2017 Retirement Plan Limits

On October 27, 2016, the IRS announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2017. Here are the highlights.

Please click 2017 Retirement Plan Limits to view the chart below as a PDF document.

¹Internal Revenue Service (www.irs.gov), ²Social Security Administration (www.ssa.gov)
*Please note, limits for Retirement Plans remain unchanged.

The Department of Labor's New Fiduciary Rule

The Department of Labor revealed its long-awaited new fiduciary rule for investment advisors Wednesday morning.

The rule is designed to guarantee that investment advisors are putting their clients’ interest  first in regards to both fees and investment choices – that is to say that they are acting in a fiduciary capacity. Liz Davidson, the author of What Your Financial Advisor Isn’t Telling You, gives some insight into the details of this new rule in an interview with USA Today.

What does the rule mean?

Liz Davidson: Under the Department of Labor’s fiduciary rule, financial advisers providing investment advice for retirement accounts (including employer-sponsored retirement accounts, Individual Retirement Accounts and even many Health Savings Accounts) will now be subject to a fiduciary standard, which requires them to put the client’s interest first.

A fiduciary standard…requires the adviser and the company to act with the care, skill, prudence and diligence that a prudent person would exercise based on the current circumstances.  Both the firm and the adviser must avoid misleading statements about fees and avoid conflicts of interest.  This is great news for consumers. The end result is that the new rule will now align the interests of both the investor and the adviser and put them on equal footing when it comes to all the information they both need to make the best decisions.

How do I know if my investment adviser is a fiduciary?

LD: Ask to see a fiduciary agreement in writing.  If your adviser is compensated even partly from commissions from investments they sell you, they’re probably not acting as a fiduciary.  The DOL offers this guide for consumers on how to tell if your adviser is a fiduciary.  Some examples of personal financial advisers that are already acting as a fiduciary whose status can be verified online are Registered Investment Advisors (RIA) and “Fee-Only” professionals who are members of NAPFA (the National Association of Personal Financial Advisors).  Some retirement plan advisers who offer employee benefits already act as fiduciaries, as do CFP professionals when offering financial planning advice.  However, many CFPs work for brokerage firms who follow the looser “suitability” standard when it comes to investment advice.

What will be the effect on fees?

LD: The expectation is that advisers required to act as fiduciaries will recommend lower-fee investments to their clients. The DOL has estimated that this will save investors up to $40 billion in fees over the next 10 years.  The practical implication of the fiduciary standard is that when choosing between two otherwise very similar investments, a fiduciary would choose the one with the lower costs. This is very helpful as the structure of much of the financial services industry is full of inherent conflicts of interest that don’t always favor consumers.

How will it affect the average investor?

LD: The fiduciary rule will have a positive effect on the average investor because it now places that investor and the adviser on the same side of the table.  Investors should see their costs go down over time and their trust in advisers go up as they experience more transparency in fee and compensation disclosure, and know that the adviser is held to a recognized legal standard to uphold the investor’s interest over their own.  Investors who don’t meet the minimum account standards for traditional advisers still have many great, low-cost options. Those investors may want to consider working with a financial adviser that charges a flat hourly, monthly, or annual fee instead of an asset-based fee... Investors who have unbiased financial wellness programs as an employee benefit can also get free financial education and guidance to help them make their own investment decisions.

If you have any further questions about the Department of Labor's new rule, don't hesitate to contact us.

**This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. Prepared by Broadridge Communication Solutions Inc. Copyright 2015

What do the Apple Watch and TIAA-CREF have in common? If you’re a TIAA-CREF client, you need to know.

Friday, April 24th was a big day for two behemoth companies.

One, the dominant world leader in personal computers and mobile devices and the largest publicly traded corporation in the world by market capitalization. The other, one of the world’s largest financial services organizations, serving the academic, research, medical and cultural fields.

On April 24th, Apple began shipments of the long awaited Apple Watch. Apple Watch is a smartwatch that integrates with the iOS operating system and the iPhone, proprietary to Apple. Early estimates have the initial orders already in excess 1.7M units with an average price over $700 per watch. This has been national and international news, hitting every major news outlet.

Friday, April 24th, was also the day that College Retirement Equities Fund (“CREF”), the companion organization of Teachers Insurance and Annuity Association of America (“TIAA”), rolled out new multi-share class versions of their eight investment portfolios. Like the Apple Watch, CREF funds are only available to clients on TIAA’s proprietary platform. The CREF portfolios are actually not mutual funds, but sub accounts within a variable annuity contract. Not only was this not considered newsworthy on a national basis, I struggle to find any mention of it other than the obligatory shareholder notice filings,FAQ notices, and employer flyers (image below)on their own website.

The new class designation is based on an institution’s total assets in CREF Accounts across all plans. Smaller plans, with total CREF assets (not TIAA-CREF plan assets, just assets in CREF funds) less than $20M, will bear the brunt of the expense change. Assignment to the new CREF classes will be determined as follows:

Total CREF Assets

  • Less than $20 million
  • $20 million up to $400 million
  • $400 million or more

CREF Class

  • R1
  • R2
  • R3

The table below reflects the current and new the expense ratio for the three new share classes,R1-R3:

Individual clients with IRA or Keogh accounts are now in the RI share class, the highest share class. Annuitants, receiving annuity income payment will default to the least expensive share class, R3.

Why is TIAA’s news significant? Fund companies modify their expense ratios all the time? This time it’s different. As of December 31, 2013, CREF’s net assets were approximately $227 billion. The average participant in a retirement plan that has less than $20M in CREF assets are now paying 50-60% more for the same CREF funds they owned before April 24th. TIAA, as the administrator of these “smaller” plans, has also increased what they receive internally by 45%. Within the expense ratio of the fund is a plan services expense, also referred to in the industry as "revenue share". From TIAA’s site, “The plan services expense, also known as the recordkeeping offset, is the portion of the expense ratio paid to TIAA that is used to offset the cost of recordkeeping and other administrative services.” The plan services expense is changing from a current .24% to .35% for the R1 funds. Thisis a component of the administrative expenses, not an additional amount.

Many of TIAA’s clients are retirement plans that are exempt from ERISA (Employee Retirement Income Security Act) since many plans, such as church plans and many retirement accounts in the grades K-12 education market, are not subject to ERISA. All 401k plan’s and most 403b’s plans, found in the non-profit, private school and higher education’s markets are subject to ERISA. ERISA’s standard of care for a plan fiduciary, as it relates to the cost of administering a retirement plan, is a test of “reasonableness.” Under ERISA’s prohibited transaction rules, the responsible plan fiduciary is prohibited from permitting a plan to enter into an arrangement with a service provider unless the arrangement is “reasonable”. The marketplace usually determines what the “reasonable” cost of delivering administrative services for a retirement plan, not the revenue sharing that may or may not exist within the funds offered in a plan. It is also unusual that a vendor providing recordkeeping services mandate what the revenue requirements are for all plans based solely on asset size in a proprietary fund offering?

The new class structure will affect only the Administrative & Distribution expenses, which will result in a different overall expense ratio for each class. The new CREF classes will impact CREF assets held in retirement plans at current and previous employers, as well as any individual plans/products employees may have. To TIAA’s credit, they have historically delivered lower cost investment options than comparable annuities and mutual funds. Cost is one of several criteria when selecting appropriate funds. Bottom line, get educated to how this may affect you or your plan.

So April 24th may have come and gone, and your Apple Watch is likelystill be on backorder. If you have a TIAA-CREF account, or you are an employer offering TIAA-CREF to your employees, especially if your plan has less than $20M in CREF assets, maybe you can use your new Apple Watch to see what these changes are costing you?

Kent Fitzpatrick, Accredited Investment Fiduciary Analyst(AIFA), Accredited Retirement Plan Consultant(ARPC) and Global Financial Steward (GFS) is the Managing Director of Asset Strategy Advisors, LLC, a Registered Investment Advisory firm. He can be contacted at www.assetstrategyrc.com,@assetstrategy,or 781-235-4426.