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Bruce Norris is joined this week by Tom Anderson. Tom has served as president of RITA for the last four years. Tom has more than 44 years of experience in banking. He was the founder, former president, and CEO of Pensco Trust Company. He is currently on the board of Pensco Holding, LLC. He was also the founder and president of Pensco Pension Services, an IRS approved non-bank custodian and broker dealer. He was also the founder and president of Financial Information Services, a bank consulting company. This week’s radio show focuses on self-directed IRA’s and retirement plans.
Episode Highlights
- What was the original reason the government approved self-directed IRAs?
- The abuse by retirement organizations in the early days of IRAs
- The amount of assets included in the self-directed accounts
- How does the amount of money in a self-directed IRA compare to a defined benefit plan?
- Will the government be putting a cap on how much people can save for their IRAs?
- What is a forced ROTH and how much has it been discussed by those in authority?
- What does RITA stand for, and what does this company do for the industry?
- What topics will be discussed by Tom and his company in Washington this month?
Episode Notes
The idea of self-directed is now 30-years old. Bruce wondered what the original motivation was for the government to approve self-directed retirement plans for the growth of traditional pension plans after the war. As they grew, the government found there were more abuses where they were either under-funded and organizations that sponsored them did not have enough money to meet their obligations to their employees. The government created a product in 1974 to deal with that situation. There was also abuse where trustees were taking their employees’ money and doing personal things with it. The government felt they needed to clean up the traditional pension area.
At the same time, as an extra protection they created individual retirement arrangements, now known as IRAs, to serve as a catch-all to allow an individual to save for themselves and control their destiny. Bruce said as it turns out, this has been an excellent idea because we all know the status of some of the defined benefit plans. Ironically, the government post 2008 thought about getting rid of 401ks and wanted to devise an annuity that would always work for everybody. This is a theory and not a practical reality, but in that case they came around as the stock market recovered people’s pension plans.
Individual retirement accounts allowed people to rearrange their allocation and get them into assets that protected against downturns. This includes things like real estate and private equity that are not as liquid, volatile, or tied to the bailing markets. In the approximate 30 years these have existed, Bruce wondered what the amount of assets are in the self-directed accounts. Tom said it has almost doubled in the last almost 15 years and is now over $7 trillion. In 2011 it was around 4.6, so it is really growing. A lot of that growth comes from the retirees moving out of their traditional plans and rolling them over into IRAs. As we all know, it is an aging population and more people are retiring and taking their pension plans and putting them into self-directed retirement accounts.
Bruce asked how $7 trillion compares to the money that is supposed to be in a defined benefit plan nationally. Tom said the government would know this number, although the $7 trillion exceeds all other pension plans including defined contribution and defined benefit. Defined benefits are like the dodo bird in that companies have realized they cannot guarantee their future since there have been too many issues with these other than individual retirement accounts. Corporate plans are really going up by the wayside. The government is concerned about this but not unaware that there has been a shift out of defined benefit contribution plans into IRAs. This is why we are seeing more and more potential regulation coming down on IRAs.
$7 trillion has not really paid any tax yet, so the government has to be looking at that and wondering if they can tap into it some way. Tom said this is true and that there have been some interesting and bizarre ideas. When you recognize the idea was for people to save for retirement on their own, you would think that would generally be encouraged. The incentives were given the tax-deferred and tax-free with the ROTH IRA after taxes. We were encouraging people to save, and now there is a post Mitt Romney situation the Democrats jumped on where there was question how he made all his money out of his retirement plan and into his IRA.
There have been thoughts on putting a cap on how much people can save. They do not want people to be too successful, so you will be limited to saving a only a certain amount. It is not only what you save, but it is what it earns. Now you are in trouble if it earns a lot. There have been thoughts about capping the amount and eliminating the inherited IRA and allowing it to take distributions over the lifetimes of the beneficiaries. There has been thoughts about even continuing the ROTH IRA and limiting the contributions for both that and the IRAs. So there have been a lot of issues.
Two years ago the IRS came out and required custodians start to break down all the asset types in IRAs with the idea that there was abuse going on in the valuations of some of the alternative assets. Last year was the first year the reporting took place, so it will be interesting to see what comes from this. A lot of custodians are always interested in doing the right thing by reporting valuations on assets. They always try to raise the bar the best that they can.
Bruce has a wide scope of friends, and some of them are more skittish about the possibilities that the government might be interested in doing a confiscation of retirement monies and make it a forced annuity. Bruce wondered if there was any truth to this. Tom said this is absolutely true and has been discussed for many years. This is something that is split across party lines and is more a Democratic issue. It is also about the 1% social class warfare that we hear about in the press as well as redistribution of wealth.
Tom thinks there was a study initiated by Senator Ron Wyden out of Oregon a couple years ago that the GO opened. The response back to him was that there was a very small percentage of people who were really making lots of money. This is only about 1,000 people in the United States, and there is a lot of misconception about either abuse or the amount of wealth that is being created in IRAs. It is consistent with the amount of wealth that is created in pension plans.
Bruce had read in an IMF report where they had thought about the idea of a one-time wealth tax. You could solve all this budget problem by levying a 20% asset tax one time. Tom said with the deficits we are dealing with, the government is always looking for the largest targets. There is an awful lot of money, $7 trillion, in IRAs. They drained this bathtub of funds that was from the deficit, but the likelihood of this happening politically is smaller since they would never stand for this.
One other suggestion is a forced ROTH, and Bruce wondered if this topic has ever been discussed. Tom said it has circulated in the administration but has not come forward as a bill. Considering the upcoming election, we will probably not see any movement on any of these ideas that have been floated until after the election. Depending on your political position, there will definitely be some opposing effects on some of these ideas.
RITA stands for Retirement Industry Trust Association. Bruce asked what they do for the industry. Tom said they are a forum for collective voice to the government and have been successful over the last 7-8 years in developing a good repore with the main agencies and governments that affect retirement accounts. This includes the Department of Labor, the IRS, and so many enforcement agencies like the North American Securities Administration Association. This also includes securities regulators such as the FCC. RITA meets with and lobbies with them on a regular basis about their views on issues in which they participate. The also give testimony on major issues such as the Department of Labor conflict of interest proposal. They were heavily involved in the initial input on the first round, and the second round was presented more in a written form.
In any case, they act as a fulcrum for their issues. As an industry group, they develop the best practices among the industry participants and share it with them. They provide education not only internally to all their members and employees, but to the public and regulators. Some of the regulators have even attended their classes and given good feedback. They have also provided information to some of the enforcement agencies to the anti-fraud members, which they have then taught to other regulators. They are active in that way and through education.
They started out as any organization in that it was originally a small senior group of people involved in the industry trying to share ideas. Many years ago he remembered going to the meetings, and very few detailed activities were discussed among the people who were concerned about competition. Now everything is on the table and it is very open, fluid conversation designed to help everyone who is a member and improve the practices in the industry.
Bruce asked about the scope of the job categories for the members of RITA. Tom said a few years ago they consisted mostly of regulated financial institutions, either trust companies that are state-regulated by the state banking departments or federally charted and regulated banks. They decided since there were other entity groups in the business, they would embrace the groups and created different categories of memberships. Now they have associate members who are third-party administrators who do the record-keeping and reporting for custodial banks. They also have service members, including companies who provide services such as statement printing or legal advice. They have different categories of membership and broadened the membership with a total of about 40 companies and growing at an annual basis.
This month they will have a large meeting, and Bruce wondered what hot topics will be discussed. Tom said what they do in March is they go to Washington and invite a lot of the key players in the government that influence their industry. They have developed relationships with these key people who come on a regular basis, and they share their knowledge and insight on where they see things going. As a cooperative member of retirement space, they have developed the credibility with all the things mentioned. This is an opportunity for anybody who attends to really rub elbows with some of the movers and shakers in the government affecting retirement accounts.
One person alone named Mark reports to President Obama on retirement issues. He has been in the government for many years and is the guru in the entire administration on retirement issues. He has been one of their key speakers. They have people from the IRS and hopefully from the Department of Labor coming despite the conflict of interest proposal. Sometimes they agree to disagree in addition to agreeing. The topics will usually be traditional things, including breakout sessions where they are designed for members to find out the best practice and what people are doing in certain areas. They will also be looking at dealing with older clients in terms of being responsible in detecting and dealing with dementia.
They also have a couple panels, including the state and federal regulatory panel. This includes key people like the General Counsel of the North America Administrators Association of all state regulators. They have the executive vice president of FENRA as wells as people from the SCC. They do not shy away from the people who are a concern to us since they may be looking into their business. They feel that meeting with them on common ground and sharing ideas and thoughts is a good strategy. Anybody who wants to get into the business either can eventually.
Bruce and Aaron have attended the conference themselves and found it very valuable. It is important to have a group such as RITA to be there because gradually you have gained confidence and they trust you. Your input is valuable, and sometimes big mistakes can be avoided because you can reason with people and say something that sounds like a good idea would not have a good outcome. They have provided positive and helpful input to some of the proposals that either the IRS or Treasury Department have contemplated in the past or their input was respected.
They also have a Treasury Congress panel with the Senior Advisory to the Secretary and Deputy Assistant Secretary of Retirement and Health Policy. They also have the tax council from the Committee on Ways and Means as well as the House of Representatives. They have the senior counsel from the Health, Education, and Labor Committee. These are the key people making these laws and proposals to Congress. They are dealing with the top movers and shakers.
They also have the senior director of retirement and research at the Investment Company Institute. This is probably the foremost information source on retirement assets in the country, although they are focused primarily on mutual funds. When we talk about $7 trillion, it sounds like an enormous amount of money. Bruce will then read a report, and 50% of the people are going to retire with $50,000 and social security represents half their income. Bruce asked if these statements are true, which Tom said absolutely. It is an education process that really starts with the parents and schools teaching young children the concept of savings. Not enough of this is going on, so there are a lot of outreach programs talking on financial literacy and the grassroots of the early stages.
Beyond that, Mark has come up with a proposal that is an automatic opt-in program that can set up an IRA account for companies that don’t otherwise have a pension or IRA plan for their employees. It is almost at no cost to the company to do it, and they will run this program that goes into Treasury bills until it reaches $15,000 for the individual employee. After this they have to move it into private sector, but it’s in a start kit for retirement savings. If a young person goes to work right out of college and are automatically thrown into a program like that, they will develop a $15,000 nest egg well into their early 20s. This will hopefully encourage them to continue since they will see how it grows.
Bruce asked if the millennials are savers since they are not necessarily real estate buyers. Tom said it is hard to say since his company is near Silicon Valley and a lot of the people here are savers. On a national or percentage basis he does not think millennials are, but he does not have data to report. He has never really seen data broken down by demographics in terms of age groups. He knows the majority of wealth and retirement accounts are in the older group since they are coming out of their pension plans. IRA balances are skewed towards the older people for that reason.
When people come out of other retirement accounts, they can have a non-taxable transfer into their IRAs. They can either do a partial rollover directly to the trustee or custodian or they can do it indirectly where they receive the funds. They would have to have 20% withheld automatically before the pension sponsor will release the funds since this is required under law. If they roll any portion of it back into an IRA, it will be tax-deferred. They can go this route or move it into either another company’s plan or take a distribution of it.
Tune in next week as Bruce continues his discussion with Tom Anderson on the Norris Group real estate radio show.
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California Real Estate Investing News is a post from: The Norris Group