Plan sponsors and fiduciaries have a lot on their minds these days. One’s duty as a retirement plan fiduciary often can be the most challenging of all job functions. Yet rarely is a new plan sponsor or a new retirement committee member fully aware of all the duties and responsibilities they assume as a retirement committee decision maker.
Instead, most retirement plan sponsors begin their fiduciary journey on a firm foundation of fiduciary ignorance. In addition to monitoring investments, benchmarking, administration and payroll, there are two macro-level concepts of which all retirement advisors and most plan sponsors should be fully aware. They are:
- the accumulation phase; and
- the decumulation phase.
The accumulation phase is a simple enough concept to grasp when advisors communicate with plan sponsors or plan participants. While the concept is simple enough to define and communicate, however, it can be anything but simple for plan participants to execute a successful savings and growth strategy. Even though a variety of investment strategies exist for accumulation, many of them can deliver a plan participant to a successful retirement outcome.
The decumulation phase is a different process—and one that can be difficult to explain succinctly. However, this phase—spending down retirement plan assets—is rarely a problem for anyone to execute. Most retirees have no problem spending their accumulated assets.
What Occurs Between Accumulation and Decumulation?
To oversimplify, one could refer to target date funds or managed accounts and reference the reduction of equity exposure as being an important component of what contributes to a successful retirement. However, there is so much more for each plan participant to consider than just the glidepath of the target date fund. Multiple investment strategies can successfully deliver a significant asset to the plan participant upon reaching normal retirement age.
For each plan participant there needs to be substantial thought, consideration and conversation when answering this question: When should I convert my assets from the existing tax-qualified structure to an after-tax account status?
What Are the Known and Unknown Factors?
When considering the conversion of tax-deferred assets to after-tax assets, the plan participant likely knows the following: existing tax law, the participant’s current age, current year’s income level and the potential tax obligation created by the conversion.
Read more commentary from Steff Chalk here.
The unknown factors pose potential pitfalls in the form of future required minimum distribution (RMD) tables, a participant’s mid- and long-term health, future market returns, future earned income (year over year) and any future tax reform.
These known and unknown factors have a direct impact on the tax obligation created by the conversion of any pre-tax asset into after-tax money, which ultimately results in how much of one’s retirement savings will be lost to taxes in the coming years.
Since most plan fiduciaries—and frankly, many retirement plan advisors—are not addressing this line of thinking, perhaps it is time for the true retirement plan specialists to start doing so. Decisions around the orderly conversion of retirement plan assets into post-tax assets could enable millions of plan participants to keep more of their hard-earned retirement assets during the time they need it most.
Forward-thinking retirement plan advisors will be the ones who can demonstrate an expertise and experience around the most tax-efficient conversion and utilization of tax-deferred retirement and IRA assets. This outside-the-box thinking may become the advantage these advisors use to help plan sponsors and participants.
Plan sponsors rarely think this far ahead. Overseeing the orderly decumulation of retirement plan assets makes sense for retirement plan advisors and their clients.
Steff Chalk is the Executive Director of The Retirement Advisor University (TRAU), The Plan Sponsor University (TPSU) and 401kTV. This column first appeared in the Winter issue of NAPA Net the Magazine.
