolled over from – an employer-sponsored retirement plan.
Rollovers now account for the bulk of assets added to IRAs every year.
Withdrawals from IRAs have been increasing as the U.S. population ages.
The Baby Boom is reaching retirement age.

31. The Future of Retirement Planning
Key issues:
Distribution planning.
As the population ages and moves into retirement.
Making plans simpler.
Greater use of default options to help participants with decision- making.
Ensuring retirement income security for all.
Providing access to a retirement plan for the 50% of workers (often lower income) who do not have it now.
Ensuring the financial viability of Social Security, which provides the majority of retirement income for two-thirds of Americans.

32. The DB-ification of the 401(k)
Key issues:
QDIA (Qualified Default Investment Alternative)
Target date
Managed account
Automatic savings features
Initial contribution
Periodic increases
Distribution planning
Automatic withdrawal features